If Canada’s population boom continues at its current frantic pace, interest rates will face upward pressure and the massive influx of people will significantly worsen affordability for homebuyers and renters, a new report from TD Bank warns.
And the bank’s economists are calling on the federal government to restore “balance” to its immigration policies.
Over the past 12 months Canada’s population surged by 1.2 million, driven by higher annual targets for permanent immigration but also a swell of non-permanent residents such as temporary foreign workers and international students.
That rapid growth has helped employers fill job openings and propelled Canada to become the fastest growing economy in the G7, but it is also causing “dislocations in other segments of the economy,” including the housing market, health care, social services and infrastructure, that threaten to undo the benefits, the report’s authors warn.
The population jump caught economists off guard, raising the question of whether it will be repeated. Based on the pace of TFW program usage and study permits in 2023 so far, TD said Canada’s population is likely to increase by another one million people this year.
If that happens, the gap between housing supply and demand would grow to 500,000 units through 2025, the report said, adding that even with aggressive policies in place to boost home construction, supply would not keep up.
The result would be an erosion in affordability for buyers and renters, a situation that would be made worse by the upward pressure a persistent high-growth immigration strategy would put on interest rates, the report said.
According to TD, if Canada’s population boom continues, the neutral interest rate – which is sometimes described as the Goldilocks level of interest that neither stimulates economic demand nor holds it back – will need to rise by 50 basis points, or half a percentage point, compared with under earlier assumptions about how Canada’s population growth would unfold.
“The implication is not only do you have a higher run rate on interest rates, but when you get into the position of cutting interest rates it would put a higher floor for how low you would go,” Beata Caranci, chief economist at TD and one of the report’s authors, said in an interview.
“The Bank of Canada is trying to push a boulder up the hill when it comes to inflation, because as it increases interest rates, the sheer size of the population keeps generating demand that outstrips supply.”
For its part, the Bank of Canada has said little about whether the rapid population growth is affecting monetary policy, though earlier this month, after the bank raised its key overnight rate by another 25 basis points to 5 per cent, Governor Tiff Macklem said on balance the effect is “probably roughly neutral.”
On the one hand, immigration has reduced pressure on the labour market and eased costs for employers, he said, while on the other, “these new entrants in the economy, they’re also new consumers, they’re renters, they’re new homebuyers, so it’s also adding to demand.”
Ms. Caranci said a jump in population like Canada has witnessed wouldn’t be such a problem if there was a similar surge in productivity; however, the country’s track record on that front is not promising. And what she called the “government guarantee” that it will bring in new workers to fill labour gaps only reduces the incentives companies have to invest in technology that would make them more efficient.
Rather than view immigration as the “be-all and end-all solution” to Canada’s aging work force, the TD report urged policy makers to focus on reforms that would remove barriers to the work force for people already here, giving the example of how flexible work arrangements and the expansion of daycare has lead to a big jump in the number of mothers with young children taking jobs.
Measures aimed at making medical and engineering credentials more transferable would also allow recent immigrants who are underemployed to fill critical gaps in the labour force, it added.
“If the purpose was to put a stop-gap in what was an extreme shortage of labour revealed by the pandemic, at some point you have to take your foot off the gas and let the supply side catch up,” Ms. Caranci said.
“If you don’t, the benefits of that population increase will erode over time. Someone has to do the math here that we have a system that can accommodate everybody.”