Thoughts

March 22, 2024 | 13:19

Canada's NPR Limits: A Measure with Muscle

Economist

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Robert Kavcic

Senior Economist and Director
Economics

Robert has been with BMO Capital Markets since 2006. He plays a key role... (Read more)

Ottawa announced that it will publish nonpermanent resident (NPR) targets later this year. The goal will be to reduce the share of NPRs in the population, currently estimated at 2.5 million or 6.2%, to 5% over the next three years. If these targets are met, while permanent resident inflows continue as planned and net births follow recent trends, we judge that Canadian population growth could grind down closer to 1% from north of 3% today. The precise profile of these targets remains to be seen, but presumably most of the pullback will take place in 2025-through-2027.

In order to hit the 5% population share, Canada will need to pivot from net NPR inflows of 800k per year today, to net outflows of more than 100k in the coming years. That will result in less upward pressure on rents, housing and services inflation. Expected underlying population growth of around 1% would continue to lift demand, but the curve will now be shifting out at a much more serviceable pace. In fact, in the decade leading up to this population burst, when affordability and services inflation were largely in check, population growth was running at just over 1%. The 400k-to-500k range is just about the sweet spot for net immigration that provides needed long-run labour supply, while also being absorbable.

For housing, this move will dampen price pressures at the margin. For investors, the current combination of interest rates, house prices and rents don’t make much economic sense, but can be overlooked because of the expectations that torrid population growth creates. If that expectation is now scaled back and rent growth assumptions are trimmed, the thought of carrying a cashflow negative property becomes even less compelling. We’re always careful to compare the current cycle with the early-1990s, because many things went bad during that period that we don’t envision today—but it certainly rhymes. The lead up to that period was marked by ‘undersupply’ problems giving way to a long home price correction. Among the factors that prolonged that cycle was a significant scaling back of international immigration.

From a growth perspective, this move will dampen demand in the coming years, all else equal—think consumer spending in areas like retail, food and telecom services. Indeed, while real household spending has held up very well in the face of higher interest rates, the aggregate is being boosted by 3% population growth. Per capita real household spending has been falling steadily since 2022Q2, and is now down almost 2% y/y, which you don’t typically see outside of recession.

The Bank of Canada views immigration as neutral over time, but we tend to put more weight on the near-term inflationary impulse. This move should ultimately set interest rates on a lower path than they otherwise would be, just as they are now arguably higher for longer than they otherwise would be. That said, the disinflation dynamic will take some time to play out. First, we’re assuming the new targets only start to bite by 2025, and the BoC should be well into easing by then. And, while some components of service inflation could be impacted quickly, others, like rent, notoriously take time to filter into the CPI even after market conditions change on the ground.

Bottom Line: Policymakers have discovered the demand curve. These measures, if carried out as planned, should take stress off housing, ease inflation pressure over time and allow Bank of Canada policy rates to track a lower path than they otherwise would, at least in the short term.