January employment data came in stronger than expected with a gain of 37,000 jobs and a slight decrease in the unemployment rate to 5.7%. While the headline was positive, the details paint a more complex picture. Most of the job gains were in part-time positions, while full-time employment declined. Private sector employment saw modest growth of just 7,000 jobs.
Despite an increase of 125,500 in the working age population, the unemployment rate was kept at bay due to a decline in the participation rate. This decrease wasn’t solely due to workers retiring; the participation rate for individuals aged 15-64 also fell. Despite a slight easing in the jobless rate, average hourly wages also fell but are still up by 5.4% year-over-year, a level considered too high by the Bank of Canada.
This employment report is likely to be seen as a reason for the Bank to maintain a patient approach to monetary policy, even though some commentators suggest that a considerable portion of inflation is caused by the influence of monetary policy on housing costs (shelter price inflation).
The Bank of Canada governor recently addressed the issue of inflation and housing affordability, emphasizing that interest rates alone cannot solve the issue. While acknowledging that monetary policy can influence short-term demand, it cannot address long-term structural issues. He noted that shelter price inflation has remained elevated and is now the biggest contributor to above-target inflation. Factors contributing to this include elevated mortgage rates due to higher policy rates and higher rents resulting from structural housing shortages.
In December, the rent component of the Consumer Price Index (CPI) increased by 8% year-over-year. According to CMHC data, rent growth in the purpose-built market exceeded 8% last year – the fastest gain on record (since 1992). Additionally, the weighted average rent growth for condominium units in Vancouver, Calgary, Edmonton, Toronto, and Montreal—representing about 90% of the condo rental stock—rose by 6%, although this was a decrease from the 9% growth observed in 2022.
While population growth has been the primary driver of rent growth, which was robust in 2023, there are indications of some slowing, particularly in Toronto. Data from the Toronto Real Estate Board shows year-over-year gains of 2-4% for one- and two-bedroom condo rentals in the last quarter of 2023. We project an increase in rents of around 5-6% for 2024, with further easing expected in 2025.
Condos have been a significant source of rental units, and high completion rates in markets like Vancouver and Toronto should help to ease rent price pressures in the next few years. Another factor is the recent cap on the inflow of foreign students, which could reduce student intake by at least 200,000. Private non-degree granting institutions will no longer have access to the government’s post-graduate work program, which allows foreign students to stay in the country and work after graduation to obtain a work permit.
As many as 125,000 international students are enrolled in GTA-area public-private college partnerships. This cap is expected to have its greatest impact on communities such as Brampton, which have a large concentration of post-secondary institutions. The Bank of Canada acknowledges that while it cannot resolve this structural issue, it is crucial to understand and factor into monetary policy because it affects the cost of living for Canadians.
We expect the Bank will begin lowering rates in June or July. By then, the US Federal Reserve will likely have acted, providing the Bank with some policy room to lower rates without weakening the dollar and causing import prices to rise. Also, by that time, the Bank should have a clearer line of sight on the direction of shelter inflation.
The impact of lower mortgage rates on shelter inflation will occur gradually since the Consumer Price Index (CPI) considers the weighted average mortgage rate. The impact on rents will be a balancing act. The central bank cannot directly affect housing affordability, but higher rates also limit construction activity which will reduce future supply. It is up to governments at all three levels to create the right conditions to get more housing built sooner so that rent inflation falls.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
The ongoing debate surrounding Canada’s foreign buyer ban raises questions about its effectiveness and necessity. While the government’s decision to extend the ban by two years aims to address concerns about foreign investment in the housing market, existing provincial policies, like foreign buyer taxes, already serve as substantial deterrents. Further, data suggests that foreign buyers predominantly target properties not typically sought after by first-time buyers, suggesting that fears of crowding out aspiring homeowners may be exaggerated. Despite the political attention given to this issue, the extended ban may be unnecessary.
Read the full article here: Canada’s Foreign Buyer Ban – Prudent Policy or Political Theatre?
Independent Opinion
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