Benjamin Tal, CIBC's Deputy Chief Economist, and Katherine Judge, CIBC Senior Economist, discuss the evolving landscape of Canadian immigration policy, its impact on the housing market, and the critical role of purpose-built rentals in addressing affordability. Drawing on recent research and government initiatives, they explore how shifts in immigration trends are shaping economic productivity, the regional variations in housing market performance and how government initiatives are shaping both immediate and future responses to Canada’s affordability crisis.
Introduction: Welcome to Eyes on the Economy by CIBC Capital Markets, a podcast series dedicated to addressing current issues in a concise format, helping to make sense of the evolving economic complexities, so that you can take action.
Katherine Judge: Welcome to CIBC's Eyes on the Economy podcast. I'm Katherine Judge, a Senior Economist at CIBC. And today I'll be speaking with CIBC's Deputy Chief Economist, Benjamin Tal, about articles that he recently published on immigration in Canada and the housing market. Welcome, Benjamin.
Benjamin Tal: My pleasure, thank you.
Katherine Judge: Thanks. So can you tell us what the main message was in the piece that you recently published on immigration in Canada?
Benjamin Tal: Yes, very interesting things happening in that space. If you look at the overall situation, there is no question about the fact that in 2023, immigration policy in Canada was suboptimal. We got about 1.2 million people into this country basically over the course of breakfast. So we all know the story. Most of them were young immigrants, students, non-permanent residents. It was basically too much of a good thing, the ability of the economy to deal with it was in question. Now this is going to change significantly because the government is slowing it down. However, one thing is very interesting. 50%, five zero, half of all new immigrants arriving to Canada at this point are arriving from one country. And this country is Canada. Now, how can you have immigrants arriving to Canada from Canada?
They were already here. They were non-permanent residents, students that their visa expired, and we are basically replacing or changing their status from non-permanent to permanent. So basically 50% of new Canadians are arriving from Canada, so they are not very new. Now, why is it important? Because of two reasons. First of all, we know from looking at the statistics that people that arrive to Canada from Canada, on average, earn 25% more than people that arrive directly from other country, which means that in terms of productivity, the ability to support economic activity, you have basically an economic multiplier attached to those immigrants much higher than otherwise. That's one thing. The other is the economic class. 60 to 70% of new Canadians are part of the economic class, the point system.
If you arrive from other country, you bring with you usually your spouse and few dependents. This means that the economic class quota is closing very quickly because you get four people instead of one. When you bring more people from Canada to Canada, it means that you actually don't get it because most of them are unattached, they are not attached. They are young people and therefore you get a higher economic multiplier attached to new immigrants arriving from Canada.
This is going to lift significantly the ability of new immigrants to contribute to economic activity in Canada. That's basically the point that we made in this article.
Katherine Judge: So how is the immigration story translating into the housing market impact? What's the impact there?
Benjamin Tal: Yes, so first of all, the slowdown in overall immigration is positive in terms of the pressure on the rental market. We definitely know that. And the ability of them to contribute to the economy is very significant. And therefore, from a long term perspective, it's very positive because we are getting a youth dividend that other countries don't have. That's one thing. But we also wrote about the housing market in general.
And usually, as you know, Katherine, many people are asking us about the Canadian housing market. How is it doing? And I say, you know, there is no such thing as a Canadian housing market. Depends where you live. Alberta is doing great. Eastern Canada doing great. Toronto and Vancouver are basically in a recession, especially in the condo space. Condo sales are down dramatically and nobody's building. We have a situation in which pre-sale activity is approaching zero. So all the cranes that you are seeing in Toronto, and Vancouver, they're basically completions. They're not starts. So therefore, what we are saying in two or three years from now, when the inventory level goes down to normal, we simply will not have new supply to replace it and prices will have to go up and that's suboptimal.
Katherine Judge: So how is the purpose built market factoring into this and what's the interplay between condos and purpose built in Toronto specifically?
