Demographic Changes and Real Housing Prices in Canada

This paper seeks to determine how demographic and non-demographic factors have contributed to past changes in Canada’s real housing prices as well as their possible impact over the next twenty years. To this goal, we estimate with annual data from 1956 to1997 a structural model of the Canadian housing market. This model possesses two important long-run properties, that is, the longrun supply curve is perfectly elastic while real housing price is cointegrated with real per-capita income. These two conditions imply that housing price shows a tendency to return to a stable longrun growth path dictated by the trend growth rate in real income. Although real income has been the dominant factor behind the fluctuations in the real asset price of housing since 1956, the growth rate of the population between 25 and 54 years of age has also played an important role. In the future, even if aging will continue to be a negative factor on housing demand, the continuation of past trends in real income is likely to be sufficient to counterbalance this negative impact. Consequently, real housing prices should continue to rise over the next twenty years, with possible exceptions in the Atlantic provinces and in Manitoba which will suffer a more substantial population decline.