A for rent sign hangs outside a home in Toronto on July 12, 2022.COLE BURSTON/The Canadian Press
The Bank of Canada said on Wednesday that new limits on international students will bring some relief to the housing market, which has seen explosive growth in rents and become a major source of inflationary pressure.
On Monday, the federal government announced that it was temporarily capping the number of study visas issued to foreign students. This year, Ottawa will approve roughly 360,000 permits, a decrease of 35 per cent from 2023. Because the visas will be allotted to the provinces on a per capita basis, B.C. and Ontario – which host the overwhelming majority of international students – will experience a drastic pullback in new enrolments.
“What’s happened in the Canadian economy over the last year is we had a particularly big surge in population growth through immigration. It came at a time when there was constrained supply” in the housing market, Bank of Canada senior deputy governor Carolyn Rogers said at a press conference on Wednesday, shortly after the central bank announced it was holding its benchmark interest rate at 5 per cent.
“The policies that were announced are on their way to sort of relieving some of that pressure,” she added. “We’ll see how they play out.”
The Bank of Canada delved into persistently high shelter inflation in its Monetary Policy Report (MPR), which was published alongside the rate decision. Rents have risen by 7.7 per cent over the past year, according to Statistics Canada’s Consumer Price Index, more than double the general inflation rate.
The combination of a long-standing shortage of homes and stronger demand from newcomers has driven the overall housing vacancy rate to record lows, leading to higher rents and keeping real estate at elevated prices, the bank said in its report.
The trouble is that these supply-and-demand fundamentals are expected to persist. “While recent government actions should help moderate some of these constraints, the imbalances are expected to be resolved only gradually,” the bank’s report said.
Over the 12 months to Oct. 1, 2023, the Canadian population rose by roughly 1.25 million people, or 3.2 per cent, the strongest pace of growth since the 1950s. Most of that increase came from temporary residents, such as international students and foreign workers, who tend to rent.
“There’s little mystery behind the ongoing surge in rents,” Bank of Montreal chief economist Doug Porter said in a recent note to investors, pointing to “rollicking population growth.”
The federal government recently told The Globe and Mail that slightly more than one million people held valid study permits at the end of last year, more than half of whom were in Ontario. This amounts to a significant increase from around 350,000 in 2015.
Economists at some of Canada’s major banks have recently called on the federal government to rein in the number of newcomers, particularly when it comes to temporary residents, for whom there were no permit limits until Ottawa’s recent action on students.
The Bank of Canada expects the housing market will continue to present a challenge in wrestling inflation back to its 2-per-cent target.
In December, shelter inflation rose 6 per cent on a year-over-year basis, according to Statscan. Beyond rents, the sharp increase in mortgage interest payments – which have increased by nearly 30 per cent over the past year – has made a large contribution to above-target inflation.
“Over the next few years, shelter services price inflation is expected to decline modestly and act as a material headwind against the return of inflation to the 2-per-cent target,” the central bank’s MPR said.