David Rosenberg: Why immigration could be good for housing affordability in the long run

2023/08/11 Leave a comment

Not to be facetious, but in the long run we are dead! Time lags matter and it is clear that current immigration policies, with some specific exceptions, are not helping address Canada’s chronic productivity gap:

We have been vocal critics of Ottawa’s aggressive immigration policy from the perspective of creating further strains on a national housing market that is already stretched to the limit from an affordability standpoint due to a lack of supply. Creating a nation of renters because of a persistent multi-year housing bubble exacerbated by the immigration-fuelled boom in demand for residential real estate, is surely going to exert negative and unstable effects on the economic fabric and society as a whole.

It would be nice if the federal government began to focus its attention toward putting more emphasis on importing construction workers and skilled tradespeople, that much is for sure. After all, real residential investment is at -18.7 per cent year over year, and negative for seven quarters in a row — and all the while, Canada’s population and housing needs have been rising inexorably.

The Canada Mortgage and Housing Corp. (CMHC) estimates that Canada needs an additional 3.5 million units by 2030 to restore affordability — so the federal government would be well advised to ask immigrant applicants whether they know how to work with hammers and nails. The country also has a deficiency of health-care workers that should be more adequately addressed in this aggressive immigration policy, but we shall save that file for another day.

Before going down the rabbit hole of lamenting the excess demand effects on housing from the record levels of immigration that have boosted population growth to two per cent at an annual rate, far above historical norms and, outside of Iceland, at the very high end of the range in the industrialized world, the beneficial impact on Canada’s growth potential from the supply side must be addressed.

And that is because one way to deal with the housing affordability crisis in Canada is to find ways to boost national income — income being the denominator in the classic homeowner affordability ratio. From that perspective, this immigration policy could very well end up carrying with it more benefits than costs, and counterintuitively prove to be a development that could redress the inherent imbalances in the national housing market.

Immigration does add to home price inflation on the demand side by elevating housing prices over the near-term. But on the supply side, it is disinflationary by filling in labour shortages and increasing productivity — which then helps provide a positive underpinning for real incomes. And it is the prospect that real income growth rises on a secular basis that is at the root of a positive “take” one can adopt on this aspect of immigration.

While difficult to quantify the net effect of the supply and demand contributions of immigration, the comprehensive models we designed show that supply effects outweigh demand — so if you take a holistic, or what is called a “general equilibrium,” view of this demographic shock, increasing immigration can indeed be disinflationary. Again, this is positive for real incomes — and this could be a real key towards helping resolve the affordability challenge.

Our models show that when net international immigration flows are accounted for, the downward inflation impact is highly statistically significant. That is very encouraging — and why the Bank of Canada has taken a very even-handed approach to this issue, with Governor Tiff Macklem commenting on the supply-side benefits of an ambitious immigration stance.

What is fascinating is that immigration, if done right, can also be a factor that reverses the structural decay in Canadian labour productivity — which has been negative year over year for the past nine quarters. High-skilled immigrants from the “economic category” of Canada’s immigration program are a solution to this problem. In fact, what seems to go under-reported is that immigration in Canada is now focused on this “economic category” — in other words, more than half of recent immigrants are “elected based upon their potential economic contribution to meet labour market needs.”

A public policy focus to improve productivity and thus decrease inflation and bolster real incomes should involve a concentration in immigration on sectors like health care and construction — to help fill in labour shortages.

Bottom line: Ensuring that we have a sensible immigration policy in Canada means using it as a tool to redress, not compound, the housing affordability crisis and a distorting real estate price bubble that just keeps getting bigger.

But the good news in all this is that immigrants in Canada do get integrated into the labour market rather quickly.

The employment rate among landed immigrants and non-permanent residents (64.6 per cent — it was 61.6 per cent in Dec 2022) has been higher than those born in Canada (62.4 per cent) every month since May 2021. The gap is now at a historic high of 2.2 percentage points.

The change in the employment rate has also been much faster for immigrants and non-permanent residents than for those born in Canada, meaning they contribute toward a backdrop of rising incomes in nominal terms.

