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Canada's Immigration Policy Driving Housing Unaffordability, Higher Rates - TD

Published 2023-07-27, 03:33 p/m
© Reuters.

By Ketki Saxena

Investing.com -- Canada's immigration policy in recent years has been predicated on the premise that newcomers are necessary to support economic growth, tax revenues, and the healthcare system.

The results of this policy have seen the Canadian population boom - skyrocketing by 1.2 million over the last 12 months alone.

However, a recent analysis by TD (TSX:TD) Economics shows that this "textbook demand shock" is having far more negative consequences than positive on the Canadian economy and social system.

The analysis by TD notes that " the question is whether the sudden swing in population has gone too far, too fast".

The report acknowledges that while high levels of immigration support the labour market and economy in the long run, "the surge in population is.coming at a cost of worsening dislocations in other segments of the economy".

"While the right hand has been solving for labour market shortfalls, the left hand has not put in place the appropriate infrastructure to absorb this large influx of people".

The results of a lack of infrastructure to support Canada's burgeoning population are most acutely seen in the housing market, the report notes.

"Continuing with a high-growth immigration strategy could widen the housing shortfall by about a half-million units within just 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."

"In other words, housing supply will struggle to keep pace with Canada’s rapidly expanding population under each scenario. A meaningful improvement in affordability will likely remain elusive. "

The report also notes that social and economic pressures are being felt in areas far beyond housing.

"This cautionary tale of housing pressures can be applied to many other parts of society, from social systems to health care to physical infrastructure"

The report cites an OECD estimate that ranked Canada 31st of 34 countries in the number of acute care hospital beds on a per capita basis, back in 2019.

Since 2019, "That ranking is unlikely to have improved given the rapid expansion in population".

The impact of this rapid population growth is also likely slowing the GDP per capita growth metrics "which reveal an economy largely moving sideways over the past two quarters", despite supporting overall GDP growth.

The support a growing population provides to GDP as a whole is also problematic, particularly as the Bank of Canada seeks to cool an overheated economy and temper inflation, as it ensures the Canadian economy becomes "less sensitiv[e] to interest rate movements and/or [displays] longer lags."

"Any demand shock that carries persistence would likely need to be addressed via a higher level of interest rates".

The result has been the Bank of Canada needing to take interest rates higher than would have been necessary had the population remained more relatively stable.

TD estimates "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.

The bottom line?

"While population growth is a good thing and a necessary remedy to aging domestic demographics... the benefits erode if it occurs too fast relative to a country’s ability to plan and absorb new entrants within the economic and social infrastructure."

In terms of the housing market, Canada's rapidly growing population will ensure that "concerns around affordability will not likely abate in the foreseeable future. "

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