Baby boomers, the housing market is in your hands.
Out of a population of 34.6 million, Canada has roughly 10 million people who were born between 1946 and 1965. This massive boomer cohort started turning 65 this year. All those empty nesters will soon have a decision to make. Should they sell now to downsize their family home, or stay on to welcome grandchildren?
This could be one of the most important questions that baby boomers deal with as they enter retirement, and the financial impact will be widely felt. Expect a slowing in today's hyperactive housing market, but not right away.
"There's this idea that when the kids leave home, boomers will downsize," said demographer David Foot, author of the influential book Boom, Bust & Echo and professor emeritus of economics at the University of Toronto. "Well, that doesn't happen. You hold on to the family house, probably into your 70s because you want grandkids to come and visit."
So figure on having about 10 years before a downsizing bulge alters the balance of sellers and buyers in our housing market. Should retiring baby boomers wait that long? Mr. Foot's analysis certainly doesn't suggest a bright future for house prices.
He starts with the observation that an aging population suggests slower economic growth. We've already seen GDP growth steadily declining from 5 per cent in the 1950s and '60s to 2 per cent more recently.
Mr. Foot's assessment of the effect on housing: "Growth in the housing market has to slow down, and the growth in house prices has to slow down."
According to his logic, we may well have seen the best days of the housing market. Time to start strategizing if you've owned a house for decades, made a ton of money and want to preserve as much as possible to help pay for your retirement.
Let's say you took advantage of weak prices in the Calgary market in 1985 and bought a home at the average price of $80,462. With the average price in September of this year at $406,252, you would have made a gain of roughly 6.4 per cent a year.
Or maybe you bought when the Toronto market was soft in 1995 and the average price was $195,311. With today's average price of $465,369, you'd be looking at an average annual gain of approximately 5.6 per cent.
You'd have to be pleased with these gains, based on the low interest rates of recent years and the stock market's ups and downs. But the longer aging boomers live in their homes, the more chance there is of a pullback in housing prices – and, hence, more reason to sell.
"I can't pick any holes in that argument," Mr. Foot said. Not that he sees a big fall ahead for the housing market. His view is much subtler than that.
For one thing, he sees good support for housing prices in the suburbs as young adults who own urban condos trade up to bigger homes where they can raise a family.
"There's quite a bit of opportunity for these twentysomethings to be moving out of the cities and continuing to grow the suburbs," he said. "It's supportive to the suburban housing market."
Immigration may also provide some support to the housing market, as will low interest rates if they continue for a while longer. That's a mixed blessing, by the way. Low rates signify a economy that is performing poorly, and that's not good for housing.
The one condition that would propel further housing gains is inflation. "If you suddenly get five or six or seven per cent inflation, that feeds into housing prices," Mr. Foot said.
Baby boomers, the right thing to do with your house seems clear if you put money matters ahead of lifestyle. Sell now and avoid the rush. Young home buyers just moving into the market, you've got to ask yourself a question: Are you buying with the expectation that today's elevated prices are justifiable on the basis of future price gains to come? If so, you should rethink that.
Yes, there's always a lifestyle argument for home ownership. But it has to stand up to financial reason.