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Rising interest rates are contributing to a steep correction in Canada’s housing market, but demographic trends will likely prevent a prolonged spiral, RBC says.

Immigration is rebounding from pandemic lows and new targets should mean a record number of newcomers, an RBC report released Wednesday said. The federal government is targeting 1.3 million new permanent residents, or 550,000 households, by 2024.

But RBC said housing demand will also see a boost from another, often overlooked demographic change: shrinking households. From 2016 to 2021, the average household size declined by 0.02 people, raising the total number of households by 140,000.

“Even a relatively small decline in average household size has a big impact on the number of new housing units required to shelter Canadians,” the report said.

Since 2016, one-person households have become the most common, with nearly 30% of Canadians living alone, RBC said. Part of this can be attributed to aging but more young Canadians are also choosing to live alone and starting families later.

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RBC said smaller households should lead to 90,000 new households by 2024 (from 2021 figures).

Taken together, the two trends of more immigration and smaller households “will strengthen demand for housing (whether owned or rented) and act as a powerful counter to sliding sales and prices —eventually putting a floor under the correction,” the report said.

Canadian home sales in July were down 29% compared to a year earlier, and prices declined by 5%. It was the fifth consecutive month of declining sales as higher interest rates cool the overheated market.

RBC forecast home resales to fall 23% this year and a further 15% next year before the market adjusts to higher interest rates. Prices will bottom in spring 2023, down about 12% from the recent peak, it said.