Immigration decline is biggest threat to home construction: Capital Economics
While the last two months have given housing market observers a lot to be optimistic about, concerns remain over the lasting impacts of the pandemic on many key segments of Canada’s real estate market.
Among the top worries is how a steep drop in immigration to the country will impact the housing market, and, in particular, new home construction.
The pandemic has caused a rapid and staggering decline in new arrivals to Canada. Recent data from the second quarter pegged the drop at 67 percent when compared to the same period in 2019. In a research note from RBC, Senior Economist Andrew Agopsowicz said visa applications had also fallen 80 percent during that period, indicating that “the slowdown could be lengthy.”
This recent data had Capital Economics’ Stephen Brown fretting about the longer term impact of this precipitous fall on the country’s housing market. Homes sales and new home building permits have remained strong, he said. But what happens in 2021 and beyond will depend on how quickly immigration can bounce back.
“The sudden plunge in immigration is a particular concern given the number of homes under construction is near a record high,” he wrote.
“Even if immigration dropped by just half, the ratio of units under construction to population growth would be far higher than at any point in the past three decades,” Brown continued.
The economist went on to note that while existing home sales and home building appear strong, there are signs of weakness in rental markets in Canada’s immigration hub cities. In Toronto, for example, Brown said that rental listings have surged in recent months and prices have posted steady declines.
Zeroing in on home construction, Brown said that another area of concern was the relatively slow rebound in new condo sales compared to single-family homes. Both Toronto and Vancouver have seen more momentum in their ground-related new construction segments, with condos lagging behind in their sales recovery.
“[D]evelopers will not be able to start construction on large multi-family projects if they cannot sell a large share of their units at the pre-construction phase,” wrote Brown.
But, at the end of the day, immigration would need to be severely affected for more than just a single year to have a drastic long-term impact on new home construction, especially on the high-rise condo market with its lengthy project completion times.
“It is the outlook for immigration over the next three to four years, rather than the next 12 months, that will help determine the ultimate demand for these types of homes,” Brown said.
“On that front, recent signs of progress on a Covid-19 vaccine, as well as the government’s commitment to its pre-virus immigration targets, bode well,” he added.