Statistics Canada has found in its own research that the “median wage of economic immigrant principal applicants surpasses that of the Canadian population one year after admission.” Immigrants pull their economic weight, in other words, and the historical record shows a trend toward labour market involvement and to improved productivity. In fact, research published by Statistics Canada found a positive relationship between the immigrant share in the business sector and growth in labour productivity, with productivity expanding by 1.9 per cent for every 10-percentage-point increase in the share of immigrants at a firm.

While we and others have been focused on the very short-term effects of the immediate demand rush the immigration policy is having on housing, perhaps we all need to take a longer-term view of the supply-side income benefits and how that can help ease the affordability problem plaguing the younger cohorts of society.

That said, it is clear that in the here and now, ensuring that the immigrants flowing into the “economic category” have experience in the building trade sector would also go a long way towards providing relief for a housing market that is clearly short of the supply needed to realign home prices to more normal levels relative to incomes.

David Rosenberg is founder and president of independent research firm Rosenberg Research & Associates Inc. To receive more of David Rosenberg’s insights and analysis, you can sign up for a complimentary, one-month trial on the Rosenberg Research website. Atakan Bakiskan is a junior economist at Rosenberg Research.

Source: David Rosenberg: Why immigration could be good for housing affordability in the long run

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Analysis: Canada’s immigration creates ‘mirage’ of economic prosperity, TD report predicts higher interest rates and an affordability crisis 

2023/07/27 Leave a comment

A number of good articles questioning current immigration policies, given their impact on housing, healthcare and infrastructure. While the change in immigration minister from one with an Atlantic perspective in favour of more immigration to a Quebec minister, more attuned to some of Quebec concerns on levels, may or may not indicate a shift from the “more is merrier” approach to a more intelligent approach that factors immigration impacts on housing, healthcare and infrastructure. We shall see.

Certainly ironic to see Minister Fraser shuffled to housing where he will have to address some of the problems he exacerbated:

Canadian Prime Minister Justin Trudeau has fueled economic growth and plugged gaps in the labor market by ramping up immigration, but now new arrivals are straining public services and contributing to an overheating economy, economists say.

Since taking power in 2015, Trudeau has brought in an estimated 2.5 million new permanent residents, driving the population above 40 million.

Canada’s population grew at its fastest pace since 1957 last year, placing it among top 20 fastest growing countries in the world, Statistics Canada said, in part offsetting the effects of aging residents who are retiring and adding to healthcare costs.

In large part thanks to immigration, Canada has matched the United States with an average GDP growth of just over 2% over the past decade, well above the 1.4% G7 average, according to Marc Ercolao, an economist at TD Securities.

But problems caused by rapid immigration are beginning to show. First of all, the Bank of Canada struggled to pin down the impact of the newcomers as it tried to cool economic growth.

Bank of Canada Governor Tiff Macklem has said immigration adds to both supply and demand, but the overall effect has increased the need for higher interest rates. While immigrants helped ease a labor shortage, they added to consumer spending and housing demand.

“If you start an economy with excess demand (and) you add both demand and supply, you are still in excess demand,” he said about immigration earlier this month after hiking rates to a 22-year high of 5.0%.

The more concrete problems are the growing strains on transit, housing and healthcare, issues that have begun to dog the federal government as municipal and provincial leaders increase calls for more funding to address them.

“If we want to do more immigration, fine, but let’s have a suite of policies” that increase infrastructure investment for “transit, housing, healthcare… schools,” said Chris Ragan, director of the Max Bell School of Public Policy at McGill University in Montreal and an adviser to the Conservative Finance Minister Jim Flaherty in 2009-10.

“Our communities and our economy are made stronger every day by people who chose to move to Canada,” said a spokesperson for the Finance Ministry.

Most “will contribute to Canada’s economic prosperity and… help address the labor shortages”, the spokesperson said.

‘MIRAGE’

Earlier this month, under pressure from Toronto’s new mayor, Trudeau’s government pledged nearly C$100 million ($76 million) to the city to help house refugees who had been sleeping on the street.

One-fifth of Canadians in the publicly funded healthcare system do not have a family doctor, the Angus Reid Institute research firm said last year. In Toronto, Canada’s largest city, an average driver lost 118 hours in traffic in 2022, up 60% on the year and the third-highest in North America, data analytics firm Inrix says.

