Population Growth and Residential Construction Activity in BC Part 2

A followup to yesterday's post on population growth and residential construction activity in BC is in order when thinking about the future path of household formation, household size, and construction activity. We have the basic function of construction activity versus population growth over the past decade:

Since 2000, every person growth in population has resulted in an additional 0.33 dwelling completions. If population were to remain fixed, annual completions would be 9,500.

More interesting is to dig a bit deeper into this "baseline" 9,500 completions. Based on historical demolitions data (CANSIM 026-0012 1965-1999 **terminated**), demolitions are about (10±2)% of housing starts (and completions). What this means is that even with no population growth there is a net 8,500 annual increase in dwellings, which can only mean that household size is shrinking and/or there is oversupply.

Indeed household size has been shrinking since 2000, with average household size falling from 2.580 to 2.473. If we account for the base population's change in household size in a year, this results in a net demand averaging 6,200 per year, which is on the same order, albeit slightly smaller than the estimate of 8,500.

There are reasonable error bars on the estimates, so we can state that, after accounting for demolitions and more importantly changing household size that housing completions have broadly aligned with population growth over the past decade.

More interesting, though, is looking forward to the next 13 years (and longer). The important takeaway from this post should be that shrinking household size has added approximately 6,200 additional residential construction units per year, or about 25% of total residential construction activity, since 2000. If household size were to plateau that would mean a 23% drop in average construction activity compared to the past 13 years (or significant oversupply). BC Stats projects household size to drop from 2.53 in 2006 to 2.37 in 2035. Under this scenario, using BC stats population projections, this would mean the projected decreasing household size will add 3,400 additional residential construction units per year, which would mean, all else equal, a 13% decrease in average construction activity from the previous decade.

Another factor to consider is the utilization of existing dwellings as the household size has dropped. While I don't have data to support one way or another, it may be true that existing dwellings are not being utilized to their full capacity (think empty nesters who haven't downsized yet). If this is true that means, once turned over, these dwellings will act as "phantom" supply that would further decrease residential construction demand.