As debate rages over how to tackle the housing crisis, Bank of Canada Governor Tiff Macklem says Ottawa’s recently announced cap on international student enrollment should help dampen inflation in rents.
“I think it will help ease the pressure on rents a little in the future,” Mr. Macklem said this week in an interview with The Canadian Press.
The federal government announced Monday a limitation, for the next two years, on new study visas issued, in order to reduce the number of temporary residents in Canada.
Immigration Minister Marc Miller said around 360,000 study permits will be granted in 2024, a 35% drop from 2023. The figure for 2025 will be set after a reassessment of the situation, more late this year.
This decision was motivated in part by the pressure that strong population growth is exerting on real estate, particularly on the rental market.
Many economists agree that capping the number of new study visas issued could help moderate housing inflation, but it is unclear how much this could lower rents.
“Although I can see the growth rate [de l’économie] and rents slow down a bit, I sincerely doubt rents will go back in the opposite direction,” said Douglas Porter, chief economist at the Bank of Montreal.
“Ultimately, I believe we’re still going to face quite significant rent inflation over the next couple of years,” he adds.
The Bank of Canada has made significant progress in its fight against inflation, which began in March 2022, when it began raising its key interest rate. Prices are rising at a slower pace across the economy, and fewer goods and services are experiencing unusually large price increases.
Although there have been bumps in the road toward the central bank’s 2% target, Canada’s inflation rate has become much more “manageable,” sitting at 3.4% in December .
Rents are driving inflation upwards
But the Bank of Canada faces a thorny problem: Housing costs are rising rapidly and interest rate hikes can only do so much.
Economist Douglas Porter believes that in normal times, the Bank of Canada could have ignored a sharp rise in housing costs.
But after two years of above-target inflation, the central bank cannot afford to let inflation stay high any longer, he said, as this risks fueling even higher inflation expectations.
The Bank of Canada announced Wednesday its decision to once again keep its key interest rate at 5% and said it had begun discussing a timetable for possible rate cuts.
But the central bank on Wednesday highlighted the role that housing and food prices play in maintaining inflation, noting that housing costs were now the “main driver” of above-target inflation.
“We expect a continued deceleration in food prices, but housing, I admit, is harder to predict,” Gov. Macklem said Wednesday in an interview after the rate announcement. director.
Last December, housing costs, which include the costs of homeownership and rents, were 6% higher than a year ago, well outpacing overall general inflation.
Data from Rentals.ca and market research firm Urbanation shows the average December rent in Canada jumped 8.6% year over year, reaching a record high of $2,178 per month. month.
When asked how the Bank of Canada plans to return to 2% inflation if housing prices continue to soar, Governor Macklem responded that slower price growth in other sectors of the economy the economy should compensate for their increase.
Forget about rents?
Royce Mendes, managing director and head of macroeconomic strategy at Desjardins, says the central bank should be patient and allow housing price inflation to subside on its own, over time. He believes the economic difficulties would be considerable if the bank maintained high interest rates for too long.
“If the central bank wants to reduce total inflation to 2% in the short term, it will have to crush the economy to reduce inflation to practically zero in all sectors” other than housing, warned economist Mendes.
Housing affordability has been a major issue in Canada since the pandemic, for a variety of reasons, including strong population growth, which has exacerbated a pre-existing housing shortage.
However, the Bank of Canada’s policy decisions have also contributed to housing price inflation, by increasing mortgage interest costs for homeowners.
At the same time, property developers are less likely to build when financing is expensive, increasing pressure on housing supply.
Rents also skyrocketed as more newcomers entered the country and looked for housing.
“We have had a structural housing supply problem in Canada for a long time,” said Mr. Macklem. With the rapid increase in immigration recently, this problem has been exacerbated. »
The governor points out that population growth fuels inflation due to housing, but it also helps reduce price pressure in other sectors by easing labor shortages.
Governor Macklem had no answer for the net effect of population growth on inflation — and, incidentally, on the central bank’s monetary policy decisions.