Canada’s next wave of immigration set to add more fuel to overheated housing market

2022/01/07 Leave a comment

About time for greater focus on the links between levels and housing prices. Federal and provincial governments need to consider such externalities rather than just push for more:

After a frenetic 18 months when Canadians pushed up home prices in a quest to ride out the pandemic in comfort, another influx of buyers is set to provide more fuel to the overheated real estate market.

The federal government has increased its annual immigration targets to the highest levels on record, creating the conditions for a surge of new permanent residents, which Canada needs to fill job vacancies. These new immigrants will add to the country’s population and immediately boost the need for housing in major job centres and nearby cities.

This will ramp up competition for homes at a time when national real estate prices have jumped 40 per cent in the past two years.

“Canada’s strong population growth is a factor driving our home prices upward at a faster pace than in many other economies,” said Bank of Montreal chief economist Douglas Porter, who analyzed the relationship between population growth and home prices in 18 developed countries.

He found that countries with faster population growth have had greater home price inflation than those whose populations have remained stable, or decreased.

Between 2010 and 2020, New Zealand and Canada both saw their populations climb by an average of more than 1 per cent each year. In Canada’s case, much of that growth was attributable to immigration.

Over that same decade, home prices rose an average of 7.9 per cent each year in New Zealand and 7 per cent each year in Canada.

Meanwhile, countries with shrinking populations have experienced stagnant or falling home values. Japan’s population declined by an average of 0.2 per cent each year, and home prices there rose an average of 0.2 per cent annually.

One reason immigration may be pushing up Canadian home prices is that Canada’s policies cater to newcomers with wealth and job skills. Many new permanent residents arrive with hefty bank accounts, or with enough professional expertise to make money quickly. And, like anyone else with means, they buy real estate.

Parisa Mahboubi, a senior policy analyst with the C.D. Howe Institute and an immigration labour expert, said integration is a challenge for all newcomers. But, she said: “Economic immigrants, especially those with Canadian experience or with education, are able to integrate into the labour market quickly. This means they are able to purchase a property sooner than other immigrants.”

New research from Statistics Canada suggests that in many cases it’s pre-existing wealth, not Canadian income, that is behind pricey real estate purchases by immigrants.

For example, in Richmond, B.C., a typical immigrant buyer in the lowest wage quintile, with median annual income of just $11,100, spent a median of $763,000 on a home in 2018, according to data from Statscan’s Canadian Housing Statistics Program (CHSP).

In contrast, a typical Canadian-born buyer in British Columbia in the lowest income quintile, with median annual income of $32,300, spent a median of $396,000 on a home in 2018, according to CHSP, which analyzed land registry information, property assessments and tax filings.

The disparity in the amounts spent by low-income immigrants and Canadian-born buyers suggests that the newcomers were relying on money not earned in Canada. The actual sources of the funds are unknown. CHSP has said the immigrant wealth could have been income earned previously in Canada or abroad, or income that was earned by others or underreported.

CHSP observed that in 2018 the majority of immigrant buyers across B.C. had moved to Canada prior to 2009 and had been admitted through the country’s various economic immigrant programs, which are designed to attract skilled workers and those with wealth.

“If you are an economic immigrant and you don’t have other opportunities, real estate becomes one of the fastest wealth generators,” said Andy Yan, director of the city program at B.C.’s Simon Fraser University. “They are wealthy. But when they try finding a job, it goes south.”

Other factors that have contributed to high home prices in Canada include low mortgage rates, a flood of domestic investors looking for high investment returns, and millennials increasingly forming families and seeking properties.

In the Toronto region, the country’s largest job centre, the average price of a home is above $1-million and many of the surrounding cities are nearing or above that price.

That has pushed Canadians and newcomers out of Toronto and into smaller regions in Southern Ontario. Some have left the province altogether for more affordable areas such as Regina, Saskatoon, Winnipeg and Halifax.

Canada’s six largest metropolitan areas – Toronto, Vancouver, Montreal, Edmonton, Calgary and Ottawa – used to be the top destinations for immigrants. But that has been changing.

In 2002, Canada’s largest cities took in 88 per cent of the country’s immigrants and non-permanent residents. In 2019, the proportion was just 68 per cent, according to Canada Mortgage and Housing Corp.

Over that same period, net international migration to those cities grew by 43 per cent. But in the rest of Canada it soared by 370 per cent, with particularly strong growth in Ontario locations such as Niagara, London, Kitchener-Waterloo and Cambridge.

Today, there is an acute shortage of housing in those smaller cities.

In Kitchener-Waterloo, Cambridge, London and the Niagara-St. Catharines region, the typical price of a home is 60 per cent higher than it was two years ago, according to the Canadian Real Estate Association home price index, which adjusts for higher-priced homes.

The flow of new permanent residents will put even more pressure on those places. If prices continue to rise, the higher cost of living could discourage newcomers.

“We need the immigration for the labour market. But if we don’t get the immigration for the labour market because they can’t afford to live in the community, that’s a significant challenge,” St. Catharines Mayor Walter Sendzik said.

The federal immigration target for 2021 was 401,000 new permanent residents. The goal for 2022 is 411,000. For 2023, it’s 421,000. By comparison, the number of new permanent residents admitted to the country in 2019 was 341,180.

