While spending by newcomers to Canada is having a negligible impact on headline inflation, it is contributing to elevated housing and rent prices, the Bank of Canada says.

Bank of Canada Deputy Governor Toni Gravelle said Thursday that high demand, coupled with a housing supply shortage, is pushing rents higher and preventing home prices from falling as much as expected at this stage of the rate-hike cycle.

“Canada’s housing supply has not kept pace with recent increases in immigration,” he told the Windsor–Essex Regional Chamber of Commerce. As a result, “population growth has added to the pressure on shelter price inflation.”

In October, the Bank of Canada’s measure of rent inflation reached a 40-year high of 8.2%, up from 7.3% in September, Gravelle said.

The national average rent price in Canada has risen by $175 over the last six months alone to reach $2,178, according to data from Rentals.ca. That’s up 10% from last year, with increases in certain metro areas up as much as 23%.

At the same time, home prices have proven surprisingly resilient in the face of the Bank’s 400 basis points of rate hikes delivered since last March.

“…housing prices have not fallen as much as we had expected,” Gravelle said.

The national average house price stood at $656,625 in October, according to the Canadian Real Estate Association (CREA). While that’s down nearly 20% from the peak reached in February 2022, it’s still 25% above the pre-pandemic average of $525,000 in October 2019.

However, while a surge in newcomers is putting pressure on limited housing supply, Gravelle said the direct impact on inflation by way of spending is almost negligible.

“…we estimate the boost to consumer spending from the recent increase in newcomers had barely any effect on inflation—less than 0.1 percentage points.”

He also spoke in-depth about the benefits and necessity of immigration, including the increase in the country’s workforce and potential output, which is how much the country can grow without contributing to inflation.

“Recent newcomers have helped ease the tight labour market, alleviating critical labour shortages in many sectors,” he said, particularly at a time when more than one in five working adults are nearing retirement.

Many new immigrants are “underemployed”

One downside, however, is that many newcomers are “underemployed,” with foreign-trained doctors working as taxi drivers, for example, due to the challenges of having their credentials recognized.

“This means some specialized jobs that could have been filled by a skilled newcomer may instead remain vacant and that hurts the economy’s potential growth,” he said.

This includes in the high-demand construction trades, where he said less than 3% of non-permanent residents currently work. This compared to about 8% of the general population.

While the federal government currently runs a Skilled Trades Program, Gravelle said it currently accounts for only 0.1% of annual permanent resident admissions, or about 455 newcomers in 2022.

“The federal government has launched a new program to help prioritize construction workers for PR status, which is a positive step,” he said.

BoC encouraged by drop in inflation, but can’t let its guard down yet

Gravelle also touched on the central bank’s efforts in bringing down inflation, which fell to 3.1% in October from a high of 8.1% last year, and its decision to leave interest rates unchanged on Wednesday.

“While we saw some welcome improvement in inflation measures in October, we must remember it’s just one month. We need to see further progress,” he said.

However, he added that the economy “no longer looks to be in excess demand.”

“The economy is now roughly in balance, but we are closely watching inflation expectations, wage growth and corporate pricing behaviour,” he added. “Our decision to maintain the policy interest rate at 5% reflects our best efforts to balance the risks of over- and under-tightening.”

Bank of Canada Bank of canada speeches BoC speech house prices immigration inflation rent inflation rent prices in canada shelter costs shelter inflation speech Toni Gravelle

Last modified: December 7, 2023