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Rapid Population Growth is the Key Factor Driving Inflation in Rental Prices, says Bank of Canada

The Bank of Canada, in a recent analysis, focused on Canadian housing cost trends and noted that “strong population growth is supporting inflation in rental prices.”

“A larger increase in newcomers than in the past is adding pressure to the structural supply constraint in housing,” states the Bank of Canada’s Jan. 24
Monetary Policy Report.

“This has helped to push the overall housing vacancy rate to record lows, which has underpinned house prices and led to higher rents.”

A chart included in the report shows a close correlation between yearly population growth and the inflation of rental prices, putting today’s rental price inflation at nearly 8 percent.

The existing
Immigration Levels Plan
established by the cabinet has a target admission of 485,000 individuals in the current year, with an increase to 500,000 in 2025.
Internal studies
carried out by the immigration department in 2023 suggest that a significant number of Canadians perceive these targets as overly ambitious.
Consumer Price Index (CPI) inflation began
in spring 2021, reaching 8.1 percent by June 2022, with a significant increase in housing price inflation, the report notes.

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According to the report, a notable driver of this trend was a 14 percent increase in house prices, reflecting strong housing demand partly fueled by low mortgage rates. However, in response to the rising inflation, the Bank of Canada started increasing the policy interest rate in March 2022.

This action has gradually helped to reduce inflation across various goods and services, though inflation in housing prices remains comparatively high at 7 percent.

Within the housing category, the report details shifts in contributing factors. Inflation related to house prices has slightly decreased due to the dampening effect of rising interest rates on housing demand. Meanwhile, mortgage interest costs and rental price inflation have surged, currently standing at approximately 29 percent and 8 percent, respectively, becoming primary drivers of housing inflation.

The report also highlights that the decrease in overall housing price inflation has been less pronounced compared to previous periods of monetary policy tightening.

This outcome is attributed to higher mortgage interest costs, a result of a prolonged period of historically low interest rates combined with a rapid increase in policy rates through 2022 and 2023; persistent structural constraints in housing supply, such as zoning restrictions, lengthy permitting processes, and a shortage of construction workers; and an increased pressure due to a larger influx of newcomers, pushing housing vacancy rates to record lows, thereby bolstering house prices and elevating rents.

The report predicts several factors are expected to sustain elevated housing price inflation.

Inflation in mortgage interest costs will likely remain high as households renew mortgages at higher rates. Additionally, ongoing structural supply challenges and strong demand due to population growth are expected to continue influencing house and rental prices. Although recent government measures may help alleviate some constraints, the Bank of Canada anticipates these imbalances will resolve gradually.

The bank expects a modest decline in housing price inflation over the coming years, which will play a significant role in the gradual return of overall inflation to a 2 percent target.

According to a recent
from TD Bank, there is an anticipation of a 10 percent decline in housing prices in the upcoming months.

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