While immigration adds to annual GDP, per capita GDP has grown only 2.4% since the first quarter of 2016 compared to 11.7% for the United States. That means Canadians’ wealth, or their standard of living, is rising more slowly than in the U.S.

“The Canadian economy on a per-capita basis is flat on its back,” said David Rosenberg, chief economist and strategist at Rosenberg Research. Through population growth “you can create this mirage of economic prosperity, but in the end that’s what it is, a mirage,” he said.

Source: Analysis: Canada’s immigration creates ‘mirage’ of economic …

TD report predicts higher interest rates and an affordability crisis 

If Canada’s population boom continues at its current frantic pace, interest rates will face upward pressure and the massive influx of people will significantly worsen affordability for homebuyers and renters, a new report from TD Bank warns.

And the bank’s economists are calling on the federal government to restore “balance” to its immigration policies.

Over the past 12 months Canada’s population surged by 1.2 million, driven by higher annual targets for permanent immigration but also a swell of non-permanent residents such as temporary foreign workers and international students.

That rapid growth has helped employers fill job openings and propelled Canada to become the fastest growing economy in the G7, but it is also causing “dislocations in other segments of the economy,” including the housing market, health care, social services and infrastructure, that threaten to undo the benefits, the report’s authors warn.

The population jump caught economists off guard, raising the question of whether it will be repeated. Based on the pace of TFW program usage and study permits in 2023 so far, TD said Canada’s population is likely to increase by another one million people this year.

If that happens, the gap between housing supply and demand would grow to 500,000 units through 2025, the report said, adding that even with aggressive policies in place to boost home construction, supply would not keep up.

The result would be an erosion in affordability for buyers and renters, a situation that would be made worse by the upward pressure a persistent high-growth immigration strategy would put on interest rates, the report said.

According to TD, if Canada’s population boom continues, the neutral interest rate – which is sometimes described as the Goldilocks level of interest that neither stimulates economic demand nor holds it back – will need to rise by 50 basis points, or half a percentage point, compared with under earlier assumptions about how Canada’s population growth would unfold.

“The implication is not only do you have a higher run rate on interest rates, but when you get into the position of cutting interest rates it would put a higher floor for how low you would go,” Beata Caranci, chief economist at TD and one of the report’s authors, said in an interview.

“The Bank of Canada is trying to push a boulder up the hill when it comes to inflation, because as it increases interest rates, the sheer size of the population keeps generating demand that outstrips supply.”

For its part, the Bank of Canada has said little about whether therapid population growth is affecting monetary policy, though earlier this month, after the bank raised its key overnight rate by another 25 basis points to 5 per cent, Governor Tiff Macklem said on balance the effect is “probably roughly neutral.”

On the one hand, immigration has reduced pressure on the labour market and eased costs for employers, he said, while on the other, “these new entrants in the economy, they’re also new consumers, they’re renters, they’re new homebuyers, so it’s also adding to demand.”

Ms. Caranci said a jump in population like Canada has witnessed wouldn’t be such a problem if there was a similar surge in productivity; however, the country’s track record on that front is not promising. And what she called the “government guarantee” that it will bring in new workers to fill labour gaps only reduces the incentives companies have to invest in technology that would make them more efficient.

Rather than view immigration as the “be-all and end-all solution” to Canada’s aging work force, the TD report urged policy makers to focus on reforms that would remove barriers to the work force for people already here, giving the example of how flexible work arrangements and the expansion of daycare has lead to a big jump in the number of mothers with young children taking jobs.

Measures aimed at making medical and engineering credentials more transferable would also allow recent immigrants who are underemployed to fill critical gaps in the labour force, it added.

“If the purpose was to put a stop-gap in what was an extreme shortage of labour revealed by the pandemic, at some point you have to take your foot off the gas and let the supply side catch up,” Ms. Caranci said.

“If you don’t, the benefits of that population increase will erode over time. Someone has to do the math here that we have a system that can accommodate everybody.”

Source: TD report predicts higher interest rates and an affordability crisis

Lastly, Diane Francis in the Financial Post:

Prime Minister Justin Trudeau’s push to increase immigration to unprecedented levels is damaging Canada’s health-care system.

