Show Transcript
The COVID-19 pandemic has led to a plunge in immigration levels in Canada. And that could have long-term implications for the country’s housing sector. Anthony Okolie speaks with Rishi Sondhi, Economist, TD Bank Group, about the outlook for Canada’s real estate markets.
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- Rishi, in your recent report on the Canadian housing market, you talk about trends around population growth and the impact on housing activity. What are those trends telling you?
- Yeah. Well, they're telling us that the population growth is slowing down in Canada. In April, immigration was down 80% year on year. In the first quarter, population growth was at the lowest it's been since 2015, so the pandemic is definitely weighing on population flows into the country.
Now, with respect to its impact on housing, I mean, it's quite simple. Fewer people equals less demand for housing, be it ownership or rental housing. Of course, the impacts on ownership versus rental will depend on the sources of the population slowdown. But again, just to reiterate, quite simply, when you have less people coming into the country, you have less demand for housing.
- And is this impact going to be temporary or longer term in nature?
- Well, we feel like it will be longer term in nature. Our population forecast right now calls for moderation in population growth, 2% through 2021. So we don't think that it's going to be an impact that's just going to be felt in the second half of this year and sort of wash away. We anticipate it lasting through next year at the least.
- You also say in your report that most immigrants and non permanent residents initially rent before buying a home. So what effect will the lower population growth have on the rental market?
- Sure. So it'll have a large and immediate impact on the rental market. So it will weigh on rental demand. You hit the nail on the head with that when you said that, to immigrants and non permanent residents, when they first come into the country, they tend to rent. And in Canada's case, the non permanent residents really is the students, the foreign students.
So they're going to, as the population slowdown manifests, that's going to weigh on rental demand. You've got to remember, this is a time when rental markets are already weak. Rental demand has suffered a pretty big blow from the disproportionately large job losses that we've seen for younger workers that have taken place during the pandemic.
And as you know, our younger workers tend to be the ones that are renters. At the same time, rental supply has been growing at a very rapid pace. So the combination of weak demand and rising supplies put downward pressure on rents. So as the population growth slows, that will weigh on rental demand, putting even more downward pressure on rental demand and rents.
- And Rishi, what about homeownership and home prices? What's the impact there, and does it vary by region?
- Sure. So there's an interesting nuance there. So as the population slowdown occurs, as I mentioned before, the immigrants and non permanent residents, they tend to rent. But some do buy, so there's going to be some demand losses there. Now, in the rental space, there's some units that are investor-owned rental units.
So the population slowdown will impact demand for these units. So in that way, the slowdown in the rental market will spill over into the ownership market. So that's sort of one avenue. Another avenue is, immigrants, when they come to the country, they do tend to buy homes. Not in great quantities initially, homeownership rates tend to rise. But they tend to rise with a lag.
So there's a bit of a hit from ownership housing demand coming from there. And there's also the hit coming from the reduced demand for the investor-owned properties. Now, with respect to the regional impacts, you've got your Toronto, your Ottawa, your Calgary, and your Montreal. And these four jurisdictions represent about 60% of the immigrant intake that we get in a given year.
So we would anticipate a disproportionally large impact on these particular markets, because they're landing at destinations for immigrants. That said, Montreal would likely see a bit of a lesser impact because homeownership rates in general are lower there. On the flip side, Calgary would probably have a larger impact because the unemployment rate is going to be likely relatively elevated.
There's that will drive even slower population growth will weigh disproportionately on that market. Now, those are some of the biggies in terms of being landing pad destinations. But let's not discount the impact of immigration on other jurisdictions, like the Atlantic region, PEI, New Brunswick, Newfoundland, Labrador, Nova Scotia.
So those regions generally have expressed pretty robust population growth since 2016 driven by immigration. So that's really underpinned and fueled housing demand in those regions. So as population growth slows down, it's going to do the opposite for these particular jurisdictions.
- So given what we know today, what's your long term outlook for the Canadian housing market?
- Sure. So we expect sales, home sales, to fall about 15% this year overall. That said, we are expecting a much better second half of this year than we saw in the first half. So the first half was really decimated by the pandemic. Buyers and sellers moved to the sidelines in the wake of the pandemic.
But now that we've had a social listing measures eased and people are getting out and buying and selling, we've seen a pretty robust comeback in activity across Canada. So we're expecting the second half of the year to be much stronger than the first half, and that's a function of pent up demand, low interest rates, gradually healing housing markets, and some of the supportive demographics, which would boost underlying demand.
So sales and prices should be stronger in the second half of this year. In 2021, we do expect population growth to weigh on demand, such that we don't see as robust a sales gain as we were expecting, say, in April. So our forecasts are downgraded relative to April, and population growth represents about a third of that downgrade.
