Bank of Canada says immigration curbs long-term inflation

Laura Dhillon Kane, Bloomberg News

Mass immigration to Canada will keep a lid on inflationary pressures in the long run, but has also strained housing markets and helped to drive rent inflation to a 40-year high, says a Bank of Canada official.

Deputy Governor Toni Gravelle said a record-high influx of newcomers has added workers to tight labour markets and significantly improved the country’s potential growth. But after immigration began ramping up in 2015, Canada’s vacancy rate for homes available to rent or buy started to fall, he said.

“Then, when newcomer arrivals picked up sharply in early 2022, that steady decline in the vacancy rate became a cliff,” he said in prepared remarks on Thursday in Windsor, Ont. “Canada’s vacancy rate has now reached a historical low.”

Gravelle delivered the speech focused on housing and immigration a day after the Bank of Canada left the benchmark overnight rate unchanged at five per cent. His remarks shed little new light on policymakers’ decision to pause, which was widely expected by markets and economists in a Bloomberg survey.

He did, however, downplay improvement in a three-month moving average of core measures that the central bank has described as key to its thinking. While that average dropped in October to about 3 per cent, at the top of the bank’s control range, the measure is “volatile,” he said.

“We must remember it’s just one month. We need to see further progress,” he said.

The bank is closely watching inflation expectations, wage growth and corporate pricing behavior, he reiterated. “These indicators are helping us assess whether inflation is on a sustained path to two per cent. Given the risks to the inflation outlook, we remain prepared to raise the policy rate further if needed.”

The impacts of immigration in Canada - which welcomed a million newcomers for the first time last year - have been hotly debated. Prime Minister Justin Trudeau’s government argues high levels of migrants are needed to offset an aging population, but a public backlash has brewed as housing prices soar, especially amid inadequate home supply.

Gravelle said that since the start of 2022, strong immigration has boosted the level of potential output by two per cent to three per cent without adding materially to inflation. The bank estimates that the increase to consumer spending from the recent increase in newcomers added less than 0.1 percentage points to inflation.

Still, housing construction has been unable to keep up with the rapid rise in demand, and that imbalance has “serious” consequences for inflation, he said.

Shelter price inflation rose to 6.1 per cent annualized in October and contributed 1.8 percentage points to that month’s total inflation reading of 3.1 per cent. While mortgage interest costs are a factor, other components of the shelter inflation basket have not come down as much as they typically would, Gravelle said.

Rent inflation, meantime, accelerated to 8.2 per cent in October, the highest in 40 years.

The situation in Canada stands in contrast with that of the United States, where housing construction has been more flexible to respond to population shifts and where rent inflation is expected to continue to decline, he said.

“Canada needs more homes,” Gravelle said. “And we need to make our housing supply more responsive to increases in demand.”

 

Short-term rentals have 'significantly impacted' housing affordability: Desjardins

Ritika Dubey, The Canadian Press

A new Desjardins report suggests short-term rentals likely contributed to the housing affordability crisis in Canada and around the world.

The report released Monday shows the proliferation of short-term rentals on platforms such as Airbnb and Vrbo has had a significant effect on the affordability and availability of homes by reducing the number of units available for long-term rentals and resale markets.

Randall Bartlett, senior director of Canadian economics at Desjardins, said short-term rentals are often more appealing to real estate investors because they make more money from them than long-term leases.

"From the perspective of the landlord, at a time of high and rising inflation, short-term rentals may offer them an opportunity to offset some of the rising costs because they can increase the rent more quickly than they could in the long-term rental market," Bartlett said in an interview.

Citing a Conference Board of Canada study, the report suggests there was a correlation between Airbnb activity and higher long-term rental prices across 19 Canadian cities with short-term rentals.

It showed every one-percentage-point increase in the share of Airbnbs was associated with a 2.3 per cent increase in rents.

The Desjardins report, using data from analytics firm AirDNA, said Canada has more than 235,800 unique active short-term rental listings on Airbnb and Vrbo, the two largest hosting platforms, amounting to about 1.4 per cent of the country's housing stock.

The national rental vacancy rate hit 1.9 per cent in 2022 — significantly below what's considered the balanced market rate of three per cent, according to the report.

Municipalities across Canada and abroad have implemented a variety of policies to combat short-term rentals, the report said, in the hopes of opening up more housing supply as affordability continues to erode.

"We're seeing this in real-time," said Bartlett, "an experiment going on in Canada, where different jurisdictions are bringing in different regulations of various stringencies," which he said will provide greater insight into the implications for the housing market. 

Bartlett said policy crackdowns on short-term rentals have had mixed results in different jurisdictions around the world.

But, he added, it seems that restricting the use of second or third properties for short-term rentals has been the most successful in bringing more units back into the long-term rental market.

Meanwhile, allowing people to continue to use their primary residence for short-term rentals has helped sustain the app-based vacation rental market, he said.

"Having that distinction seems to support and certainly bring more rental homes back to the long-term rental market," Bartlett said.

The report suggests governments partly restrict commercial non-principal short-term rentals, strictly enforce penalties for non-compliance and hold short-term rental platforms accountable to help ease the housing crisis.

Toronto has restricted short-term rentals to a maximum of 180 nights per year for an entire home, the report noted. However, homeowners can rent out up to three bedrooms in their primary residence for an unlimited number of nights.

In British Columbia, legislation was passed in October that could return 16,000 short-term rentals to the long-term market. This requires online platform accountability — removing listings that don't include a valid business licence and sharing information about short-term rental listings with the province, which may share it with local governments. 

Nathan Rotman, Canada policy lead with Airbnb, said the Desjardins report is "misleading with the figures failing to account for Canadians sharing the home they live in or a cottage — homes that would not be added to the long-term housing market."

Rotman said while Airbnb is willing to work with municipalities to address community concerns, strict short-term rental regulations have not alleviated Canada's housing crisis.

"With the vast majority of hosts in Canada sharing just one home and more than 90 per cent of our top markets in Canada having some form of regulations in place, more home-sharing regulations are not an effective solution to address the country’s housing concerns," Rotman said.

Bartlett said: "At the end of the day, we need to increase supply dramatically and there are a lot of policies to do that." 

He forecasts 2024 is going to be a challenging year for the housing market in Canada. 

Bartlett predicts landlords will continue to feel the pressure of high interest rates on their monthly mortgage payments and a growing population will heap more demand on the housing market overall.

"There's going to be very little price relief," he said. 

"Ultimately, the measures that are being brought in to increase supply — not just by limiting short-term rentals but also cutting the GST on purpose-built rentals and reducing exclusionary zoning — will all help in the long run to bring more supply but not going to help materially in 2024."

This report by The Canadian Press was first published Dec. 4, 2023.