BMO Highlights Potential Correction in Canadian Real Estate Prices Due to Immigration Changes

BMO Highlights Potential Correction in Canadian Real Estate Prices Due to Immigration Changes

This week, BMO Capital Markets shared important insights on Canadian real estate, noting that Canada is taking significant steps to improve housing affordability by reducing its population growth. The bank has previously highlighted that plans to triple new home construction to boost affordability may not have been entirely realistic. With the acknowledgment of these challenges, BMO predicts a positive shift toward more affordable housing as construction efforts align with a smaller population.

Changes to Immigration Could Impact Real Estate Prices

Canada is taking a breather on immigration after realizing that previous strategies may not have worked as hoped. Following this year’s reduction in the number of temporary residents, including foreign students, the country is now focusing on stabilizing housing markets through a gradual population decrease. For the next couple of years, expect a dip in population growth as part of an effort to bring balance to housing after ambitious homebuilding promises fell short.

Robert Kavcic, a senior economist at BMO, shared, “We've voiced our concerns for years about the narrative that Canada needs to dramatically ramp up housing construction. While it wasn’t entirely feasible, the real issue lay in the demand curve going out of control.”

Kavcic emphasizes that for a long time, there weren't significant supply issues; instead, demand was influenced by policies intended to boost home prices, often causing confusion about affordability.

As changes to immigration targets were announced recently, he explains that this represents a second factor affecting demand, following the Bank of Canada’s rate hikes that addressed speculative buying. With expected population growth slowing from over 3% to nearly zero, the impact on housing costs, particularly rents, is anticipated to be swift.

Understanding the Demand-Focused Approach to Housing Issues

Policymakers are recognizing that the challenges in the housing market are more about demand than supply. Initially, they pointed to regulatory obstacles as the cause of rising home prices. However, lifting these regulations led to higher land values but fewer new builds. The government invested heavily through loans and stimulus to encourage developers, but results were minimal.