Canadian Real Estate Fuelled or Cooled by Immigration Policy?

With an increase in new Canadians settling in urban centres, what will the supply and demand dilemma look like in the Canadian real estate market by 2027? In 2022, RE/MAX Canada, in collaboration with CIBC and The Conference Board of Canada, published a five-year outlook that assessed real estate in Canada and what it will look like by 2027. Two years into the span, a lot has already changed in the nation, be it the real estate market or immigration.

The economy has ground to a halt, the labour market is not doing as well as our neighbours to the south, and the cumulative effect of inflation has negatively impacted households nationwide. As the first quarter of 2024 comes to a close, many unstable factors are in play — from interest rates and inflation to multiple conflicts in Europe and the Middle East — that will impact the economy in the near and far future. Based on specific plausible and confirmed scenarios, let’s explore how policy decisions in recent years might affect the Canadian real estate market over the next five years.

Unlocking the Future: The Economic Chapter

A recent survey conducted by Leger on behalf of RE/MAX Canada found that more than half (54 per cent) of Canadians are worried that additional interest rate increases will hinder their ability to participate in the real estate market this year. Forty per cent of Canadians think climate change will impact their decision about where to purchase a home.

In 2023, the Canadian economy grew at the slowest pace since 2016, aside from the first year of the coronavirus pandemic. Statistics Canada data show that full-year growth was 0.6 per cent in the first quarter, 0.2 per cent in the second quarter, -0.1 per cent in the third quarter, and 0.2 per cent in the fourth quarter. Canada’s labour market has not been performing well either, with the unemployment rate climbing above six per cent for the first time since January 2022.

Additionally, the prolonged military conflict between Ukraine and Russia, tensions in the Middle East, and the Red Sea crisis could threaten growth prospects and trigger an inflationary revival.

Immigration Might Relieve Labour Shortages, Exacerbate Housing Demand

The federal government has been aggressive in welcoming newcomers into the country. In 2022, Ottawa opened its doors to 432,000 immigrants. In 2023, Canada saw 471,771 new permanent residents enter the country. These figures have exceeded the government’s Immigration Levels Plan 2023-2025. While the consensus among economists is that legal immigration is a net benefit to an economy, the worry is that Canada is actively contending with housing affordability challenges, with demand outpacing supply.

It is expected that demand in the housing market will increase, especially in urban centres such as Vancouver and Toronto, which are hot spots for new Canadians. With rising demand, what solutions are on the horizon to address affordability? Can governments implement new tax measures, or are other scenarios more likely?

The survey commissioned by RE/MAX Canada also found that 73 per cent of Canadians think home ownership is the best investment they could make. At the same time, the survey found that more than one-fifth (21 per cent) are considering homeownership alternatives or searching for inter-provincial or city relocations as the public tries to find better housing affordability options.

The Impact of Immigration on Canadian Real Estate

While economists at the big banks largely agree that immigration is positive for the Canadian economy, they have contended that the federal government has poorly managed this file.

“Immigration produces significant benefits for the Canadian economy as a whole and helps meet the labour market needs of particular communities and sectors. Canada’s system excels at selecting immigrants who have a high likelihood of long-term economic success. However, the system could improve by selecting more immigrants to fit specific, chronic labour market needs. In particular, a focus on immigrants with skills in the trades and construction could help address severe labour shortages that limit housing supply,” says Iain Reeve, Associate Director of the Immigration Research, Conference Board of Canada.

Research by the Conference Board of Canada has shown that higher immigration levels can benefit the Canadian economy with greater GDP and public revenues. CIBC Capital Markets and The Conference Board of Canada agree that the Canadian economy needs a minimum of 400,000-plus new immigrants annually to sustain our economic vibrancy.

In fact, Canada has far exceeded this number in 2022 and 2023 by as much as 18 per cent in recent years. Even in 2021, Canada accepted roughly 405,000, above the government’s current targets.

New immigrants are not the only factor to consider in determining housing demand. The formula is complicated and often does not look at things such as immigrants already living in Canada and Canadian students in temporary housing. To get an accurate measure of housing demand, further refinement is needed to housing data collection methods, according to both CIBC Capital Markets and The Conference Board of Canada.

Research suggests that the profile of new Canadians is quite distinct from historical immigrant cohorts. Many have higher educational credentials and Canadian work experience. For example, just 10,000 new immigrants in 2015 held a post-graduate work permit versus more than 88,000 in 2021, according to data compiled by the Conference Board.

Earlier this year, the federal government offered reforms to the program, reducing the cap of 364,000 approved study permits, down 35 per cent from 2023.