The numbers reveal the problem. Last year, Canada welcomed 492,984 new immigrants, all of whom will eventually be issued health cards, entitling them to medical benefits for life. This year, another 465,000 immigrants are set to arrive, plus another 485,000 in 2024 and 500,000 in 2025.

Between 2016 and 2021, the Trudeau government admitted a record of over 1.3 million permanent immigrants into the country, all of whom will require medical services. This has put a significant strain on large urban areas such as Toronto, Vancouver and Montreal, which have borne the burden of the influx because they are where the lion’s share of immigrants settle. Toronto and Vancouver, in particular, already suffer from health-care shortages and unaffordable housing prices.

The feds set immigration targets with little regard for skills, the burden placed on social welfare systems or the impact on housing costs. The result is that many hospitals are reaching their limits. Doctors and nurses are in short supply, Canadians face long wait times for specialists and elective surgeries and millions lack a family physician.

Since I began pointing out the connection between deteriorating health care and high immigration levels last year, little has changed. Recently, Immigration Minister Sean Fraser responded with an embarrassingly inadequate policy fix, announcing that Ottawa would fast-track immigration approvals for 2,000 health-care professionals.

This is not nearly enough. Financial Accountability Office of Ontario projects that Ontario alone will be short 33,000 nurses and personal support workers by 2028, despite provincial initiatives to boost graduates.

Canada’s immigration levels are disproportionate to other developed nations, taking in about four times as many immigrants as the United States on a per capita basis. To make matters worse, Ottawa’s screening is inept. Despite the staggering immigration numbers, the federal government has failed to address the shortage of skilled labour across the country by recruiting qualified tradespeople.

This push to significantly increase the population was concocted at a weekend gathering in 2011 in Muskoka, Ont., led by Dominic Barton, who served as global managing director of McKinsey and Co. before becoming Canada’s ambassador to China for a time, and former BlackRock Inc. honcho Mark Wiseman. They created a Toronto-based lobbying group called the Century Initiative, which believes Canada’s population should reach 100 million by 2100.

The group estimates that, given sagging birth rates, reaching their arbitrary goal of 100 million would require Canada to accept at least 500,000 immigrants a year, if not more. This has now become our official immigration policy, with the Trudeau Liberals targeting around half a million new immigrants per year.

The Century Initiative hopes to create “mega-regions,” increasing the population of the Greater Toronto Area from 8.8 million in 2016 to 33.5 million by the end of the century, the population of Metro Vancouver from 3.3 million to 11.9 million and the National Capital Region from 1.4 million to 4.8 million.

Seven years of this foolish Liberal immigration policy has placed a significant strain on the health-care system and housing market. And Canada is going to make matters worse by admitting upwards of 753,000 international students this year, which will further increase the cost of rentals.

A CIBC report last year said that the admission of huge numbers of newcomers in 2022, including an estimated 955,000 “non-permanent residents,” represents “an unprecedented swing in housing demand in a single year that is currently not fully reflected in official figures.”

This unbridled immigration is placing a burden on Canada’s struggling health-care system and housing market. It is irresponsible.

Source: Diane Francis: Immigration pushing housing, health care to the breaking point

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What’s the right number of immigrants for Canada?

2023/06/06 Leave a comment

In contrast to Globe editorial, Immigration: Canada needs more newcomers and (much more) housing, this article asks the needed questions, featuring business and academic economists who are increasingly challenging the current general political and economic consensus:

How many immigrants should Canada be admitting?

Economists are asking that question with increasing intensity – and for good reason. Canada’s population jumped by more than a million people last year. The surge was the largest annual increase in the country’s history, and one that was driven nearly entirely by immigration.

The skyrocketing number of new Canadians is putting added pressure on an already drum-tight housing market. People are scrambling “for a place to live in a market with no housing supply,” Bank of Nova Scotia warns. Home prices are climbing, while the rental vacancy rate is at “a generational low,” according to National Bank of Canada.

For now, the Liberal government in Ottawa is sticking to the aggressive pro-immigration policy that it introduced after being elected in 2015. It is targeting nearly half-a-million immigrants a year– roughly double the 261,000 that Canada admitted annually in the 2010 to 2014 period.

