Surging immigration could lead to a significant widening of the gap between incoming demand and ongoing construction
The Canadian government’s immigration targets might have some unintended consequences if economic and social infrastructure growth fails to keep pace with the surge of newcomers, according to TD Economics.
The federal government’s plan to draw in approximately 500,000 immigrants annually by 2025 might be an effective solution to the economic impact of an aging population, “but now the question is whether the sudden swing in population has gone too far, too fast,” TD said.
TD warned that a high-growth immigration strategy could lead to a significant widening of the gap between incoming housing demand and ongoing construction. TD estimated that taking the government’s plan into account, Canada’s housing shortfall could surge by as many as half a million units within a mere two years.
“Recent government policies to accelerate construction are unlikely to offer a stop-gap due to the short time period and the natural lags in adjusting supply,” TD said. “In addition, we estimate that the neutral interest rate level would likely need to be lifted by an extra 50 basis points relative to prior assumptions on population growth.”
“It’s great for long-term fundamentals,” Drew Donaldson, founder and CEO at Donaldson Capital, told Canadian Mortgage Professional. https://t.co/eIeCHp8Ayf#mortgageinsights #mortgageindustry #immigration #housingmarket
— Canadian Mortgage Professional Magazine (@CMPmagazine) January 6, 2023
TD stressed the need for policymakers to strike a balance between immigration and sustainability.
“Greater thought and estimation needs to occur on what’s a true absorption rate for population growth,” TD said. “Policy cannot be singularly focused on the perceived demands of employers, and even educational institutions.”
The Bank of Canada is ideally placed to established buffers against these instabilities – but at a steep cost.
“Any demand shock that carries persistence would likely need to be addressed via a higher level of interest rates in the absence of some offsetting productivity surge, which has not been Canada’s forte,” TD said.
“We calculate that the neutral level of interest rates would rise by an extra 50 basis points to counterbalance the federal government’s immigration targets relative to the prior assumptions on population growth.”
