A series of research papers by Canada Mortgage and Housing Corp. suggest that while housing demand and house prices will stay strong during the next two decades, demand for mortgage credit will show a substantial decline.

A report for CMHC by researchers Mario Fortin and Andre Leclerc says: "We project that the number of new loans will suffer a significant reduction beginning in 2003, coming down to between 300,000 and 450,000 annually, compared to the current level of approximately 700,000. In 2026, it will thus reach a level of activity similar to that of the early '80s."

The researchers used projections for population, income, mortgage interest rates and inflation to come up with various scenarios for the Canadian mortgage market up to 2026. They say all scenarios suggest that the number of new loans as well as the total mortgage debt outstanding will drop, and that the decline will begin in 2002.

Earlier, based on economic and demographic growth patterns, the researchers predicted that housing demand will continue to rise during the coming decades. But house buyers will be older, and in a better financial position to pay off their home purchases. The researchers say that the decrease in demand for mortgage funds will be lower if there's a more rapid growth in the 25- to 35-year age group, combined with favourable economic conditions.

The study concludes that the number of new loans reacts strongly to variation in interest rates. "Our results suggest that a permanent, one-percentage-point increase in interest rates reduces the number of new mortgage loans by almost 14 per cent in the first year," says the report.

Fortin and Leclerc say that although changes in demand for mortgage credit at the time of purchase is well understood, more research is needed to understand how and why more mature households have mortgages. "The theory suggests that as they mature, households are motivated to pay off their mortgages. However, a desire for portfolio diversification may lead them to maintain a mortgage balance, especially if it is possible to make more profitable investments where returns are tax sheltered," says the report. In Canada, mortgage interest is not deductible for income tax purposes.

Some analysts have long predicted that housing demand and house prices would drop in the coming decades because the number of young households, in the prime home buying age range, is decreasing. But CMHC's Ian Melzer says, "The greatest part of the downward demographic pressures occurred during the 1990s. What remains to be absorbed will occur mostly between 2002 and 2005 when the growth of the population aged 25 - 54 will slow more rapidly. However, the upward trend resulting from the projected increase in real income is expected to dominate the demographic impact, especially after 2005."

In a study, "Demographic Changes and Real Housing Prices in Canada," Melzer predicts housing prices are not likely to drop during the next 15 years, and that Ontario, Alberta and British Columbia should see the greatest price increases.

Besides demographics, the study says other major factors affecting house prices are income; employment stability; housing costs such as maintenance, interest rates and taxes; tastes; migration; and housing supply and demand. Meanwhile, CMHC recently launched a bonds program designed to provide the mortgage market with an alternative and competitive source of funds. Last week the agency said the initial bond issue has reached $2.2-billion, exceeding the corporation's expectations of $1.5-billion.

"The unprecedented size of this bond issue clearly demonstrates the extent to which investors and Canada's mortgage industry has embraced this new and innovated mortgage funding vehicle," says Karen Kinsley, CMHC vice-president.

Information about the bond issue and all of the long-term housing and mortgage market studies is available at CMHC's web site.

For more articles by Jim Adair, please press here.

Published: June 21, 2001

Use of this article without permission is a violation of federal copyright laws.

Jim Adair is editor of REM: Canada's Real Estate Magazine, a business publication for real estate agents and brokers. He has been writing about Canadian real estate, home building and renovation issues for more than 30 years. You can contact Jim at .