Short-term cyclical factors are consistent with a gradual cooling off in Canada’s housing market over the next several years, according a report released today by Scotia Economics.

At the same time, long-term fundamentals, including slower population growth, are expected to dampen the demand for housing.

According to the report, the country’s average annual rate of population growth is projected to slow to just 0.8% over the coming decade, reflecting an aging society and historically low fertility rates.

“This less favourable demographic trend does not in itself pose a major risk to the housing outlook,” said Adrienne Warren, senior economist, Scotia Economics, in a release. “Real household income growth and the level of interest rates have a statistically more significant influence on housing sales and price appreciation.”

Yet the expected moderation in underlying housing demand comes at a time when affordability is at a cycle low, supply conditions are becoming better balanced and pent-up demand has largely been satisfied, potentially reinforcing the industry’s more subdued prospects.

“Demographic shifts will also influence the type of housing in demand,” added Warren. “In particular, the changing age structure of the Canadian population and the growing significance of immigration will likely favour certain forms of housing and certain geographical areas.”

“Immigration will also play an increasingly important role in shaping housing demand,” said Warren. “Immigration has been the dominant source of household formation since the early 1990s, a trend that will accelerate over the coming decade as the rate of natural population growth continues to slow.” Net international migration is expected to account for over two thirds of Canada’s population growth between 2006 and 2016. Immigration could be Canada’s only source of population growth by about 2030.

The strong wave of immigration since the early 1990s remains an ongoing important supportive factor for housing. Homeownership rates rise with the duration of residence, and is concentrated among foreign-born who have lived in Canada for 10 years or more, reflecting the time needed to accumulate the necessary savings.

“More than one third of foreign-born residents in Canada’s largest urban centres have been in Canada for ten years or less. This suggests a significant pool of potential homebuyers ready to enter the Canadian real estate market,” said Warren. “The “typical” homebuyer in the coming decade will not be as traditional as in the past, having more diverse social and demographic characteristics.”