Why the argument that immigration is the only real reason behind hovering house costs is flawed

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The argument became a serious challenge in 2020 when immigration rates dropped significantly due to pandemic restrictions, but house prices continued to escalate

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Murtaza Haider and Stephen Moranis, Special for Financial Post More buyers looking for fewer homes to buy and rent is at the heart of home price inflation.More buyers looking for fewer homes to buy and rent is at the heart of home price inflation. Photo by Cole Burston / Bloomberg Files

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Soaring house prices in Canada have fueled an exciting and highly relevant debate about their determinants, such as whether the demand for housing is growing too fast as some believe, or whether supply is lagging demand, causing more buyers for fewer units compete to buy and rent.

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A recent comment suggests that the demand for new housing is a direct result of net population growth, which is mainly driven by immigration. According to Statistics Canada, international migration has accounted for more than three quarters of total population growth since 2016, reaching 85.7 percent in 2019.

If immigration is the reason for the population growth driving demand for housing, it can be argued that Canada should perhaps reconsider the number of immigrants it accepts each year in order to ease pressure on housing and infrastructure.

Canada’s economy has grown almost in step with population growth over the years. World Bank data shows that the country’s gross domestic product (GDP) per capita has more than doubled since 1990. Canada’s GDP per capita used to be similar to the United States, but the gap has widened since 2012.

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Some argue that growing the economy by increasing the population is not the right approach. They say Canada should focus on increasing economic productivity by exploring ways to increase its GDP per capita, which may require lower population growth to sustain economic growth. Some believe that this would make housing prices more affordable because there would be less demand.

But the argument that immigration is the main driver of house prices in Canada became a serious challenge in 2020 when immigration rates dropped significantly due to pandemic restrictions. Canada’s population rose 0.4 percent in 2020, a quarter of the increase seen a year earlier, according to Statistics Canada.

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To put these numbers in perspective, consider that 2020 “had the lowest annual growth since 1945 (in numbers) and 1916 (in%), both times Canada was at war,” Statistics Canada said. In addition, immigration played a much smaller role in population growth, so that the “population growth due to international migration in 2020 was over 80 percent lower than in 2019”.

Those who argue that immigrants and foreign investors are the main determinants of house price inflation could find it difficult to explain what role, if any, new immigrants played in the record escalation in house prices during the pandemic. Most of the borders have been closed, immigration numbers have declined, and international capital flows have been stifled due to economic uncertainty.

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Underneath the rhetoric for and against population growth hides the unevenness of the demographic landscape across Canada. As the country’s population grew, hundreds of small and medium-sized towns declined. Even Montreal’s population fell from 1.77 million in 1971 (the year with the highest population in the city) to 1.7 million in 2016.

Maxwell Hartt, professor of geography and planning at Queen’s University in Kingston, Ontario, examined the uneven population growth in cities and towns as the population declined in his recent book Quietly Shrinking Cities: Canadian Urban Population Loss in an Age of Growth. The book presents a meticulous study of why people are leaving a city or have fewer children, leading to a population decline.

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Hart said immigration is critical to stabilizing Canada’s population growth. Without them, the population would have shrunk because Canadians haven’t had enough children since 1972 to replace themselves.

The differences and similarities between shrinking cities and others are fascinating. Hart observed, for example, that both shrinking and growing cities were similar in terms of Aboriginal populations and the percentage of adults with post-secondary education.

What set shrinking cities apart was that their populations were older and had fewer immigrants and visible minorities. The proportion of immigrants in growing cities was 83 percent higher than in shrinking cities, while the proportion of visible minorities in growing cities was more than double that in shrinking cities.

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Shrinking cities experience no demand-side pressure on housing. In relation to income, housing is far cheaper there than in cities with growing populations. But shrinking cities continue to shrink. Relative affordability and the lack of population pressures make a place not desirable enough for residents to stay and keep the population stable.

Demand-side pressure on housing and infrastructure is only one aspect in determining an appropriate level of immigration. Another consideration is how much labor it will take to sustain economic growth and replace a rapidly aging workforce.

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The housing demand discussion is relevant, but it shouldn’t cover up the fact that Canada has a supply problem. Fewer homes have been built in recent years than in the early 1970s, when the population was much smaller.

More buyers looking for fewer homes to buy and rent is at the heart of home price inflation. Removing supply-side alternatives from the solution mix will only make matters worse.

Murtaza Haider is Professor of Real Estate Management at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached on the Haider-Moranis Bulletin website www.hmbulletin.com.

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