Canada Housing Market

In a major policy shift, Canada has announced cuts to immigration targets, aiming to ease economic pressures—particularly in the housing market. The government’s revised immigration plan will lower the cap on permanent residents and set limits on temporary residents, a move that is expected to have significant impacts on housing demand, particularly in rental markets.

This decision comes after a period of unprecedented population growth, where Canada saw a 3.2% increase from January 2023 to January 2024—the highest rate since 1957. According to Statistics Canada, this surge was largely due to immigration, with permanent and temporary residents making up 97.6% of the increase.

What Prompted the Change?

The rapid influx of people into Canada has strained the country’s housing supply, pushing vacancy rates down and rents up in cities across the nation. With high interest rates and increased construction costs also hampering the housing market, the government aims to find a sustainable balance between economic growth and housing availability.

“Immigration is essential for our country’s economy and accounts for almost 100% of Canada’s labour force growth,” said Marc Miller, Minister of Immigration, Refugees, and Citizenship, during a recent speech. However, he acknowledged that the pressures on housing and social services require a “more sustainable approach” to immigration.

The new targets involve reducing permanent resident entries from 500,000 to 395,000 by 2025, then to 380,000 in 2026, and eventually 365,000 in 2027. Temporary residents will also see limits for the first time, with Canada aiming to keep their population share at 5%. This is expected to reduce Canada’s population growth rate by 0.4% by 2026 before returning to gradual growth in 2027.

Rental Market Impacts

According to Robert Hogue, Assistant Chief Economist at RBC, this policy adjustment could lead to a cooling of the rental market, as many newcomers, particularly temporary residents, typically rent rather than buy. Hogue notes that the reduction in temporary residents may reduce rental demand in the short term, particularly in areas near universities, where international student enrollment has significantly reduced vacancy rates.

“We expect any net outflow of non-permanent residents will shrink rental demand in the near term—especially in areas close to post-secondary education institutions,” Hogue explained. With condo completions also set to rise in major cities like Toronto, a declining renter population could create a temporary surplus, potentially leading to slower rent increases or even slight declines in some areas.

Long-Term Effects on Housing Supply and Demand

In the long run, the reduction in immigration targets could help address Canada’s housing supply gap, which reached an estimated 545,000 units between 2015 and 2023. With fewer newcomers forming households, the demand for new housing is expected to drop. RBC projects that nearly 400,000 fewer households will form over the next three years than originally anticipated, providing an opportunity to make progress on the housing supply deficit.

“We now expect an average 150,000 new households will be formed annually under this stricter policy—well within the number of new units the construction industry can deliver,” Hogue stated. However, he cautions that high construction costs, unrelated to immigration, continue to pose challenges for affordable housing development.

Homeownership Market and Interest Rate Influence

Despite the projected decrease in housing demand, experts caution that a rapid shift in homeownership may not occur. Canada still has a significant population of immigrants who arrived in recent years and may now be looking to purchase homes. Additionally, any future cuts to interest rates could further fuel demand, counteracting the cooling effects of reduced immigration.

While this new immigration policy could present a “golden opportunity” for Canada to get closer to its housing supply goals, Hogue emphasizes that the benefits won’t be immediate, as past housing shortages and high construction costs continue to create obstacles.

Conclusion

Canada’s revised immigration targets represent a substantial shift in policy aimed at addressing economic and housing challenges. The reduction in newcomers could ease the rental market and help close the housing supply gap over time. However, factors like construction costs and potential interest rate cuts will play significant roles in determining the overall impact on Canadian housing.

References:

• Hogue, R. (2024). RBC Economic Report.
• Statistics Canada. (2024). Annual Population Growth Report.
• Immigration, Refugees and Citizenship Canada (IRCC). (2024). Government of Canada.