However, a growing number of critics are challenging the logic behind Ottawa’s great immigration ambitions.

Prominent business economists say they are baffled by the government’s insistence on sticking to supersized immigration quotas at a time of widespread housing shortages. Stéfane Marion, chief economist at National Bank of Canada, and David Rosenberg, president of Rosenberg Research, have urged Ottawa to consider revising its targets to allow housing supply to catch up to demand.

Meanwhile, a new working paper from a trio of Canadian academic economists digs deeper into the issues around immigration. The paper, currently circulating in draft form under the title, The Economics of Canadian Immigration Levels, offers a scholarly but withering critique of current policy.

The authors – Matthew Doyle and Mikal Skuterud of the University of Waterloo, and Christopher Worswick of Carleton University – argue that policy makers are mistaken to conclude “that if some immigration is good for the economy, then more must be better.”

Granted, how you view this issue depends on how you define “better.” The three economists acknowledge that if Ottawa’s goal is simply to swell Canada’s geopolitical clout then, yes, it does make sense to fling open the doors and welcome a massive influx of newcomers. More workers and more consumers will mean a larger economy.

But size isn’t everything. Imagine a case in which Canada’s economic output doubled while its population did, too. Would this improve life for a typical Canadian? Not really. The average person would wind up seeing no improvement in their standard of living. The increase in the size of the economic pie would be matched by an equivalent increase in the number of people sharing it.

There is also morality to consider. On paper, it’s possible to show that a country can generate an “immigration surplus” by bringing in masses of low-skilled workers to take menial jobs. This underclass of low-paid immigrants can free up the existing population to pursue better-paid occupations.

However, it’s questionable how far this idea can or should be pushed in an egalitarian country such as Canada. The notion of an immigration surplus downplays the stresses faced by low-paid immigrants. It ignores issues of income inequality and focuses only on the benefits reaped by the people already in the country.

The three professors argue for a more equitable, more inclusive approach. They say the fairest and most reasonable test of Canadian immigration policy is whether it helps to grow output per person – or gross domestic product (GDP) per capita, in the jargon.

Research has demonstrated that measures of per capita GDP are closely tied to feelings of well-being and life satisfaction. If immigration offers a surefire way to boost this number, then there is good reason to think it is benefiting the nation as a whole.

Unfortunately, for the pro-immigration camp, there is no evidence that it does much of anything to help accelerate growth in GDP per capita.

The opposite is often true. When immigration is limited and labour is in short supply, businesses can find it profitable to invest in new capital – tools, computers, factories and other gear – to boost the productivity of scarce workers. This capital investment can help to swell per capita GDP.

In contrast, when immigration is surging, the case for capital investment may look less attractive. Businesses can find it cheaper to hire an additional worker to meet new demand instead of investing in new equipment. The result can be a larger work force, but one with lower productivity and lower per capita GDP.

The three professors look back at past decades and see nothing to indicate that immigration has ever been an economic tonic.

“Using evidence for Canada and the U.S., we find either a negative relationship, or no relationship, between periods of high immigration and subsequent growth in GDP per capita,” they wrote in their paper.

Just to be clear here: The lack of any obvious economic payoff from immigration doesn’t mean Canada should slam the door shut on newcomers.

The economists point out that federal legislation lists 12 goals for immigration, ranging from family reunification to supporting minority official languages communities. Many of those goals aren’t economic in nature and can still justify substantial levels of immigration.

But the dubious economic case for immigration raises questions about why Ottawa has been basing so much of its immigration policy on economic rationales. The government’s most recent targets allot roughly 60 per cent of immigrant slots to economic-class applicants – that is, people who are, in theory, being chosen for their ability to contribute to Canada’s prosperity.

This emphasis on economic-class immigrants may reflect misconceptions.

Consider, for instance, the idea that immigration is needed to fill low-skill, essential jobs. This doesn’t make a lot of sense, according to the economists. Admitting people to fill low-wage jobs pulls down, rather than pushes up, GDP per capita.

Just as questionable is the idea that immigration can offset the effects of Canada’s aging population.

Immigrants age and eventually retire just like anyone else. While there may be a short-term demographic dividend from immigration, “leveraging this demographic dividend to produce ongoing growth would require a Ponzi-type strategy of continually increasing the immigration rate to undo the increasing size of the retirement-age population,” the economists wrote.