Anthony Passarelli, a CMHC senior analyst, said that if immigration reaches these record-high levels and Canada doesn’t respond by increasing its housing supply, the effects on the housing market could be noticeable. “We will likely go through a similar situation, where you see another price surge and the ripple effects of people getting priced out of the larger population centres and moving further out,” he added.

Asked whether Canada should slow the pace of immigration until the country has enough affordable housing, BMO’s Mr. Porter said: “I suspect policy will be little swayed by housing market concerns. Having said that, at the very least the impact on housing should be taken into consideration when determining immigration targets.”

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Mahboubi, Skuterud – An Economic Reality Check on Canadian Immigration (Part I), Part II link

2021/03/11 Leave a comment

Good and needed critical thinking regarding the limitations and weaknesses of the government’s immigration plan and approach:

COVID-19 travel restrictions hobbled Canada’s immigrant admissions in 2020. In response last fall, the federal government revised its 2021 targets upwards, saying it was necessary for our economic recovery.

Showing its commitment to the ambitious target, on February 13 the government issued invitations to a record-breaking 27,332 applicants in its Canadian Experience Class (CEC) program, which targets applicants with Canadian work experience, and are therefore more likely to be living in Canada.

But to issue so many invitations, it was forced to drop its Comprehensive Ranking System cut-off score in its Express Entry system to an all-time low of 75, far below the previous record of 413. This strategy is analogous to a university doing away with entry standards to significantly boost enrolment. If history is an indicator, there is good reason for concern.

The primary objective of Canada’s economic-class immigration programs is to leverage immigration policy to boost the economic well-being of Canadians. To do that, we need immigration inflows to raise GDP per capita, not simply increase the population.

To assess if we are achieving this objective, Canadian researchers examine earnings of new immigrants. Since workers’ earnings comprise roughly two-thirds of GDP, we need new immigrants to earn more than the national average if we are to raise GDP per capita.

Unfortunately, the evidence is that Canada has historically struggled to achieve this objective, and continues to struggle. The hard reality is that we saw a substantial deterioration in the earnings of subsequent cohorts of new immigrants and an increase in their relative poverty rates from the early 80s to the early 2000s.  

This prompted numerous reforms of skilled immigration policies since 2005, primarily directed at improving immigrant selection, including introducing pre-migration mandatory English/French language testing and education credential assessments. A key piece of the policy reform was the 2015 introduction of the Express Entry system.

Rather than admit applicants who have met the minimum requirements of one of Canada’s economic-class programs on a first-come, first-served basis, the Express Entry system skims the cream of the applicant pool on a regular basis using a tool known as the Comprehensive Ranking System (CRS). The CRS assigns each applicant a score between zero and 1,200 using a set of criteria, including age, education, and work experience. The factors and their relative weightings were determined by a statistical analysis predicting immigrants’ earnings during their first 10 years in Canada.

While there is evidence that these reforms have helped curtail the deterioration in immigrants’ earnings, they continue to experience significant economic integration challenges. For example, a recent Statistics Canada study shows that international students who graduated in 2010-2012 earned considerably less than domestic graduates in their first five years after graduation.

Shortfalls of former international students are also evident when their earnings are compared to domestic graduates with similar degrees in similar fields of study.

The economic challenges of Canadian university-educated immigrants are, in fact, exceptional. Whereas university-educated immigrants from India who settle in the United States outperform their US-born counterparts with similar education, the average earnings of Indian-born university-educated immigrants in Canada fall significantly below their Canadian-born counterparts. This reflects the continuing truth that US universities and salary premiums attract the world’s best and brightest while Canada’s relatively generous welfare state attracts migrants less sure of their talents.

Examining the 2016 earnings of recent immigrants admitted under an economic-class program, we find that CEC principal applicants had higher average earnings than the non-immigrant population. When we also include their spouses and dependants, their combined average earnings were only slightly lower than prime-age non-immigrants (Figure 1). This small difference reveals both the success of Canada’s CEC program, but also the risk of forgoing CRS standards to reach immigration targets.

Immigration, Refugees and Citizenship Canada (IRCC) has held 170 Express Entry draws since January 2015. The median CRS cut-off score in past draws was 461 and has never dropped below 413. Lowering the standard to 75 means admitting immigrants who will experience more significant economic-integration challenges. Doing so during an economic crisis with high levels of joblessness seems ill advised.

In the government’s defence, all 27,332 CEC applicants who received invitations in February’s draw have at least one year of Canadian experience, and it is likely that a high percentage are currently employed, and in all likelihood many close to the front line during the pandemic. There are unquestionably compelling ethical reasons for providing these workers and their families with pathways to permanent residency.

But there is a risk in using economic-class programs to achieve humanitarian objectives; it compromises the ability of the Express Entry system to achieve its economic objectives.

The Tinbergen Rule says that for every policy target there should be at least one policy instrument. When there are fewer instruments than targets, the ability of policy to achieve its targets is compromised. Let us make sure that all our immigration programs do at least one thing well, instead of everything badly.

Tomorrow, we examine the potential consequences of increasing immigration during the crisis.

Source: https://www.cdhowe.org/intelligence-memos/mahboubi-skuterud-–-economic-reality-check-canadian-immigration-part-i

Part II: https://www.cdhowe.org/intelligence-memos/mahboubi-skuterud-–-economic-reality-check-canadian-immigration-part-ii

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