The Bank of Canada has decided to keep its benchmark interest rate unchanged at 5.0% for the third consecutive announcement in 2023.
A senior official from the Bank of Canada has pointed out that the recent influx of newcomers is contributing to inflation by increasing the demand for housing. This raises concerns that rents and home prices may continue to rise unless there is a corresponding increase in housing supply.
In a speech delivered in Windsor, Ontario, Deputy Governor Toni Gravelle acknowledged the positive aspects of the surge in immigration, noting that it has contributed to economic growth, expanded the workforce, and helped counteract the effects of an aging population. However, he also cautioned that this demographic shift is placing additional pressure on a housing market already grappling with structural challenges, such as zoning restrictions and a shortage of construction workers.
Gravelle stated, “This surge in demographic demand, combined with preexisting structural supply issues, may explain the ongoing increase in rent inflation in Canada. It also provides some insight into why housing prices have not declined as much as initially expected.”
The Bank of Canada has observed that, despite increases in interest rates, certain housing-related costs, like house prices, have not decreased significantly. This phenomenon is attributed to the fact that Canada’s housing supply has struggled to keep pace with demand.
According to the deputy governor, the decline in Canada’s vacancy rate, which measures the availability of homes for rent or purchase, began shortly after immigration levels began to rise in 2015. He noted that this trend intensified in early 2022 when newcomer arrivals surged, leading to a more pronounced decline in the vacancy rate.
Gravelle highlighted that the combination of rapid population growth and existing structural housing challenges has contributed to the disparity between housing markets in Canada and the United States. Unlike the U.S., where housing construction has been more adaptable to respond to population changes and where rent inflation is expected to decrease, Canada’s housing supply has struggled to keep up with recent increases in immigration.
The deputy governor emphasized the need for all levels of government to collaborate in reducing barriers to building more homes, or else rent and home prices may continue to climb.
Canada has witnessed significant population growth in recent years as the federal government pursues more ambitious immigration targets and allows more non-permanent residents into the country.
While the Bank of Canada has maintained its key interest rate target at five percent, it has also cautioned that it is prepared to raise rates if necessary in its efforts to combat inflation.