In an effort to combat the country’s severe housing shortage, Canada has announced a significant reduction in immigration targets, creating opportunities and obstacles in the quest to improve affordability.
In October, the Canadian government made a pivotal decision to slash its projected intake of permanent and non-permanent residents by over 900,000 over two years. Experts suggest this shift could play a crucial role in cooling Canada’s overheated housing market and alleviating the chronic housing supply issues. However, economists warn that this policy adjustment will offer only temporary relief and won’t fully resolve the broader affordability crisis.
Impact on Housing Demand
Robert Hogue, RBC’s chief assistant economist, has highlighted how this substantial cut will affect housing demand. The projected reduction is expected to result in a 0.4% population decrease by 2026, with population growth anticipated to resume at a more moderate pace in 2027. According to Hogue, the most immediate effect will be a slowdown in household formation—a key factor driving housing demand.
His forecast indicates that nearly 400,000 fewer households will be formed over the next three years, marking a dramatic 46% drop compared to previous projections. Hogue states, “Canada will now get a golden opportunity to reduce the housing shortage,” emphasizing that success depends on the pace of homebuilding. If construction activity remains consistent or increases, the impact on housing supply could be more pronounced.
Cooling Rental Markets
One significant area of change will be the rental market, particularly in urban centers like Toronto and Vancouver. Rental demand in these cities has surged in recent years, driven largely by an influx of international students and non-permanent residents. The new immigration policy is likely to cool this demand, which could lead to higher vacancy rates and potentially ease rental prices.
With fewer newcomers entering the rental market, some relief is expected for tenants facing skyrocketing rents. Still, experts remain cautious, noting that the impact on rents will be uneven and depend on regional housing dynamics and the completion of purpose-built rental projects.
Effects on Real Estate Investment
The reduction in population growth may also influence the behavior of real estate investors. Investors who were banking on consistent growth in rental income might reevaluate their plans. Hogue anticipates that some investors could hold off on purchasing condos and apartment buildings, anticipating reduced returns. This shift could lead to a more balanced housing market, especially if investor activity wanes.
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Rate Cuts and Renewed Homebuyer Demand
Despite these adjustments, homeownership demand remains poised to rebound in the coming years, fueled by expected interest rate cuts. As the Bank of Canada navigates an economic environment marked by higher unemployment and subdued inflation, rate reductions could make borrowing more affordable.
Since 2022, rising interest rates have kept many potential homebuyers on the sidelines. As rates decrease, pent-up demand could re-enter the market, sparking renewed interest in homeownership. However, the affordability of homes will still depend heavily on other factors, such as wage growth and housing supply.
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Long-Term Challenges
While the policy change offers a chance to alleviate housing pressures, RBC’s analysis underscores that the housing market won’t instantly rebound. The housing supply gap remains vast: between 2015 and 2023, housing construction lagged behind household formation by about 545,000 units. Bridging this gap will require sustained efforts in construction and strategic policymaking.
High construction costs continue to be a significant hurdle. Developing affordable housing in cities like Toronto and Vancouver remains expensive, with labor shortages and high material prices complicating efforts. Hogue stresses that most affordability improvements will likely come from a combination of lower interest rates and rising household incomes, but these measures will only partially offset the dramatic loss of affordability seen during the pandemic.
Canada’s decision to reduce immigration targets marks a crucial step in addressing the housing crisis. While it may provide short-term relief, systemic issues in the housing market, such as high construction costs and insufficient supply, will persist. Policymakers and developers must work together to find sustainable solutions to ensure long-term affordability for all Canadians.
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