High rent and house prices partly down to immigration, BoC deputy says

The recent surge in newcomers is adding to inflation through housing demand and rents and home prices could continue to rise without boosting housing supply, a senior Bank of Canada official said Thursday.

In a speech in Windsor, Ont., deputy governor Toni Gravelle acknowledged many of the benefits coming from this rise in immigration, noting it has helped grow the economy, expand the workforce and counteract our aging demographics.

But he warned it’s also adding pressure to a housing market riddled with structural challenges, including zoning restrictions and a shortage of construction workers.

"This jump in demographic demand coupled with the existing structural supply issues could explain why rent inflation continues to climb in Canada. It also helps explain, in part, why housing prices have not fallen as much as we had expected," Gravelle told the Windsor−Essex Regional Chamber of Commerce.

The Bank of Canada has recently noted that even as interest rates have risen, other shelter costs that would typically fall – like house prices – have not declined by much.

It’s attributed this phenomenon to the fact that Canada’s housing supply has struggled to keep pace with demand.

The deputy governor said shortly after immigration began ramping up in 2015, Canada’s vacancy rate – which measures how many homes are available to rent or buy – started to fall.

"Then, when newcomer arrivals picked up sharply in early 2022, that steady decline in the vacancy rate became a cliff," Gravelle said.

The combination of higher population growth and these structural problems have contributed to the discrepancy between housing markets in the US and Canada, the deputy governor said.

"Canada’s housing supply has not kept pace with recent increases in immigration. This is different from the United States, where housing construction has been more flexible to respond to population shifts and where rent inflation is expected to continue to decline," he said.

The deputy governor warned all levels of government to need to work together to reduce barriers to building more homes, or else rent and home prices could continue to climb.

Canada has experienced strong population growth in the last couple of years as the federal government pursues more ambitious immigration targets and allows more non−permanent residents into the country.

The Bank of Canada maintained its key interest rate target at five per cent on Wednesday, but cautioned it was prepared to raise rates if needed in its fight against inflation.