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John Pasalis: Canada’s immigration policies are driving up housing costs

Commentary

Ask a Canadian why home prices are so high and you’ll certainly get a whole host of answers from foreign buyers to greedy investors and, up to recently, a long period of low interest rates.

But the most common answer you are likely to hear is that a lack of supply of new housing in Canada is the primary cause of the high cost of housing.

The lack of supply narrative has been the dominant explanation for high home prices in Canada over the past five years. Every level of government in Canada cites a lack of supply as the primary cause for high home prices and countless academic and bank economists have made the same argument. Scotiabank’s chief economist went so far as to argue that a lack of supply was the underlying cause “for rising prices and diminished affordability”. When an economist says A causes B they mean that the relationship is a statistical fact rather than an opinion.

The debate regarding the key drivers of high home prices has been so one-sided it led Howard Anglin, former deputy chief of staff under Stephen Harper, to write a column in The Hub in 2021 titled, “The one factor in the housing bubble that our leaders won’t talk about.”

What’s the one factor not talked about? How Canada’s immigration boom is impacting the demand for housing and, by extension, increasing the cost of housing.

Over the previous decade, Canada admitted roughly 275,00 new immigrants each year. In 2022, Canada saw a record 431,645 new permanent residents and this number is expected to reach 500,000 annually by 2025.

An unequal two-sided problem

When considering these two demand and supply factors alone, demand for homes due to changes to Canada’s immigration level and the lack of supply of new homes to meet this demand, we see an interesting phenomenon. One factor, the lack of supply, has been discussed for many years, and year after year, political efforts to mitigate this issue have failed. The other factor, immigration, is one that policymakers have far more control over.

Policymakers don’t have any direct control over the number of new homes developers launch and complete each year, a number that has always been hard to achieve due to labour shortages and other factors, and is only expected to decline in the years ahead due to higher interest rates and the current economic uncertainty.

So why has the debate about the high cost of housing focused on a solution that policymakers have no direct control over, building more homes, as opposed to addressing the demand for housing from changes in our immigration level, something policymakers have direct control over?

I’ll highlight what I believe are the two primary reasons.

The false lure of the zoning panacea

A popular area of academic research has been to explore the role that local zoning policies have on the supply of new housing and home prices, and the academic conclusions on the surface sound very intuitive.

Municipalities that have relatively few zoning restrictions on the supply of new housing tend to have more affordable homes and experience more moderate growth in house prices because builders can more easily adjust to changes in demand by building more homes. Academics also argue that these cities with few zoning restrictions have fewer and shorter housing bubbles.

I’ll admit, it’s a wonderful story! If cities simply remove zoning barriers to new housing, builders will flood our market with new homes putting an end to years of rapid price growth and leaving us with an affordable housing market for all.

Unfortunately, the academic theories don’t hold up very well in the real world. Many of the cities that economists cite as having relaxed zoning policies which, in theory, should see modest price growth, such as U.S. cities like Houston, Atlanta, and Charlotte, have all seen a significant surge in home prices over the past decade. Cities like Phoenix in the U.S. and Dubai more globally which have relatively relaxed zoning policies experienced housing bubbles during the first decade of the 2000s because the supply of housing wasn’t able to keep up with the sudden surge in demand from investors.

The fact is that even with relaxed zoning policies, it’s very hard for the construction sector to respond to a rapid surge in demand for housing.

A report by the Bank of Montreal found that countries with higher rates of population growth also saw the most rapid increase in home prices, a result that is intuitively obvious, and one we are seeing in Canada. While it’s very easy for our government to double the number of immigrants moving to Canada each year, it’s extremely hard for them to double the number of homes being built to house these new Canadians. When housing completions don’t increase enough to match a country’s immigration goals, the result is what we are experiencing in Canada: a spike in the cost of housing.

Despite the evidence, the solution to our housing crisis promoted by our policymakers and expert economists continues to be rooted in the delusion that housing supply can respond to any sudden surge in the demand for housing if we simply reform zoning policies.

This does not mean supply-side reforms that encourage more housing and more density are not important, they are. But supply-side policies alone are not the panacea to our housing crisis that some academics and economists make them out to be.

A politically sensitive issue

The other likely reason that many economists have argued that a lack of supply is the cause for high home prices is because any suggestion that Canada’s record high immigration levels may in fact be the bigger driver of home prices runs the risk of being called xenophobic. I’ve experienced this myself from self-described “housing advocates” who believe that with the right zoning reforms, there is no limit to how many homes Canada can build.

But questioning what is the right level of immigration for our country, and whether the current level is doing more harm than good, isn’t xenophobic at all. It’s a critical policy question that for a long time has been ignored out of fear that one might be called a racist for even raising the question.

But the times are changing.

Over the past month we have seen a significant shift in this discussion. More journalists, economists, and editorials are questioning the goal of our federal government’s immigration strategy and whether their current immigration targets are doing more harm than good.

