David Rosenberg and Atakan Bakiskan
We have been vocal critics of Ottawa’s aggressive immigration policy from the perspective of creating further strains on a national housing market that is already stretched to the limit from an affordability standpoint due to a lack of supply. Creating a nation of renters because of a persistent multi-year housing bubble exacerbated by the immigration-fuelled boom in demand for residential real estate, is surely going to exert negative and unstable effects on the economic fabric and society as a whole.
It would be nice if the federal government began to focus its attention toward putting more emphasis on importing construction workers and skilled tradespeople, that much is for sure. After all, real residential investment is at -18.7 per cent year over year, and negative for seven quarters in a row — and all the while, Canada’s population and housing needs have been rising inexorably.
The Canada Mortgage and Housing Corporation (CMHC) estimates that Canada needs an additional 3.5 million units by 2030 to restore affordability — so the federal government would be well advised to ask immigrant applicants whether they know how to work with hammers and nails. The country also has a deficiency of health-care workers that should be more adequately addressed in this aggressive immigration policy, but we shall save that file for another day.
Before going down the rabbit hole of lamenting the excess demand effects on housing from the record levels of immigration that have boosted population growth to two per cent at an annual rate, far above historical norms and, outside of Iceland, at the very high end of the range in the industrialized world, the beneficial impact on Canada’s growth potential from the supply side must be addressed.
And that is because one way to deal with the housing affordability crisis in Canada is to find ways to boost national income — income being the denominator in the classic homeowner affordability ratio. From that perspective, this immigration policy could very well end up carrying with it more benefits than costs, and counterintuitively prove to be a development that could redress the inherent imbalances in the national housing market.
Immigration does add to home price inflation on the demand side by elevating housing prices over the near-term. But on the supply side, it is disinflationary by filling in labour shortages and increasing productivity — which then helps provide a positive underpinning for real incomes. And it is the prospect that real income growth rises on a secular basis that is at the root of a positive “take” one can adopt on this aspect of immigration.
While difficult to quantify the net effect of the supply and demand contributions of immigration, the comprehensive models we designed show that supply effects outweigh demand — so if you take a holistic, or what is called a “general equilibrium,” view of this demographic shock, increasing immigration can indeed be disinflationary. Again, this is positive for real incomes — and this could be a real key towards helping resolve the affordability challenge.
Our models show that when net international immigration flows are accounted for, the downward inflation impact is highly statistically significant. That is very encouraging — and why the Bank of Canada has taken a very even-handed approach to this issue, with Governor Tiff Macklem commenting on the supply-side benefits of an ambitious immigration stance.
What is fascinating is that immigration, if done right, can also be a factor that reverses the structural decay in Canadian labour productivity — which has been negative year over year for the past nine quarters. High-skilled immigrants from the “economic category” of Canada’s immigration program are a solution to this problem. In fact, what seems to go under-reported is that immigration in Canada is now focused on this “economic category” — in other words, more than half of recent immigrants are “elected based upon their potential economic contribution to meet labour market needs.”
A public policy focus to improve productivity and thus decrease inflation and bolster real incomes should involve a concentration in immigration on sectors like health care and construction — to help fill in labour shortages.
Bottom line: Ensuring that we have a sensible immigration policy in Canada means using it as a tool to redress, not compound, the housing affordability crisis and a distorting real estate price bubble that just keeps getting bigger.
But the good news in all this is that immigrants in Canada do get integrated into the labour market rather quickly.
The employment rate among landed immigrants and non-permanent residents (64.6 per cent — it was 61.6 per cent in Dec 2022) has been higher than those born in Canada (62.4 per cent) every month since May 2021. The gap is now at a historic high of 2.2 percentage points.
The change in the employment rate has also been much faster for immigrants and non-permanent residents than for those born in Canada, meaning they contribute toward a backdrop of rising incomes in nominal terms.
Statistics Canada has found in its own research that the “Median wage of economic immigrant principal applicants surpasses that of the Canadian population one year after admission.” Immigrants pull their economic weight, in other words, and the historical record shows a trend toward labour market involvement and to improved productivity. In fact, research published by Statistics Canada found a positive relationship between the immigrant share in the business sector and growth in labour productivity, with productivity expanding by 1.9 per cent for every ten-percentage-point increase in the share of immigrants at a firm.
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While we and others have been focused on the very short-term effects of the immediate demand rush the immigration policy is having on housing, perhaps we all need to take a longer-term view of the supply-side income benefits and how that can help ease the affordability problem plaguing the younger cohorts of society.
That said, it is clear that in the here and now, ensuring that the immigrants flowing into the “economic category” have experience in the building trade sector would also go a long way towards providing relief for a housing market that is clearly short of the supply needed to realign home prices to more normal levels relative to incomes.
David Rosenberg is founder and president of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website. Atakan Bakiskan is a junior economist at Rosenberg Research.