It takes ten years for immigrants to have earnings that are commensurate with their skills, education, and experience when compared to similar Canadian-born workers. Trends have improved in recent years. Although the data is limited on this subject, the available numbers suggest that about a third of homeowners in Canada are immigrants. Experts say this is due to Ottawa concentrating on economic immigrants and better immigrant support systems. This means that new immigrants can land on their feet faster and participate in the Canadian economy in various ways, such as entering into Canadian real estate ownership.

Experts believe that immigrants will be the driving force behind new home construction in the coming years.

“Saving for a down payment and buying their first home in Canada […] is a very important milestone for immigrants and new Canadians,” David MacDonald, the group vice president of financial services at Environics Research, told STOREYS last year. “They’ve taken a big risk by moving to a new country, and buying a home is a great indicator of success. I see new Canadians being a great driving engine of the new home construction market going forward.”

However, as both CIBC Capital Markets and The Conference Board of Canada have stated, Canada’s immigration levels alone are not an issue. There is a missed opportunity by not selecting more immigrants who are trained in the trades, where all regions across Canada are experiencing a deep labour shortage.

It is estimated that the construction sector’s hiring requirements will reach 351,800 by 2033 because 21 per cent of the current labour force is anticipated to retire in the next decade, according to BuildForce projections. This will impact Canada’s ability to fulfill the new housing and affordable housing starts as predicted by the federal government.

“Currently, Canada’s federal immigration policy does not link with the country’s labour market needs, and that will be a mounting problem in our capacity to build enough homes to meet the high demand over the next five years,” said Benjamin Tal, the deputy chief economist at CIBC Capital Markets.

Ottawa Mixed Messaging on Immigration, Housing

Despite ambitious immigration targets by the federal government in recent years, officials are now warning that housing construction has failed to keep up with the population growth observed.

In March, Statistics Canada reported that the country’s population reached 41 million, just nine months after reaching a population of 40 million. Statisticians note that a majority of the 3.2 per cent bump has been facilitated by temporary immigration.

However, with the Canada Mortgage and Housing Corporation (CMHC) warning that the country is short 3.5 million homes, could the nation afford to open its doors to more newcomers?

After announcing a $6 billion housing infrastructure initiative on April 3, Prime Minister Justin Trudeau conceded that the “massive spike” in temporary immigration has created a situation that Canada cannot absorb.

“It’s really important to understand the context around immigration. Every year, we bring in about 450,000, now close to 500,000, permanent residents a year, and that is part of the necessary growth of Canada. It benefits our citizens, our communities, it benefits our economy,” said Trudeau. “However, over the past few years we’ve seen a massive spike in temporary immigration, whether it’s temporary foreign workers or whether it’s international students in particular that have grown at a rate far beyond what Canada has been able to absorb.”

In January, The Canadian Press obtained 2022 Immigration, Refugees and Citizenship Canada (IRCC) documents that suggested Ottawa’s 2023-2025 immigration targets would “exceed the growth in available housing units.”

“As the federal authority charged with managing immigration, IRCC policy-makers must understand the misalignment between population growth and housing supply, and how permanent and temporary immigration shapes population growth,” the documents stated.

Canada is on track to welcome twice as many permanent residents in 2026 as it did a decade ago: 485,000 in 2024 and 500,000 in 2025 and 2026.

Despite concerns these trends would have on the housing, health care, and other public services, Housing Minister Sean Fraser told CTV News that these numbers are “in the right place” because they help address “demographic challenges and economic challenges that immigration can help solve.”

“The challenges that we’ve experienced have largely been on the temporary side of the equation,” he said. “These are programs that are not subjected to a level that’s typically set by the government, but driven by demand either by institutions like colleges and universities or by employers who tap into the temporary foreign workers program.”

However, Immigration Minister Marc Miller confirmed on March 21 that the federal government would establish targets for temporary residents to support “sustainable” growth in the number entering Canada and potentially ease cost-of-living difficulties.

According to BMO economist Robert Kavcic, the limits would help provide relief to the nation’s rental market and the broader real estate industry.

“We’ve been firm in our argument that Canada has had an excess demand problem in housing, and this is maybe the clearest example,” Kavcic said. “Non-permanent resident inflows, on net, have swelled to about 800K in the latest year, with few checks and balances in place, putting tremendous stress on housing supply and infrastructure.”

Of course, the pressures that provinces and municipalities face from growing migration are not equal. Since newcomers typically settle in places like Vancouver, Toronto, or Montreal, the Prairies or the Maritimes are unlikely to face similar hurdles. At the same time, there is a knock-on effect whereby Ontario or British Columbia households are priced out of the housing market and explore more affordable options, such as those offered in Alberta or Nova Scotia.

Still, economists and market watchers will debate the issue and advocate for solutions that balance the subjects of growing the economy, mitigating labour shortages, accepting newcomers, and preventing housing and rental prices from spiralling out of control.