Benjamin Tal: This is a very good question because for the first time we see a situation in which purpose-built rental activity is taking over and that's extremely important because for many years we have been saying that the condo market cannot be the rental market and the rental market cannot be the condo market and that's exactly what we're starting to see now. Purpose-built rental activity is rising dramatically in places like Toronto and also in Vancouver.
Land prices are rising and that's something that is changing the economic seal for the better. We have a situation in which the government is recognizing that a big part of the affordability issue is rental. So we need to provide incentive to developers to build rental. We're talking about development charges, we're talking about GST, SLUS, HST, and all kinds of other incentives to really provide some activity in this space and unfreeze it.
And that's more less what's happening. So the vacuum that will be created by the lack of condos will be filled by purpose-built. And that's a very good environment to be in. Why? Because who are the next generations of renters? There will be young families with kids. They need to deal with the company, not a landlord. They need stability, and that's exactly what purpose-built rental will provide. So I'm very excited about this trend. I think it's a very important trend, a very big part of the puzzle we call the affordability crisis in Canada.
So in this kind of environment, I think that the fact that the government is getting that we need to encourage and provide incentives to developers is extremely important. Without that, this market will not fly and purpose-built rental to be a big part of the affordability puzzle solution.
Katherine Judge: And on that note, Prime Minister Carney just announced the Build Canada Homes initiative with the goal of increasing housing supply. So how optimistic are you about that plan making a dent in our housing supply shortage, which would take one to two years to build off at the current pace of housing starts?
Benjamin Tal: Yes, I think it's a very good step in the right direction. think that the prime minister is a bit optimistic about the ability of Canada to double housing starts in a very short period of time. That's not going to happen because we simply don't have the capacity. By allocating 13 billion dollars to affordable housing, the prime minister is sending a very clear signal that he is very serious about affordable housing. And that's very important. Now, remember, we're not talking about the market best housing. We are talking about affordable housing, which is a totally different story. The main issue in Canada is not only affordable housing, but market best housing that is in shortage and that's something that we have to deal with separately.
Katherine Judge: So just broadening out the conversation we've talked about condos, purpose-built rental, what are the prospects for the low-rise segment of the market?
Benjamin Tal: Yes, I think that if you look at the overall situation, the low-rise segment of the market is fine. It's not great, but it is okay. It's in a balanced condition. The main issue is in the condo space, and that's something that is going to be with us for a while. I believe that the next two years we'll see condo prices going down by another 5 to 7 % before they stabilize. And then if we don't build more, they will start rising. But we have to remember that something else is happening here. The model is changing. I think that the future of the condo space given the surge in purpose-built rental means that the model is very different now. What I mean by that is that the focus in the future will be on, the condo market on end users as opposed to investors. Many developers that were not well capitalized are no longer in the market. So it's more concentrated and more capitalized.
And I think that also the size of units will be different. We are not going to build those very small units for investors. We are going to build them for families. That would be a very, very different model compared to the past 10, 15 years.
Katherine Judge: Now in the background we have Bank of Canada reaching a terminal rate of 2.25% on the overnight rate. So how much further room do you see for mortgage rates to fall and support demand in the housing market?
Benjamin Tal: Yes, I don't see a situation in which the five-year rate will go down dramatically. They are basically going to stay more or less where they are in terms of rates. I think that we are talking about a situation in which ⁓ the short end of the curve will start going down by 50 to 75 basis points. That will help clearly to trigger some demand, and we need short-term demand to ignite the supply in the frozen market. But at the same time, I think that the number one issue is really the labor market and the uncertainty regarding Trump.
We'll have to find some sort of equilibrium there before we see a significant improvement in the market.
Katherine Judge: Thank you, Benjamin, for your insights and thank you to our listeners for tuning in. Until next time, we'll be keeping our eyes on the economy and calling it as we see it.
Outro: Please join us next time on the Eyes on the Economy where we will share our latest perspectives and outlook for the Canadian and US economy.
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