Yesterday, two more voices were added to the chorus warning about a crash in the Canadian property market. The Canadian Centre for Policy Alternatives and the OECD, the rich country think-tank, both worried publicly about the economic impact of a short term downturn in housing prices.

The fears of both groups are primarily based on the idea that higher interest rates will create a housing correction in an overheated market.

In the complex calculus of changing real estate prices, there is a second, less-discussed trend affecting the price of your home. That is the baby boom bulge, which in some sectors of the market is about to cause the gradual unwinding of a boomer housing bubble. And the effect might not be quite what you imagine.

As Canadians have seen, predicting the future of the property market is hardly an exact science. Warnings of doom have been coming out of banks, international organizations and the financial media ever since the U.S. property market peaked in 2006 and began to crash over the next several years.

Crystal ball

As we try to gaze into the real estate crystal ball for what will happen next, Canada's changing demographics must certainly be taken into account, says Ben Rabidoux, who runs North Cove Advisors, a specialty market research firm.

"One of the more concerning developments that no one's talking about is the demographic trend," Rabidoux says. "We are adding the fewest number of people to the working age population that we ever have."

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While Calgary boomers hoping to sell may withdraw their houses from the market rather than accept a low price, purpose-built houses are already cutting their prices because builders must sell at all costs to repay commercial lenders (Reuters)

According to the Bank of International Settlements, sometimes described as the central bankers' central bank, demographics has a crucial effect on financial assets. For one thing, in a population where more people are leaving the workforce than entering, as is beginning to happen now in Canada, the entire economy tends to shrink. But there is also a direct impact on housing as older homeowners try to sell. 

BIS puts the age when people begin to sell their homes at about 70 years old. Other studies put it a bit lower, between 60 and 65 years of age.

In Canada, the largest age cohort, commonly known as the baby boom, is now reaching that point. The question is, as more people reach house-selling age, who will be the buyers, and at what price?

Hilliard Macbeth, long time portfolio manager and author of When the Bubble Bursts, says he has already seen the demographic effect in his own pricey Edmonton suburb, which may offer a taste of what could happen elsewhere.

Forced sale

Older boomers are putting their houses up for sale, but they aren't getting the offers they expect. So they take their houses off the market. Meanwhile nearby houses built on spec are selling at sharp reductions, as builders — and their backers — are forced to sell to get their money out.

"The baby boomers thought they had lots and lots of time," Macbeth says, but the decline of the Alberta resource sector suddenly moved everything forward.

Rabidoux foresees something similar coming in Ontario, but the relative decline will depend on what kind of house and where it is located.

"You drive through the countryside, and in the middle of nowhere you've got this sprawling, 4,000-square-foot brand new house," he says. "They're everywhere."

Rabidoux expects those rural monster homes will be some of the hardest to sell as boomers age and no longer want the responsibility of managing such properties. For the generation coming after, he thinks those houses will be impractical and unaffordable at current prices.

Interestingly, unlike others, he does not predict doom for the Toronto market. Rabidoux believes that family-sized homes in convenient and popular areas of big cities like Toronto will be less inclined to fall in price. Big cities always have richer people able to splash out. And in places like inner city Toronto, there is a limited supply of single family homes.

In smaller communities like London, Ont., for example, there is plenty of room for new construction. That means large family homes in smaller cities will not have the advantage of scarcity value.

Boomer demand

So besides places like inner city Toronto, which type of properties will keep their value? In smaller communities, the premium will be on smaller, low-maintenance homes, especially bungalows. In larger cities, larger condos in prime areas with more than one bedroom will still be needed as boomers downsize.

Besides rural monster homes, the properties that will do the worst are the 500-square-foot condos, Rabidoux says. They are in plentiful supply because they were easier for builders to sell as investment properties. But he predicts boomers moving out of relatively spacious family homes will not be interested.

Both Macbeth and Rabidoux agree that with a large number of boomers moving out of the housing market and a smaller group of young people moving in, prices will inevitably fall. But unlike the potentially dramatic effect caused by swings in interest rates, the boomer bubble is likely to unwind slowly, with more expensive houses the first to feel the pinch.

"I think you're going to increasingly see an imbalance in supply and demand in the high end of the market," Rabidoux says. "But listen, I would have said that two or three years ago and it hasn't happened."


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