After years of silence regarding the impact our government’s immigration policies are having on healthcare, housing, and wages, more and more experts are starting to ask some very important questions. And not surprisingly, in virtually every column the author clarifies that they are not xenophobic or against immigration, but are noting some of the negative side effects of our country’s aggressive immigration strategy.

Why are more experts starting to talk about our government’s immigration targets?

It’s becoming clearer that the federal Liberal government’s strategy to nearly double the number of immigrants admitted to Canada each year without making the necessary investments to support them is straining our housing markets and health-care system.

A demand crush that further hurts renters

The other important factor is that many of the negative side effects of Canada’s immigration strategy are starting to be felt most by the poorest and most marginalized communities in Canada—including many of these immigrants themselves.

While the discussion about Canada’s housing crisis often centres around the high price of homes and its impact on first-time buyers, a bigger concern should be how our government’s policies are driving up the cost of renting as renters typically have much lower household incomes as compared to homeowners, and unlike homeowners they don’t benefit financially from the rising cost of housing.

To provide some context to the recent acceleration in rents, it is helpful to compare how average rents have changed before and after the current Liberal government took office in 2015.

Under the previous federal Conservative government, the average rent for a Toronto condominium went from $1,570 in 2006 to $1,866 in 2015, a $297 (or 19 percent) increase in nine years. In contrast, average rents under our current Liberal government have climbed from $1,866 in 2015 to $2,657 in 2022, a $791 (or 42 percent) increase in just seven years.

Am I suggesting that our current government’s change in immigration policy alone is responsible for this outsized increase in average rent in Toronto? Of course not, but of the most common explanations for the high cost of housing, from foreign buyers to low interest rates and even irrational exuberance, this one has the most direct impact on rents.

Calculating the demand and price of a property is more complex as the source of capital and the cost of debt are all important factors, alongside the usual factors such as the number of households requiring housing. Rent, on the other hand, is simply the cost of housing services, a cost more closely linked to the demand and supply for housing services, and not as impacted by other factors.

It’s worth noting that the higher appreciation in condo rents since 2015 was not due to a lack of building. Average annual condo completions were 12 percent higher after 2015 when compared to the period before 2015. This additional supply didn’t cool condo rents because Canada’s population was growing faster than these housing completions.

The impact of—and on—foreign students

The other aspect of Canada’s immigration policies that is often overlooked is the growth in the number of international students attending universities, which are not directly included in Canada’s immigration numbers today. An important part of Canada’s immigration pipeline, the number of foreign study permit holders in Canada has climbed from 352,330 in 2015 to 621,565 in 2021.

The Globe and Mail’s Matt Lundy argues that there is a simple explanation for this boom in foreign students: money.

The annual tuition for foreign students is five times what domestic students pay, so post-secondary institutions are doing what any profit-maximizing corporation would do: they are admitting as many foreign students as they can.

But unlike Canada’s program for permanent residents, there are no targets for foreign study permit holders—post-secondary institutions can admit as many students as they want each year. But while these institutions have the right to maximise their profits by admitting as many foreign students as possible, they have no obligation to ensure there is adequate housing for the students they are admitting. The lack of planning and investment from post-secondary institutions into the housing needs of their students means that the burden of Canada’s housing crisis has fallen in part on these often financially stretched students who are moving to Canada for a better life but are left feeling exploited. When foreign students are fighting for the most affordable rentals in their community, it also puts pressure on low-income households looking for the same.

It’s time to start asking harder questions about the negative side effects of Canada’s immigration policy. As economist David Green wrote, immigration is not some magic pill for saving the economy.

Sean Speer: The ‘just transition’ won’t be just if it guts our middle class

Commentary

Hub readers would be somewhat justified for being confused about the current political maelstrom about the so-called “just transition” of oil and gas workers. The language of “just transition” has up until recently been mostly confined to academics, think tanks, and climate advocacy organizations. It’s now at the centre of a renewed debate about the costs and consequences of the Trudeau government’s climate change agenda, including for particular regions, sectors, and workers. 

The controversy started about two weeks ago with the release of an 81-page federal briefing document for Natural Resources Minister Jonathan Wilkinson on the government’s plan to transition workers in carbon-intensive industries such as oil and gas production into job opportunities in greener parts of the economy.  

It precipitated a swift reaction from federal and provincial politicians, including Alberta Premier Danielle Smith who said the briefing document confirmed her “worst fears” about the Trudeau government’s plans to shift the centre of gravity of Canada’s economy from carbon-intensive to less carbon-intensive sectors. 

The ensuing political tensions are a bit odd. The players seem to be slightly confusing causes and symptoms. Premier Smith’s problem isn’t presumably the federal government’s plan for training and employment subsidies to help transition oil and gas workers into new jobs. It’s Ottawa’s plan to threaten their current jobs in the first place. 

