Surge in newcomers putting pressure on inflation via housing demand: BoC official

The recent surge in newcomers is adding to inflation through housing demand, a senior Bank of Canada official said Thursday, warning rental and home prices could continue to rise without a boost to housing supply.

In a speech in Windsor, Ont., deputy governor Toni Gravelle acknowledged many of the benefits coming from this rise in immigration, noting it has helped grow the economy, expand the workforce and counteract an aging population.

But he warned it's also adding pressure to a housing market riddled with structural challenges, including zoning restrictions and a shortage of construction workers.

"This jump in demographic demand coupled with the existing structural supply issues could explain why rent inflation continues to climb in Canada. It also helps explain, in part, why housing prices have not fallen as much as we had expected," Gravelle told the Windsor-Essex Regional Chamber of Commerce.

The Bank of Canada has recently noted that even as interest rates have risen, shelter costs that would typically fall — such as house prices — have not declined by much. It says the inability of housing supply to keep up with demand is to blame.

Since coming into power, the federal Liberals have pursued a more ambitious immigration policy, arguing Canada needs to welcome more people to grow the economy and address aging demographics. This approach has drawn more scrutiny over the last couple of years as Canada experiences record population growth that economists say is worsening housing affordability.

The deputy governor said shortly after immigration began ramping up in 2015, Canada's vacancy rate — which measures how many homes are available to rent or buy — started to fall.

"Then, when newcomer arrivals picked up sharply in early 2022, that steady decline in the vacancy rate became a cliff," Gravelle said.

The combination of higher population growth and these structural problems have contributed to the discrepancy between housing markets in the U.S. and Canada, the deputy governor said.

"Canada's housing supply has not kept pace with recent increases in immigration. This is different from the United States, where housing construction has been more flexible to respond to population shifts and where rent inflation is expected to continue to decline," he said.

The deputy governor warned all levels of government to need to work together to reduce barriers to building more homes, or else rent and home prices could continue to climb.

The federal government has defended its immigration policy by arguing that newcomers are part of the solution to building more homes. 

But Gravelle's speech offered statistics that show Canada's immigration policy has not been successful at bringing in more construction workers. 

"While Canada is welcoming more newcomers than ever, only about three per cent of non-permanent residents work in construction. By comparison, roughly eight per cent of the overall employed population works in construction," he said.

Gravelle said the federal skilled trades program, an immigration pathway that includes qualified construction workers, has also failed to bring in many construction workers. 

"At the same time, around 20 per cent of Canada's construction workforce is set to retire in the next decade," he said. 

Higher interest rates have also hindered housing construction as developers face mounting borrowing costs. But in a news conference later on Thursday, Gravelle said the housing market's challenges are about more than just interest rates.

"We have an under-supply of homes now when we have high interest rates. So it's very clear that interest rates are not the only factor affecting the under-supply of homes," Gravelle said. 

Bank maintains key rate at 5%

Gravelle's speech comes one day after the Bank of Canada maintained its key interest rate target at five per cent and cautioned it was prepared to raise rates if needed in its fight against inflation.

Financial markets are already speculating on the timing of interest rate cuts next year, but Gravelle said the central bank is not discussing rate cuts just yet.

"Once we get more confidence that we have seen that inflation is on a sustainable path to two per cent ... then we might be in a position to even start thinking about cutting rates. But we're not even there," Gravelle said.