Throughout the developed economies immigration has become a hot-button that is being pushed by populists everywhere. Brexit was, in part, a reaction to the unrestrictive immigration policies of the EU;  it is most likely to be center stage once negotiations start with Brussels. Within the EU, there are political elements in Germany and France warning against an open-door immigration policy. And, the recent U.S. presidential election featured heated debates on immigration from Mexico and the Middle East.

Not so in Canada, where the electorate voted in a government that promised to take in over 25, 000 Syrian refugees (which achieved in 2016) and continues to encourage immigration as part and parcel of the growth of the economy.

Why Canada needs immigration is readily apparent from Chart 1. Prior to 2010, the Canadian population expanded as both the existing population and immigration contributed positively. However, demographic trends clearly point to the need for increased immigration to offset a negative growth in the existing population. Just maintaining annual immigration of 150,000 yearly, for example, over the next decade will be insufficient to maintain the current size of the population. 

Chart 1

Canada’s major source of population growth is immigration, accounting for 2/3rds of the increase in total population in 2015 alone. Immigration plays a huge part in driving the Canadian economy and this is nowhere more apparent than in the residential housing market. Table 1 highlights the main demographic forces accounting for the strong housing demand.

Table 1

 Using a conservative measure for the average household size of 1.85 persons, suggests that Canada needs to add to its housing stock about 200,000 new housing units each year. Currently, it is meeting that requirement, thus supply is roughly in balance with the growth in household formations, on a national scale.

 However, there is a market imbalance in the Vancouver and Toronto. Those two cities have experienced double-digit price increases steadily for more than 5 years, and every indication points to continued price appreciation. What is really driving housing prices in these cities? Nearly half of the new immigrants are electing to settle in Vancouver and Toronto. This means each city needs to build approximately 50,000 new housing units each year. Studies in the Vancouver area reveal that more than half of the immigrates purchase homes, thus putting additional pressure on local prices. For Canada as a whole, there are 400,000-500,000 temporary non-residents putting additional pressure on the rental market in these two cities.  

What is in store for Canadian housing demand? The Canadian government recently announced that it intends to admit  400,000 immigrants in 2017, an increase of some 80,000 over the level achieved in 2015. This will undoubtedly continue to maintain the pressure on the housing industry to meet the population demands. As such, housing will remain a pillar of growth as it has been for more than a decade.