Population Surge Strains Canadian Housing And Inflation, Limits Rate Cut Options

“Surging Canadian Population Strains Housing and Inflation, Restricting Bank of Canada’s Rate Cuts, Says National Bank Economist”

Stefane Marion, Chief Economist at the National Bank of Canada, warns that Canada’s annual population growth of 1 million residents in 2022 and 2023, equivalent to the US, which added 20 million people over the last two years, exacerbates housing deficits and maintains high prices for shelter and inflation.

Marion anticipates that because of soaring housing costs and inflation, the Bank of Canada will only possibly be able to make a “modest” 100 basis points cut in the interest rates by 2024, constrained by the challenge of keeping price gains below 3%.

At the Bloomberg Canadian Finance Conference, Marion notes the stickiness of home prices, contrary to the central bank’s assumption that they would decrease with higher rates. He emphasizes the need to build 600,000 homes annually to accommodate the unprecedented population surges, far surpassing the record of about 370,000. Marion points to a massive supply issue, resulting in demand like never before.

The impact population surges have on inflation is evident in the consumer price index’s shelter component, causing it to accelerate. Marion highlights the role of high mortgage interest and rents in subduing inflation conspicuously above the Bank of Canada’s target. Apart from shelter costs, inflation hovers around 2%, according to Marion.

Moreover, Marion predicts rising government spending on healthcare, schools, childcare, and infrastructure due to high population growth, further challenging inflation control. He suggests the “need to re calibrate on the demand side and accommodate supply,” emphasizing the necessity of dealing with permanent immigrants, students, refugees, and temporary workers.

Marion notes Canada’s favorable fiscal position despite these challenges, which boasts the lowest net debt. It also delays the borrowing levels among G-7 countries. He also highlights the country’s minimal spending on oil, coal, and natural gas subsidies within the G-20, citing information from the International Monetary Fund.

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