Why does immigration remain such an important factor for Canada’s real estate market?

As there are not so many signs of cooling in Canada’s housing market, even with elevated construction costs and the current pandemic, certain specialists demand lifting the restrictions on housing supply. In their opinion, more homes for sale will balance the supply and demand normalizing the real estate prices.

However, a recent report by the CD Howe Institute says that removing the housing construction restrictions may lead us to quite an opposite direction. Dealing with growing housing prices, developers could create an excessive supply, supporting the speculative investments that caused the market crash at the beginning of 1990s.

“Yes, solving the issue of restrained supply remains vital, but investors and policymakers need to closely track the factors affecting demand in order to avoid a bursting bubble,” – said authors Ed Devlin, founder of Devlin Capital and a senior fellow at the C.D. Howe Institute; Thomas Rowlands, an analyst at Devlin Capital; and Parisa Mahboubi, a senior policy analyst at the institute.

Before the pandemic, the forecasts pointed to the on-going excess demand in Canada’s real estate market from 2017 to 2021. Household formation was expected to outpace housing construction. The trend of high international immigration that we’ve seen since 2016 was expected to push the average annual household formation above 200,000 from 2019 to 2023, while housing completions in 2019 and 2020 were below 200,000.

“Population aging, caused by decreasing fertility and lifespan rise, has led to higher immigration target levels lately,” – they said.

Nevertheless, with the pandemic restrictions, immigration flow was restrained. Last year, only fewer than 185,000 newcomers entered Canada, marking a 46% shortage from the target level of 340,000. This year’s plan of more than 400,000 newcomers is also difficult to reach, and it causes pressure on the country’s ability to balance the housing market in the nearest future.

They say, there are also other important factors.

For instance, the five-year mortgage rate has not returned to its pre-pandemic level, and with the recent statements from the central bank it’s not expected to happen in a year or so. The switch to remote work has led to a sharp increase in demand for homes in suburbs.

“As soon as investors and policymakers get a better handle on post-COVID changes in household formation and workplace transformations, they can better assess the real state of the national housing market and its sectors”, – they added.