So what can Canada do to improve its economic-class immigration system?

The three co-authors suggest that Ottawa should focus on admitting immigrants with higher levels of skills and education than it is currently targeting. They argue that the goal should be to select immigrants who can earn at least as much as, if not more, than the average Canadian within 10 years of arrival. Over time, this policy should boost GDP per capita.

The economists don’t offer any estimate of how such a policy would affect the number of immigrants being admitted, although Prof. Skuterud and Prof. Worswick both acknowledged in interviews that the impact, at least at first, would likely be a significant decline in the number of newcomers.

They suggest this might be wise, given the stresses being put on social systems by today’s massive influx of immigrants. Their paper cautions that “the strains currently being placed on the public health care system, the public education system and the highly regulated housing sector suggest even more reason to be cautious about setting high levels of economic immigration.”

Pro-immigration voices can, of course, find plenty here with which to take issue. That is absolutely fine. A vigorous debate over immigration is exactly what Canada now needs.

Source: What’s the right number of immigrants for Canada?

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Rosenberg: Ottawa should consider a less ambitious immigration policy to help ease this epic housing affordability crisis

2023/05/05 Leave a comment

Asking the needed question:

The bizarre way the Trudeau government has dealt with an epic housing affordability crisis in Canada has been to exacerbate the demand-supply imbalance by pursuing the most aggressive pro-immigration policy on record. As a result, population growth keeps climbing, with Canada seeing its highest ever annual growth rate at 2.7 per cent – or more than a million people – last year .

This is truly insane.

The problem is that the country does not have the adequate supply, especially when it comes to residential real estate, to absorb this sort of immigration-led population growth without exerting further strains on the stretched housing market. The ratio of population to housing stock is 40 per cent above historical norms. And the same is true for the homeowner affordability ratio.

It would have been one thing if the Bank of Canada’s rate hikes of the past year had worked to bring real estate prices down to more reasonable levels, but the federal government didn’t let that happen with its aggressive immigration stance, which kept housing inflation intact. Canadian homeowner-wannabees have been crowded out by still-elevated prices and the central bank-induced rates shock.

The need to ramp up debt massively to afford a home has left Canadian household balance sheets extremely stretched, with a debt/income ratio at record levels of 180 per cent. And more than 14 per cent of incomes are now being drained by ever-higher debt-service costs. Even the tightest labour markets on record and expanding earnings growth have fallen short of mitigating the influence from higher rates and still-ridiculous home prices which, by the way, are back on an uptrend.

How much debt is each generation of Canadians carrying, and how do you compare?

The BoC seems unlikely to raise rates again, which means the Canada Mortgage and Housing Corp. has to start clamping down on lending guidelines.

Ottawa should seriously consider a less-ambitious immigration policy, which is doing more harm than good at this point. A country where folks in their 30s are crowded out of the housing market because of an elongated period of excessive home price inflation that is the result of government policy is not a very happy country. This will all come out in the wash in the next election, and if I were in opposition, this is the card I would be playing.

Prime Minster Justin Trudeau has aided and abetted the most onerous housing affordability conditions the country has ever faced and which are having ill effects on society at large.

To show just how egregious the situation is, for homeowner affordability to revert to its long-term average, home prices would need to fall by almost 30 per cent. But the government’s immigration policy won’t allow for this natural correction from crazy-stupid price levels. Interest rates would need to fall nearly two percentage points or we would need to see a 40-per-cent surge in incomes.

No matter, we have a very unstable situation on our hands. It seems highly unlikely that the affordability ratio can remain at such a massive deviation from its long-run average.

The question is: How will it revert to the mean? There is no way incomes will rise by 40 per cent. Maybe over the next decade, but certainly not quickly enough.

What is needed is for the BoC to allow for lower rates, and that in turn requires a fiscal and regulatory policy that will foster a return to more reasonable home prices (sorry, existing homeowners – your net worth needs to go down) and sustainably low inflation (which Ottawa’s spending and immigration policies are working against).

David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.

Source: Ottawa should consider a less ambitious immigration policy to help ease this epic housing affordability crisis

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