But it nevertheless sets up an intellectual and political battleline between Ottawa and Alberta rooted in competing conceptions of how we ought to think about the pursuit of our collective climate goals: is it about managing the decline of the country’s oil and gas sector, or instead what the Public Policy Forum has come to champion as the “aggressive decarbonization” of energy production, transmission, and usage? How we answer this question in the coming years will have significant economic, political, and social consequences. 

The term “just transition” is widely thought to have been coined by Tony Mazzocchi, a well-known American labour and environmental activist, in the early 1990s. He and his acolytes saw the concept as a means of addressing tensions and creating alliances between the labour and environmental movements. 

The basic idea was to design and implement large-scale public programs—what Mazzocchi famously called a “Superfund for Workers”—that would mitigate the inequitable effects on livelihoods caused by environmentally-motivated transformations in energy systems and resource use. As he wrote at the time: “we need to provide workers with a guarantee that they will not have to pay for clean air and water with their jobs, their living standards or their future.”

The Trudeau government has since adopted this language in the context of its own ambitious emission-reduction targets including the impending adoption of an emissions cap on the oil and gas sector. It’s a basic recognition that such policy actions won’t be costless and their consequences will be concentrated among certain people and places. 

The government’s briefing materials essentially say as much: “The transition to a low-carbon economy will have an uneven impact across sectors, occupations, and regions, and create significant labour market disruptions.” There’s been a lot of attention paid in particular to some numbers in the document including the possible employment threat of “large-scale transformations” for about 13.5 percent of Canadian workers, including more than 200,000 in the energy sector. 

Even if Ottawa’s just transition plan to mitigate the displacement effects for some share of these affected workers is ultimately effective, the consequences could still be significant. Consider, for instance, Alberta’s oil and gas sector employs nearly one in ten workers across the province’s entire economy. 

These figures actually underestimate the energy sector’s role in Canadian political economy over the past two decades. I’ve previously written for The Hub about the phenomenon of “jobs polarization” in the modern economy. The basic idea is that the shift from a goods-producing economy to a service-based economy has contributed to a bifurcation of the labour market with a growing share of jobs concentrated in high- and low-skilled occupations. It’s come to be described as an “hourglass economy.” 

Although Canada isn’t immune to these trends, our labour market structure has remained more egalitarian than most peer jurisdictions. Labour economists David Green and Benjamin Sand attribute it in large part to sustained labour demand in the energy sector over the past twenty years or so. Their analysis finds that during this period of jobs polarization across advanced economies, Canada’s resource-based sectors have acted as an “employment alternative to low-paying services jobs.” 

This conclusion aligns with the work of economist Kevin Milligan who has similarly argued that resource-based jobs have sustained Canada’s middle class in the 2000s. As he has written: “The resource sector has contributed substantially to the good jobs that underpin middle-class resilience.”

Another way to put it is this: during a period of worldwide jobs polarization, Canada’s natural resources sectors in general and its oil and gas sector in particular have counteracted this trend, fortified the country’s middle class, including among those without post-secondary credentials, and in so doing had a powerful anti-inequality effect on Canada’s labour market. 

Throwing these workers into disarray therefore would not merely have economic consequences in the form of job and income losses, but it could have broader political and social implications. Remember the story of the contemporary populism around the Western world is in large part the political expression of those who once aspired to a middle-class life and have instead slid down the skills ladder into lower-paid jobs or unemployment altogether. 

If one thinks about the just transition debate according to this lens, policy-based threats to resource-based jobs could hasten the erosion of middle-class jobs in Canada, produce greater inequality in our society, and ultimately precipitate a rise in political and social instability. 

This of course doesn’t mean that Canadian governments ought to abandon their climate goals. But it is a reminder that they need to be judicious in how they assess the benefits and costs of different policy actions if for no other reason than it will undoubtedly threaten the political durability of their own policies. It’s difficult to envision how a stringent climate policy that resulted in major employment dislocation and a spike in inequality could possibly be sustainable. 

With this in mind, the Trudeau government would be wise to adjust how it thinks and talks about the application of its climate goals to the resource-based sectors along the lines set out in a recent letter from Premier Smith to the prime minister. The letter puts forward some sensible ideas to encourage investment in lowering the carbon intensity of oil and gas production, as well as new technologies such as Carbon Capture Utilization and Storage, hydrogen, geothermal, and nuclear. 

But its key point is more fundamental: the ultimate goal of federal policy shouldn’t be the managed decline of oil and gas employment through regulations, taxes and transfer payments but rather the support for sustainable, high-paying employment opportunities through a mix of emission-reducing technologies and low-emitting energy exports. 

Put differently: instead of a just transition plan, what we actually need is a low-carbon export strategy that strengthens the domestic conditions for the development and adoption of low-emitting technologies and shapes the global trading and reporting regime for emissions accounting between importing and exporting jurisdictions.

Such an agenda may not satisfy the most hardcore climate activists but it would reflect a proper understanding of justice in terms of ensuring that the costs and consequences of climate policy aren’t disproportionately borne by resource-based workers and communities. That’s the basis of a just and durable climate change agenda for Canada.