Real Estate on the Edge: How Immigration Cuts May Undermine the Benefits of Rate Reductions
November 15, 2024
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
By Allwyn Dsouza, Senior Analyst, Research and Insights, REIC/ICI
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Canada's recent decision to reduce immigration quotas and restrict international student admissions is set to create profound shifts across the housing market and the broader economy. This policy reversal is a major measure targeting demand-side pressures, intended to ease Canada's housing shortage and improve affordability. However, this step—though necessary to address the housing crisis as we outlined in our March 2024 article—comes at a challenging time for the housing market, which continues to struggle despite successive rate cuts by the Bank of Canada (BoC).
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With the sharp reduction in immigration, the impact on demand may be deeper and more immediate than anticipated, particularly as interest rate increases have already softened housing demand. Just as the recent period of liberal immigration policies and historically low interest rates drove the housing market to unsustainable highs, this new policy shift could amplify the current demand decline, especially in the rental sector. The result may be a chain reaction of economic effects, from dampened consumer demand to slowed provincial growth, potentially offsetting any recovery momentum spurred by the BoC’s rate cuts.
1. Immigration and Canada’s Rental Market: A Delicate Balance
For years, Canada’s immigration policy has been a major driver of demand for rental properties, especially in metropolitan areas. International students, temporary foreign workers, and new immigrants have collectively fueled rental demand in cities like Toronto and Vancouver where limited housing options and urgency often lead newcomers to pay higher-than-average rents. This group not only pays a premium but tends to choose centrally located, transit-accessible housing, further elevating rental market averages. A reduction in these high-rent-paying tenants is likely to reduce average rents significantly, particularly in key Census Metropolitan Areas (CMAs) where they are concentrated.
1. Immigration and Canada’s Rental Market: A Delicate Balance
For years, Canada’s immigration policy has been a major driver of demand for rental properties, especially in metropolitan areas. International students, temporary foreign workers, and new immigrants have collectively fueled rental demand in cities like Toronto and Vancouver where limited housing options and urgency often lead newcomers to pay higher-than-average rents. This group not only pays a premium but tends to choose centrally located, transit-accessible housing, further elevating rental market averages. A reduction in these high-rent-paying tenants is likely to reduce average rents significantly, particularly in key Census Metropolitan Areas (CMAs) where they are concentrated.
Figure 1.0
Source: Economic and Social Reports Vol. 4, no.10, October 2024, Statistics Canada Catalogue no. 36-28-0001
According to Statistics Canada, international students pay approximately 10% more in rent than Canadian-born tenants, while temporary foreign workers pay 21% more on average[1]. This “rent premium” inflates average rental costs in high-demand urban markets indicating that with fewer international students and foreign workers, landlords may face a substantial demand gap, potentially accelerating rent price declines. The gap may be especially pronounced as international students and temporary workers are more likely to live in newer dwellings (built within the last 10 years) and near urban cores and transit systems, compared to longer-term immigrants and Canadian-born residents.
Figure 2.0
Source: Economic and Social Reports Vol. 4, no.10, October 2024, Statistics Canada Catalogue no. 36-28-0001
This policy shift will also have notable implications for the condo and multifamily housing sectors, given that international students and temporary workers are overrepresented in these types of housing. Statistics show that the percentage of respondents living in condominiums is significantly higher among international students (32.0%) and temporary foreign workers (33.9%) compared to Canadian-born residents (15.7%) and longer-term immigrants (18.0%).
Figure 3.0
Source: Economic and Social Reports Vol. 4, no.10, October 2024, Statistics Canada Catalogue no. 36-28-0001
Early data already reflects a cooling trend, with a 1.2% national decline in rental prices in 2024—the first annual decrease since July 2021. This shift is seen across major markets, with 20 cities now recording year-over-year rent declines, compared to just four cities a year ago. Given the more drastic reductions in immigration limits, the impact on rents and home prices is likely to be even more pronounced in the coming years.
Figure 4.0
Source: Rentals.ca, REIC analysis
Falling rental demand does not bode well for home prices as these markets are closely linked, with a correlation coefficient of 0.96. Therefore, a significant shock to the rental market—driven by simultaneous demand reduction and rising supply—which could have lasting effects on housing demand and price stability over the long term.
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Figure 5.0
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Figure 6.0
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2. Rising Supply Meets Declining Demand: Shifting Dynamic in Rentals
As demand declines, rental supply continues to rise, particularly in the condominium sector. Many investors who previously purchased condos to sell at a profit may now choose to rent out these units instead of selling at a loss, especially as the sales-to-new-listings ratio reaches its lowest point in five years, indicating a softening sales market. The upcoming wave of condo completions will further boost rental inventory as developers with unsold units would be expected to pivot toward the rental market. Combined with reduced immigration, this increase in rental supply is likely to accelerate rental price declines and, due to the strong correlation between rental and home prices, could put additional downward pressure on housing values.
