The title of a recent paper from TD Economics says it all.
“Fewer People = Less Demand: Easing Population Growth to Weigh on Housing” goes the heading of the study prepared by economist Rishi Sondhi.
According to Sondhi, Canada’s population is seeing its slowest growth since 2015, and immigration has collapsed due to the COVID-19 pandemic.
That’s bad news for the country’s housing market.
Canada’s population has expanded greatly on account of immigration, and with fewer newcomers arriving, both homeownership and rental markets are going to take a hit.
“Lesser inflows of immigrants and non-permanent residents will impact rental and ownership housing markets alike,” Sondhi wrote in the document released Wednesday (July 8).
According to Sondhi, the slowdown in immigration will have “lasting impacts on the market for ownership housing”.
The effects are expected to be felt through 2021.
Sondhi noted that most immigrants tend to settle in Toronto, Vancouver, Montreal, and Calgary.
These metropolitan areas accounted for over 60 percent of inflows last year.
According to Sondhi, these regions “saw the largest slowdown in immigration over March/April, with levels down 60% year-on-year, compared to a decline closer to 50% in other jurisdictions”.
“Moving forward, the largest blow to housing demand from an immigration slowdown would likely be imparted on these four CMAs [census metropolitan areas], given their popularity as ‘landing pad’ destinations,” Sondhi wrote.
In the paper, Sondhi noted that Canada’s population grew by 75,000 in the first quarter of 2020, making for the weakest increase since 2015.
“Higher frequency data points to a further significant slowing in the second quarter, as the number of immigrants arriving to Canada dropped by 80% year-on-year in April,” Sondhi stated.
“While some of this setback is likely temporary in nature,” Sondhi continued, “we see the mix of ongoing travel fears, a pandemic-related slowdown in processing times for immigration applications, government travel restriction measures, and an only gradually healing global economy holding population growth well below its pre-virus rate of around 1.5% annually over the next few years.”
On the matter of rentals, the TD economist noted that the slowdown in population growth will “exacerbate the hit to rental demand coming from the record job losses observed during the pandemic”.
This is happening as “rental supply has been increasing, both for purpose-built and investor-owned units”.
“With demand depressed and supply elevated, rents have fallen in markets such as Toronto, Montreal and Vancouver,” Sondhi wrote.
According to Sondhi, weak population growth will be a major factor in “slowing growth in home sales and prices through next year”.
This “dynamic explains about one-third” of TD Economics’ “downgraded view for Canadian sales growth through 2021”.
“Meanwhile, other factors, most prominently elevated unemployment, account for the other two-thirds of the downgrade,” Sondhi wrote.
“These headwinds will offset various positives for the outlook, including the presence of significant pent-up demand, supportive demographics and low interest rates, resulting in modest price growth in the second half of 2020 and a mild decline next year,” the economist continued.
Although there will be fewer newcomers, immigrants who arrived in previous years are anticipated to make up for the slack in home purchases.
According to Sondhi, population growth has been robust since 2016, and “some of the 1.1 million net immigrants who’ve arrived in Canada since then will make up part of the pent-up demand expected to power solid sales growth in the second half”.
“This will, of course, depend on how many of these people were able to keep their jobs during the pandemic, as well as the speed at which they are re-hired,” Sondhi explained.