And with respect to prices, we're expecting prices to dip a little bit, actually. We expect them to fall by about 1% on average next year as population growth weighs on demand, alongside elevated unemployment and some other factors. And housing supply remains elevate, which also puts a downward pressure on prices.
- Rishi, thank you very much for your insights.
- Thank you, Anthony.
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- Yeah. Well, they're telling us that the population growth is slowing down in Canada. In April, immigration was down 80% year on year. In the first quarter, population growth was at the lowest it's been since 2015, so the pandemic is definitely weighing on population flows into the country.
Now, with respect to its impact on housing, I mean, it's quite simple. Fewer people equals less demand for housing, be it ownership or rental housing. Of course, the impacts on ownership versus rental will depend on the sources of the population slowdown. But again, just to reiterate, quite simply, when you have less people coming into the country, you have less demand for housing.
- And is this impact going to be temporary or longer term in nature?
- Well, we feel like it will be longer term in nature. Our population forecast right now calls for moderation in population growth, 2% through 2021. So we don't think that it's going to be an impact that's just going to be felt in the second half of this year and sort of wash away. We anticipate it lasting through next year at the least.
- You also say in your report that most immigrants and non permanent residents initially rent before buying a home. So what effect will the lower population growth have on the rental market?
- Sure. So it'll have a large and immediate impact on the rental market. So it will weigh on rental demand. You hit the nail on the head with that when you said that, to immigrants and non permanent residents, when they first come into the country, they tend to rent. And in Canada's case, the non permanent residents really is the students, the foreign students.
So they're going to, as the population slowdown manifests, that's going to weigh on rental demand. You've got to remember, this is a time when rental markets are already weak. Rental demand has suffered a pretty big blow from the disproportionately large job losses that we've seen for younger workers that have taken place during the pandemic.
And as you know, our younger workers tend to be the ones that are renters. At the same time, rental supply has been growing at a very rapid pace. So the combination of weak demand and rising supplies put downward pressure on rents. So as the population growth slows, that will weigh on rental demand, putting even more downward pressure on rental demand and rents.
- And Rishi, what about homeownership and home prices? What's the impact there, and does it vary by region?
- Sure. So there's an interesting nuance there. So as the population slowdown occurs, as I mentioned before, the immigrants and non permanent residents, they tend to rent. But some do buy, so there's going to be some demand losses there. Now, in the rental space, there's some units that are investor-owned rental units.
So the population slowdown will impact demand for these units. So in that way, the slowdown in the rental market will spill over into the ownership market. So that's sort of one avenue. Another avenue is, immigrants, when they come to the country, they do tend to buy homes. Not in great quantities initially, homeownership rates tend to rise. But they tend to rise with a lag.
So there's a bit of a hit from ownership housing demand coming from there. And there's also the hit coming from the reduced demand for the investor-owned properties. Now, with respect to the regional impacts, you've got your Toronto, your Ottawa, your Calgary, and your Montreal. And these four jurisdictions represent about 60% of the immigrant intake that we get in a given year.
So we would anticipate a disproportionally large impact on these particular markets, because they're landing at destinations for immigrants. That said, Montreal would likely see a bit of a lesser impact because homeownership rates in general are lower there. On the flip side, Calgary would probably have a larger impact because the unemployment rate is going to be likely relatively elevated.
There's that will drive even slower population growth will weigh disproportionately on that market. Now, those are some of the biggies in terms of being landing pad destinations. But let's not discount the impact of immigration on other jurisdictions, like the Atlantic region, PEI, New Brunswick, Newfoundland, Labrador, Nova Scotia.
So those regions generally have expressed pretty robust population growth since 2016 driven by immigration. So that's really underpinned and fueled housing demand in those regions. So as population growth slows down, it's going to do the opposite for these particular jurisdictions.
- So given what we know today, what's your long term outlook for the Canadian housing market?
- Sure. So we expect sales, home sales, to fall about 15% this year overall. That said, we are expecting a much better second half of this year than we saw in the first half. So the first half was really decimated by the pandemic. Buyers and sellers moved to the sidelines in the wake of the pandemic.
But now that we've had a social listing measures eased and people are getting out and buying and selling, we've seen a pretty robust comeback in activity across Canada. So we're expecting the second half of the year to be much stronger than the first half, and that's a function of pent up demand, low interest rates, gradually healing housing markets, and some of the supportive demographics, which would boost underlying demand.
So sales and prices should be stronger in the second half of this year. In 2021, we do expect population growth to weigh on demand, such that we don't see as robust a sales gain as we were expecting, say, in April. So our forecasts are downgraded relative to April, and population growth represents about a third of that downgrade.
And with respect to prices, we're expecting prices to dip a little bit, actually. We expect them to fall by about 1% on average next year as population growth weighs on demand, alongside elevated unemployment and some other factors. And housing supply remains elevate, which also puts a downward pressure on prices.
- Rishi, thank you very much for your insights.
- Thank you, Anthony.
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