Last week, the federal government announced it will be cutting immigration in response to mounting economic pressures, including the cost and availability of housing. This move from the feds would involve lowering the cap on permanent residents and introducing controlled targets for temporary residents.
The repeal on immigration comes after years of intense population growth, with January 2023 to January 2024 seeing an annual population growth rate of 3.2% — the highest rate since 1957. Of those 1,271,872 newcomers, 97.6% were made up of permanent and temporary immigrants, with only 2.4% of that growth stemming from natural increase, according to Statistics Canada.
With such intense immigration occurring in a small period of time, and an inadequate amount of new housing coming online, the housing market tightened and the gap between the number of would-be homebuyers and renters and supply widened to critical levels — an issue only exacerbated by high interest rates, the growing cost to build, and high land costs, just to name a few factors.
By slowing immigration, the feds aim to strike a balance between mitigating the economic challenges that have arisen as a result of the steep population growth and remaining a nation that prides itself on a welcoming immigration policy.
"Immigration is essential for our country’s economy and accounts for almost 100% of Canada’s labour force growth," said the Honourable Marc Miller, Minister of Immigration, Refugees, and Citizenship during a speech in Ottawa last Thursday. But in light of "pressures on housing and social services," Miller added, Canada requires "a more sustainable approach" to immigration.
That new approach involves reducing permanent resident targets from 500,000 to 395,000 in 2025 and down to 380,00 in 2026, before setting a target of 365,000 in 2027.
For the first time ever, the government will also be capping temporary resident volumes by reducing their share of Canada's population to 5%. Compared to each previous year, we will see Canada’s temporary population decline by 445,901 in 2025 and 445,662 in 2026, before seeing a modest increase of 17,439 in 2027.
Overall, Canada will welcome 900,000 less newcomers over the next two years and see its population decline by 0.4% by 2026, followed by slow growth beginning in 2027.
These reductions are accompanied by a number of other policy changes aimed at reducing immigration including the cap on international students and increased eligibility requirements for temporary foreign workers.
In light of these changes, Canada's housing market can expect to see some substantial impacts both in the long and short term. According to a recent report from Robert Hogue, Assistant Chief Economist at RBC, the new immigration targets constitute "one of the more consequential policy reversals in recent memory."
Rental Market To Cool
One of the first areas to experience the impacts of reduced immigration, Hogue says, will be the rental market as newcomers, especially temporary residents, rely more heavily on renting than owning.
"We expect any net outflow of non-permanent residents will shrink rental demand in the near term—especially in areas close to post-secondary education institutions where ballooning international student enrolment crushed vacancy rates," says Hogue, adding that some markets are already seeing a cooling off in demand.
At the same time, cities like Toronto are seeing a substantial amount of condo completions come online, which, when coupled with a declining renter population, will produce a supply surplus that could slow rent hikes. "They could even drive rent lower if vacancies jump materially (above 3% as a general rule)," says Hogue. But, cautious investors might shy away from throwing their money into condos and purpose-built apartment buildings if demand remains low.
Closing The Gap
In the longer term, the gap between housing supply and demand could be lessened as a result of fewer immigrant households being formed. "We project that nearly 400,000 fewer households (or -46%) will be formed over the next three years than we had expected in The Great Rebuild," says Hogue.
The sheer lack of would-be-homeowners could provide a "golden opportunity" for Canada to get back on track with its housing targets — the caveat being that we keep up the recent pace of homebuilding. "We now expect an average 150,000 new households will be formed annually under this stricter policy—well within the number of new units the construction industry can deliver," says Hogue.
But the shift won't be felt immediately. "We estimate growth in housing stock fell short of new households by 545,000 between 2015 and 2023. This gap will take years to undo," Hogue says. In the meantime, construction costs remain high due to factors outside of immigration, meaning homebuilders will continue to struggle to deliver affordable homes.
Also hampering a swift cooling of the homeownership market despite the new immigration policy are interest rate cuts and the "wave" of immigrants that arrived in Canada over the last 10 years and could now be in the position to buy a home of their own.
"We see more reasons for homebuyer demand to grow in the next year or two than decline," says Hogue. Adding that "Softer demographics will temper the recovery’s pace, keeping sales only modestly above the 10-year average through 2026, nationally."