Key Contributors to Increased Supply
As demand declines, rental supply continues to rise, particularly in the condominium sector. Many investors who previously purchased condos to sell at a profit may now choose to rent out these units instead of selling at a loss, especially as the sales-to-new-listings ratio reaches its lowest point in five years, indicating a softening sales market. The upcoming wave of condo completions will further boost rental inventory as developers with unsold units would be expected to pivot toward the rental market. Combined with reduced immigration, this increase in rental supply is likely to accelerate rental price declines and, due to the strong correlation between rental and home prices, could put additional downward pressure on housing values.
Key Contributors to Increased Supply
- Condo Completions and Multifamily Developments: A surge in new condo and multifamily units, especially in urban centers like Toronto and Vancouver, is saturating the rental market. Investors who once saw these properties as opportunities for capital gains may now need to hold them off-market to avoid selling at a loss in a downtrend.
Figure 7.0
Source: CMHC
Nearly 40% of Canada’s housing inventory is occupied by renters and reduced immigration will heavily impact demand for new rental inventory, particularly in the condo and multifamily segments.
- Diminishing Sales Demand: In September, new listings rose 4.9% month-over-month with an influx of sellers across the country’s largest markets. By month’s end, there were 185,427 properties listed for sale on Canadian MLS® Systems—a 16.8% increase from the previous year. As sales lag behind new listings, the national sales-to-new-listings ratio has dropped to 51.3%, firmly placing many markets in buyer’s territory. While some buyers may take advantage of this environment others may wait, expecting further rate cuts from the BoC in the coming months.
Figure 8.0
Source: CREA
3. Blunting the effect of BoC rate cuts
Although the BoC has signaled more rate cuts, the reduced demand from fewer immigrants and non-permanent residents may dampen the effectiveness of these cuts in reviving the housing market. Historically, rate reductions have boosted homebuyer demand by lowering monthly mortgage costs, thereby enticing more buyers. However, with a sharp slowdown in population growth and growing investor caution, the anticipated recovery in home sales may be muted.
Moreover, lower BoC rates are not translating into savings for many homebuyers and investors as fixed-rate mortgages, which make up the majority of Canadian mortgages, are linked to bond yields that have not fallen in sync with BoC policy rates. Since June 2024, the BoC has reduced rates by 125 basis points, yet 5-year bond yields have declined by less than 100 basis points, limiting the benefits for prospective buyers.
Investor Hesitancy and High-Price Dynamics
Canada’s housing market has seen substantial price increases creating affordability challenges even with rate cuts. For investors, who account for around 40% of homebuyers in some urban areas, the economic return on residential properties is increasingly unattractive:
Declines in rental prices will also impact Canada’s inflation rate, as shelter costs form a substantial part of the Consumer Price Index (CPI). Falling shelter costs may provide the BoC with additional flexibility to cut interest rates without triggering inflation concerns. However, persistent declines in rents and property values could also stymie the expected rebound in housing activity limiting the BoC’s ability to drive a robust real estate recovery through rate cuts alone.
Beyond the real estate sector, the reduction in population growth will likely depress consumer demand in retail, automotive, and other industries. Immigrants, who are often young and upwardly mobile, have traditionally been a key source of demand in these sectors. With fewer new residents, consumer demand across various sectors is likely to experience a noticeable drop impacting related industries and provincial economies reliant on this spending.
4. Regional Variances and Mid-Sized Markets
While Toronto and Vancouver are likely to feel the most direct impact, mid-sized markets could also be significantly affected. Cities like Calgary and Halifax which have benefited from interprovincial migration spurred by high living costs in larger urban centers, may now face heightened vulnerability. A reduced influx of residents—both from immigration and interprovincial migration—could undercut the growth these regions have experienced in recent years. This concern is especially relevant for Alberta where a proposed GHG emissions cap may further restrict growth in the energy sector, potentially stifling labor movement into the province and compounding the economic challenges posed by reduced migration.
5. Are These Policy Shifts Too Reactionary?
While intended to address the housing crisis, some experts caution that these drastic immigration policy changes may represent an overcorrection. Canada’s prior immigration policies were designed to foster economic resilience through steady population growth. However, the current approach suggests a potential "hard stop" to population-driven economic expansion, a shift that could disrupt the housing market and consumer economy well before any long-term affordability gains materialize. A phased or regionally targeted strategy may have provided a more balanced impact on high-demand areas without stalling national growth.
Canada’s significant policy reversal on immigration, though necessary to reduce housing pressures, could carry substantial economic consequences, particularly for the real estate sector. While declines in rental and property prices may improve short-term affordability, the broader effects—ranging from investor uncertainty to cooling consumer demand—pose considerable risks. Prolonged adjustments in both price and demand may be inevitable, placing pressure on policymakers to strike a balance between housing market stabilization and sustaining economic growth amid rapidly shifting market conditions.
Ultimately, while these policy shifts may offer temporary relief in housing costs, the broader implications for Canada’s housing market stability and economic health are profound. As the market seeks a new equilibrium, the longer-term impacts of this immigration policy reversal will require careful monitoring and potentially adaptive measures to ensure economic stability across Canada’s diverse regions.
