Canadian housing construction is failing to match population growth, causing historically high inflation. Immigration is exacerbating the housing supply imbalance. Policymakers must prioritize strategies to promote housing construction.
OTTAWA--The senior Bank of Canada official, Deputy Governor Toni Gravelle, warns that Canadian housing construction has failed to match the rapid population growth driven by immigration. This imbalance is leading to historically high levels of inflation in the housing market, particularly in the cost of shelter.
Gravelle, in his prepared remarks in Windsor, Ontario, highlights the significant impact of immigration on the already strained housing supply. He states, "Population growth has added to the pressure on shelter-price inflation."
Shelter expenses make up approximately a quarter of Canada's consumer-price index basket. In October, shelter-price inflation surged by 6.1%, contributing to an overall inflation rate of 3.1%. Notably, rent inflation reached an alarming rate of 8.2%, the highest in four decades. Although housing prices have decreased due to higher mortgage rates and a slowdown in economic activity, Gravelle explains that the decline has not been as significant as anticipated.
During the one-year period ending on June 30, Canada's population increased by 1.15 million or nearly 3%, with immigration accounting for nearly all of this growth. Moreover, Canada's working-age population is expanding at a faster pace compared to the United States, Europe, and the United Kingdom.
In the third quarter of this year, housing activity emerged as a bright spot in Canada's gross domestic product (GDP) data, with a notable jump of 8.3%. This surge was primarily fueled by increased housing construction. However, while this growth is positive, it falls significantly short of meeting the country's growing housing needs.
According to Canada Mortgage and Housing Corp., the national housing agency, an estimated 3.5 million new homes are required to bring house prices down to affordable levels. This exceeds the current forecast for construction. To address this issue, government officials at both the federal and regional levels must take action to reduce barriers to housing construction.
Failure to do so will continue to exert upward pressure on inflation-related factors such as rent and house prices. Therefore, it is crucial for policymakers to prioritize strategies that promote and facilitate housing construction.
Additionally, the recent increase in immigration has played a significant role in alleviating tight labor-market conditions. Job vacancies have now returned to levels seen before the pandemic. Since the beginning of 2022, strong immigration patterns have boosted Canada's potential output by 2% to 3%. This enhancement is undoubtedly a noteworthy improvement for the country's economy.
The ongoing trends in both housing construction and immigration present substantial opportunities for continued economic growth. However, it is imperative that policymakers remain proactive in addressing barriers to construction and ensure that the necessary infrastructure is in place to meet the nation's housing demands.
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