Inflation, Immigration & LTI Rule Changes - What does this mean for Toronto Real Estate!
In this week’s market update, we discuss inflation, immigration, and OFSI's new mortgage rules! Massive changes in lending rules and immigration policies will change the real estate landscape in the coming years. I will break down the changes and implications here.
Inflation
Annual inflation fell to 2.8% year-over-year in February, with the cost of cellular services, groceries, and internet access services contributing to slower growth. These are volatile segments of the market and are subject to monthly changes.
Similarly, the Bank of Canada’s (BoC’s) preferred measures of core inflation were also surprising, coming in at just 3.1% on average. This was below the expected amount for the second month in a row. Seasonally adjusted core inflation rose 0.1% in February and is now up 0.3% over the past three months. This is the lowest rate of growth since late 2020.
Housing costs, meanwhile, continue to put pressure on the household budget. Shelter prices rose 6.5 percent year-over-year last month, up from 6.2 percent in January. Mortgage interest costs are still adding 0.8% to headline CPI. If mortgage costs were removed from headline CPI, it would be bang on the BoC target at 2% for the second straight month.
Rents continue to be a thorn in the BoC’s side. The rented accommodations index was up 7.9% year over year, adding over 50bps to the headline CPI.
Immigration & Population Growth
For the first time, Canada will put a "cap" on the number of new temporary resident arrivals to the country when it sets immigration levels in the fall. Non-permanent residents, comprised overwhelmingly of temporary workers and international students, grew by 800,000 in the past year alone and currently account for 2/3 of headline population growth. The federal government will aim to reduce the temporary resident share of the total population to 5% from 6.2% currently over a three-year period.
The impact on the total population growth will be significant. By this time next year, population growth will have plunged to just 0.8% from 3.2% currently, and it will flatline at roughly 0.7% out to 2027
What are the possible implications?
Massive impede to economic growth - Canada’s economy has grown over the last few years not by becoming more productive but by adding more people to our country. By drastically slowing population growth, we can expect our economy to substantially slow in turn. A chronic lack of business investment has meant that Canadian labour productivity has declined for 11 of the past 14 quarters and remains at 2017 levels. We have already seen real GDP per capita output decline for five consecutive quarters and is deeply negative on a y/y basis.
The rental market will cool significantly - non-permanent residents are virtually all renters! There is a strong correlation between non-permanent resident y/y growth and CPI rent growth. Canada is set to see record growth in Condo and Purpose-Built Rental completions (220,000 units in the pipeline) simultaneously as a potential decline of NPRs (a potential decline of 440,000 people from its current level).
OFSI’s Loan-to-Income Limits
Canada’s banking regulator dropped new regulations last week that will limit the share of new mortgages with loans above 450% of borrower income. The new measures are expected to be implemented in Q1 next year. The new rule is a directive for the Banks, not the borrowers. Each Bank will be expected to adhere to a threshold or share of its mortgages above the LTI limits. The specifics for evaluating this threshold have not been released. However, it will be on a case-by-case basis. Currently, only 12% of new mortgages have LTI ratios above 450%, down sharply from 26% in 2022.
These changes may be a little too late, as new residential mortgages are declining, and residential mortgage growth is at the lowest level (3.4% annual growth) in decades.
That’s it for this week’s update!