Elevated housing prices in Canada, fueled by unprecedented population growth, present a challenging conundrum for the Bank of Canada as it navigates the complexities of monetary policy, according to Stefane Marion, Chief Economist and Strategist at the National Bank of Canada.
Despite the Bank of Canada's efforts to implement restrictive monetary policies, Canadian house prices have remained stubbornly high. Marion attributes this phenomenon to the record population growth the country has experienced, with an annual influx of 1 million residents in both 2022 and 2023. To put this in perspective, Marion notes that this growth is equivalent to the United States adding a staggering 20 million people over the same two-year period.
This surge in population exacerbates housing deficits, keeping shelter prices and inflation at elevated levels. Marion argues that the high housing prices and inflationary pressures make it challenging for the Bank of Canada to implement substantial interest rate cuts. Marion predicts that the central bank will only be able to make "modest" cuts of around 100 basis points in 2024, given the difficulty of keeping price gains below three percent.
Marion highlights the conundrum faced by the central bank, stating, "Home prices are stickier, and that’s a conundrum for the central bank because they were assuming that with higher rates home prices will actually come down. Population growth is good down the road, but the capacity constraint pushes inflation higher."
To address the unprecedented population surges, Marion suggests that Canada needs to build 600,000 homes annually, a substantial increase compared to the current record of approximately 370,000. This massive supply-demand imbalance underscores the urgent need to address the country's housing supply issue.
The impact of population surges on inflation is evident in the consumer price index’s shelter component, which continues to accelerate, Marion notes. High costs for mortgage interest and rents contribute significantly to keeping inflation well above the Bank of Canada’s target. Excluding shelter costs, Marion indicates that inflation hovers around two percent.
Marion also highlights that high population growth will lead to increased government spending on essential services such as schools, healthcare, childcare, and infrastructure. However, he cautions that this additional spending may not alleviate inflationary pressures, emphasizing the need to recalibrate on the demand side and simultaneously accommodate supply.
Despite these challenges, Marion underscores Canada's favorable fiscal position, boasting the lowest net debt and borrowing levels among the Group of Seven countries. Additionally, the country spends the least in the G-20 on subsidies for oil, coal, and natural gas, according to data from the International Monetary Fund. Marion's analysis suggests that while Canada faces a complex economic landscape, its fiscal strength positions it well to navigate the challenges posed by the confluence of high housing prices and unprecedented population growth.
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