The Real Estate Institute of Canada (REIC) remains committed to upholding professionalism and ethics as Canada’s housing market faces new challenges from recent immigration policy shifts. In this changing landscape, REIC empowers its members with advanced training to understand the complex interplay between policy changes and demand-supply dynamics. By fostering ethical leadership and providing industry-leading education, REIC ensures that real estate professionals are equipped to offer insightful, adaptable guidance to clients and communities, helping them navigate these profound changes and anticipate their impacts on housing affordability.
Although the BoC has signaled more rate cuts, the reduced demand from fewer immigrants and non-permanent residents may dampen the effectiveness of these cuts in reviving the housing market. Historically, rate reductions have boosted homebuyer demand by lowering monthly mortgage costs, thereby enticing more buyers. However, with a sharp slowdown in population growth and growing investor caution, the anticipated recovery in home sales may be muted.
Moreover, lower BoC rates are not translating into savings for many homebuyers and investors as fixed-rate mortgages, which make up the majority of Canadian mortgages, are linked to bond yields that have not fallen in sync with BoC policy rates. Since June 2024, the BoC has reduced rates by 125 basis points, yet 5-year bond yields have declined by less than 100 basis points, limiting the benefits for prospective buyers.
Investor Hesitancy and High-Price Dynamics
Canada’s housing market has seen substantial price increases creating affordability challenges even with rate cuts. For investors, who account for around 40% of homebuyers in some urban areas, the economic return on residential properties is increasingly unattractive:
- Declining Cash Flow: With lower rents and rate cuts insufficient to drive new demand, many investors may struggle to break even on monthly cash flows. Declining rental yields are further reducing the appeal of residential properties as investment options.
- High Market Prices: Current property prices may need to drop further to achieve cash-flow-positive status, which rate cuts alone are unlikely to accomplish. At prevailing prices and with increasing rental supply, significant adjustments are needed for these investments to become financially viable.
Declines in rental prices will also impact Canada’s inflation rate, as shelter costs form a substantial part of the Consumer Price Index (CPI). Falling shelter costs may provide the BoC with additional flexibility to cut interest rates without triggering inflation concerns. However, persistent declines in rents and property values could also stymie the expected rebound in housing activity limiting the BoC’s ability to drive a robust real estate recovery through rate cuts alone.
Beyond the real estate sector, the reduction in population growth will likely depress consumer demand in retail, automotive, and other industries. Immigrants, who are often young and upwardly mobile, have traditionally been a key source of demand in these sectors. With fewer new residents, consumer demand across various sectors is likely to experience a noticeable drop impacting related industries and provincial economies reliant on this spending.
4. Regional Variances and Mid-Sized Markets
While Toronto and Vancouver are likely to feel the most direct impact, mid-sized markets could also be significantly affected. Cities like Calgary and Halifax which have benefited from interprovincial migration spurred by high living costs in larger urban centers, may now face heightened vulnerability. A reduced influx of residents—both from immigration and interprovincial migration—could undercut the growth these regions have experienced in recent years. This concern is especially relevant for Alberta where a proposed GHG emissions cap may further restrict growth in the energy sector, potentially stifling labor movement into the province and compounding the economic challenges posed by reduced migration.
5. Are These Policy Shifts Too Reactionary?
While intended to address the housing crisis, some experts caution that these drastic immigration policy changes may represent an overcorrection. Canada’s prior immigration policies were designed to foster economic resilience through steady population growth. However, the current approach suggests a potential "hard stop" to population-driven economic expansion, a shift that could disrupt the housing market and consumer economy well before any long-term affordability gains materialize. A phased or regionally targeted strategy may have provided a more balanced impact on high-demand areas without stalling national growth.
Canada’s significant policy reversal on immigration, though necessary to reduce housing pressures, could carry substantial economic consequences, particularly for the real estate sector. While declines in rental and property prices may improve short-term affordability, the broader effects—ranging from investor uncertainty to cooling consumer demand—pose considerable risks. Prolonged adjustments in both price and demand may be inevitable, placing pressure on policymakers to strike a balance between housing market stabilization and sustaining economic growth amid rapidly shifting market conditions.
Ultimately, while these policy shifts may offer temporary relief in housing costs, the broader implications for Canada’s housing market stability and economic health are profound. As the market seeks a new equilibrium, the longer-term impacts of this immigration policy reversal will require careful monitoring and potentially adaptive measures to ensure economic stability across Canada’s diverse regions.
The Real Estate Institute of Canada (REIC) remains committed to upholding professionalism and ethics as Canada’s housing market faces new challenges from recent immigration policy shifts. In this changing landscape, REIC empowers its members with advanced training to understand the complex interplay between policy changes and demand-supply dynamics. By fostering ethical leadership and providing industry-leading education, REIC ensures that real estate professionals are equipped to offer insightful, adaptable guidance to clients and communities, helping them navigate these profound changes and anticipate their impacts on housing affordability.
[1] Economic and Social Reports Vol. 4, no.10, October 2024, Statistics Canada Catalogue no. 36-28-0001
Allwyn Dsouza is REIC’s Senior Analyst, Market Research and Insights. He can be reached at [email protected]. Media enquiries can be directed to [email protected]