Canada’s next wave of immigration set to add more fuel to overheated housing market

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After a frenetic 18 months when Canadians pushed up home prices in a quest to ride out the pandemic in comfort, another influx of buyers is set to provide more fuel to the overheated real estate market.

The federal government has increased its annual immigration targets to the highest levels on record, creating the conditions for a surge of new permanent residents, which Canada needs to fill job vacancies. These new immigrants will add to the country’s population and immediately boost the need for housing in major job centres and nearby cities.

This will ramp up competition for homes at a time when national real estate prices have jumped 40 per cent in the past two years.

“Canada’s strong population growth is a factor driving our home prices upward at a faster pace than in many other economies,” said Bank of Montreal chief economist Douglas Porter, who analyzed the relationship between population growth and home prices in 18 developed countries.

He found that countries with faster population growth have had greater home price inflation than those whose populations have remained stable, or decreased.

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Between 2010 and 2020, New Zealand and Canada both saw their populations climb by an average of more than 1 per cent each year. In Canada’s case, much of that growth was attributable to immigration.

Over that same decade, home prices rose an average of 7.9 per cent each year in New Zealand and 7 per cent each year in Canada.

Meanwhile, countries with shrinking populations have experienced stagnant or falling home values. Japan’s population declined by an average of 0.2 per cent each year, and home prices there rose an average of 0.2 per cent annually.

One reason immigration may be pushing up Canadian home prices is that Canada’s policies cater to newcomers with wealth and job skills. Many new permanent residents arrive with hefty bank accounts, or with enough professional expertise to make money quickly. And, like anyone else with means, they buy real estate.

Parisa Mahboubi, a senior policy analyst with the C.D. Howe Institute and an immigration labour expert, said integration is a challenge for all newcomers. But, she said: “Economic immigrants, especially those with Canadian experience or with education, are able to integrate into the labour market quickly. This means they are able to purchase a property sooner than other immigrants.”

New research from Statistics Canada suggests that in many cases it’s pre-existing wealth, not Canadian income, that is behind pricey real estate purchases by immigrants.

For example, in Richmond, B.C., a typical immigrant buyer in the lowest wage quintile, with median annual income of just $11,100, spent a median of $763,000 on a home in 2018, according to data from Statscan’s Canadian Housing Statistics Program (CHSP).

In contrast, a typical Canadian-born buyer in British Columbia in the lowest income quintile, with median annual income of $32,300, spent a median of $396,000 on a home in 2018, according to CHSP, which analyzed land registry information, property assessments and tax filings.

The disparity in the amounts spent by low-income immigrants and Canadian-born buyers suggests that the newcomers were relying on money not earned in Canada. The actual sources of the funds are unknown. CHSP has said the immigrant wealth could have been income earned previously in Canada or abroad, or income that was earned by others or underreported.

CHSP observed that in 2018 the majority of immigrant buyers across B.C. had moved to Canada prior to 2009 and had been admitted through the country’s various economic immigrant programs, which are designed to attract skilled workers and those with wealth.

“If you are an economic immigrant and you don’t have other opportunities, real estate becomes one of the fastest wealth generators,” said Andy Yan, director of the city program at B.C.’s Simon Fraser University. “They are wealthy. But when they try finding a job, it goes south.”

Other factors that have contributed to high home prices in Canada include low mortgage rates, a flood of domestic investors looking for high investment returns, and millennials increasingly forming families and seeking properties.

In the Toronto region, the country’s largest job centre, the average price of a home is above $1-million and many of the surrounding cities are nearing or above that price.

That has pushed Canadians and newcomers out of Toronto and into smaller regions in Southern Ontario. Some have left the province altogether for more affordable areas such as Regina, Saskatoon, Winnipeg and Halifax.

Canada’s six largest metropolitan areas – Toronto, Vancouver, Montreal, Edmonton, Calgary and Ottawa – used to be the top destinations for immigrants. But that has been changing.

In 2002, Canada’s largest cities took in 88 per cent of the country’s immigrants and non-permanent residents. In 2019, the proportion was just 68 per cent, according to Canada Mortgage and Housing Corp.

Over that same period, net international migration to those cities grew by 43 per cent. But in the rest of Canada it soared by 370 per cent, with particularly strong growth in Ontario locations such as Niagara, London, Kitchener-Waterloo and Cambridge.

Today, there is an acute shortage of housing in those smaller cities.

In Kitchener-Waterloo, Cambridge, London and the Niagara-St. Catharines region, the typical price of a home is 60 per cent higher than it was two years ago, according to the Canadian Real Estate Association home price index, which adjusts for higher-priced homes.

The flow of new permanent residents will put even more pressure on those places. If prices continue to rise, the higher cost of living could discourage newcomers.

“We need the immigration for the labour market. But if we don’t get the immigration for the labour market because they can’t afford to live in the community, that’s a significant challenge,” St. Catharines Mayor Walter Sendzik said.

The federal immigration target for 2021 was 401,000 new permanent residents. The goal for 2022 is 411,000. For 2023, it’s 421,000. By comparison, the number of new permanent residents admitted to the country in 2019 was 341,180.

Anthony Passarelli, a CMHC senior analyst, said that if immigration reaches these record-high levels and Canada doesn’t respond by increasing its housing supply, the effects on the housing market could be noticeable. “We will likely go through a similar situation, where you see another price surge and the ripple effects of people getting priced out of the larger population centres and moving further out,” he added.

Asked whether Canada should slow the pace of immigration until the country has enough affordable housing, BMO’s Mr. Porter said: “I suspect policy will be little swayed by housing market concerns. Having said that, at the very least the impact on housing should be taken into consideration when determining immigration targets.”

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