Focus
February 16, 2024 | 13:15
Extraordinary Population Delusions and the Trouble with Crowds
Economics
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Economics
Economics
Economics
Economics
Economics
Economics
Fixed Income Strategy
Economics
Extraordinary Population Delusions and the Trouble with Crowds |
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Canada’s population has exploded by 1.3 million people in the past year, or 3.2%, the fastest pace since the 1950s. This surge is rooted in sound principles, but has clearly run amok. Indeed, the narratives around the population boom have, in our view, been off the mark, although recent measures (e.g., caps on international students) suggest that is changing. Here are five pieces of the narrative that are worth challenging: |
Myth: Immigration targets are carefully managedCanada has historically boasted a carefully-managed system of permanent resident targets, which remains in place today. In the 2023 Immigration Levels Plan, Canada set permanent resident targets peaking at 500k per year by 2025 and 2026, with roughly 60% of those inflows arriving in the economic class (including high-skilled workers and those covered under provincial nominee programs). Those official immigration targets have been rising steadily from about 300k before the pandemic and around 250k in the decade prior (Chart 1). Now, we’ll be among the first to argue that a robust pipeline of skilled immigrants is essential to maintain future labour force and potential output growth. But, the current population ‘situation’ goes well beyond robust official targets. The roughly 1.3 million net international inflow in the past year has dwarfed these targets, entirely on the back of unchecked nonpermanent resident inflows—split between temporary foreign workers and international students (Chart 2). Reality: Canada’s well-managed immigration plan has unravelled, and the surge of nonpermanent residents has run beyond anyone’s ability to plan. Municipalities can’t be expected to prepare for such an inflow, resulting in stress on transportation and service infrastructure. And, it’s an acute demand shock that has crushed housing affordability. |
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Myth: Housing affordability is a supply problem and we’ll triple constructionCanada is currently building more than it ever has, with more units now under construction than ever before in raw and in per capita terms. The industry has been operating at full capacity and has shown an all-out ability to complete about 225k-to-250k units per year. Incidentally, at 2.5 people per household, that’s just enough to cover official immigration targets and some domestic formation. It’s little coincidence that housing affordability was largely in check until about three years ago when population growth swelled past these targets—see Chart 3 and ask what suddenly changed. |
Meantime, federal and provincial measures that hope to triple the rate of housing construction have simply never been realistic—Chart 3 also shows how extreme such targets are. While we applaud measures to speed up the responsiveness of supply (such as faster approval processes, etc.), and welcome tax changes that incent more supply, the reality is that the industry is bound by capacity constraints, and will build based on market conditions. Since the 2022 federal budget that was laden with supply goals, housing starts have actually fallen—as we expected. Reality: Canada’s housing situation is the result of massive excess demand shocks. Deeply negative real interest rates stoked excessive price gains that are still normalizing; and, a near-tripling in population growth in a short period of time is something no supply curve can adequately respond to. Myth: More people is disinflationaryInternational immigration is a key mechanism with which to ease coming labour shortages and lift potential growth over the longer term. At a time when the Bank of Canada is actively fighting an inflation battle, with an eye on wages, one could think that torrid population flows would help. But, integrating new Canadians into the labour market takes time, and there are often language barriers, skill mismatches or issues with credential recognition—we hear these concerns often in the business community. |
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In the meantime, while the inflation-absorbing effect of higher labour supply takes time to materialize, elevated population flows add to aggregate demand and inflation pressure immediately, while weighing on per capita growth. Inflation pressure is clear in areas such as housing, health care and other services where supply and infrastructure can’t keep up (Chart 4). Reality: An immediate surge in population growth when supply is already struggling to keep up is inflationary in the short run. And, the impact on growth is not entirely clear. Consider that without this demand shock, Bank of Canada policy rates could be lower alongside less pressure on housing and services inflation. As it stands now, these pressures will keep policy rates restrictive for longer than they otherwise would be. Myth: We need the workersIt’s true that Canada’s fertility rate has been falling steadily for decades, most recently hitting all-time lows in 2022. As a result, the population mix has been skewing older; and, as we’re in the middle of a wave of Baby Boomer retirements (aged 59-78 years this year, according to StatCan), the country’s dependency ratio is poised to rise further. All this has led to the need for skilled immigrants to fill the country’s labour gaps over the long term. |
It’s the short term where things get trickier. After experiencing historic tightness during the pandemic, the labour force began loosening in the second half of 2023. As of November, job openings (Chart 5) are on a steady path downwards and just above pre-pandemic trends. To be sure, vacancies remain elevated in some sectors (e.g., construction), but even they have fallen and the broader loosening argues against a large-scale labour shortage. Instead, existing avenues (such as the Temporary Foreign Workers program) could fill those gaps while being flexible to market conditions. Reality: In the long term, Canada’s demographic challenges will benefit from the immigration of skilled workers into the country. But, the labour market’s return to balance means additional inflows could lead to rising unemployment, without skills- or sector-specific targeting. The jobless rate is now up almost a full percentage point from the cycle low, and the employment rate is down almost a full percentage point, suggesting that the job market is no longer absorbing all of the inflows. Myth: People want intensificationThe pandemic-era trend of larger homes has only partially reversed course, with smaller-sized cities in more affordable regions benefitting from sturdy demand for homes. (The exception being Ontario, where small- to mid-sized cities saw a larger ramp-up in prices during the pandemic; Table 1.) Take a look at Chart 6, showing an ongoing outflow from Ontario and BC towards Alberta and the Atlantic provinces. Sure, the absolute flows are flattered by the sheer size of Ontario and BC—but note Quebec, which has a large population and is relatively affordable, is experiencing far smaller outflows. So, there seems to be a clear preference for cheaper, and more spacious, homes. That’s little surprise; remember, we’re right around the peak of Millennial homebuying age. At the other end, the Baby Boom generation is delaying downsizing longer than ever. |
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Reality: While some intensification is a natural by-product of population growth, it is far from clear that this is what people are looking for. In fact, housing demand is telling the opposite story. People are looking for larger homes in more affordable markets. And, let’s not pretend that intensification alone will solve our housing crisis, because markets like the GTA have already been intensifying, by rule, for 15 years. |