Immigration’s impact on home prices hard to quantify — until you take it away
Its absence can lead to huge consequences, Murtaza Haider and Stephen Moranis say.
Housing markets respond to demand generated by households. An increase in population or the purchasing power of buyers is likely to exert upward pressure on housing prices and rents. But how much of that pressure is generated by immigration, the biggest factor driving Canada’s population growth?
The interest in that question has increased since housing affordability became a significant concern in large cities in Canada.
Rapid price escalation in Toronto and Vancouver during 2016-17 raised concerns about the impact of foreign money, something provincial governments addressed by implementing measures including a foreign homebuyers tax.
But those concerns, and the resulting tax measures, primarily involved the influence of non-resident speculators, not immigrants looking to actually build lives here.
In the past, research focused primarily on the shelter needs of recent immigrants who struggled to find adequate employment in Canada. New immigrants usually found housing in low-income and predominantly rental neighbourhoods. Over time, as they assimilated, immigrants transitioned from rental to owner-occupied housing.
Immigrants to Canada may not necessarily be low-income. For instance, investor-class immigrants are usually wealthier than the native-born population, and could have a more substantial effect on housing prices.
Immigration is also responsible for the net increase in the Canadian population. With an aging workforce, the influx of younger and highly educated immigrants is even more critical for the Canadian economy. Thus, between 2019 and 2021, Canada plans to bring in over one million immigrants, of which most will be economic migrants.
Most economic immigrants continue to settle in the three most populous city regions in Canada, namely Montreal, Toronto, and Vancouver. However, the big three are attracting a smaller share of immigrants now than before.
For instance, 72 per cent of the economic principal applicants initially settled in the big three in 2004. By 2014, their share had declined to 51 per cent.
However, the lure of big cities is more pronounced for business class immigrants and skilled workers. In 2014, the three populous city regions attracted 85 per cent of the business class immigrants and 70 per cent of the skilled workers.
Immigrants usually flock to larger cities because of the abundance of employment opportunities there. When housing prices are falling, immigrants generate the additional demand for housing needed to stabilize the markets. However, when housing prices are escalating, especially in supply-constrained urban markets, new immigrants might contribute to the growing demand for housing.
Ather Akbari and Yigit Aydede of Saint Mary’s University estimated the effects of immigration on house prices in Canada. Writing in the journal Applied Economics, they determined that immigration contributed to no more than 0.1-per-cent to 0.12-per-cent increase in housing prices. But it was immigrants who had arrived in Canada at least 10 years earlier who were contributing to the rise, the study found, not recent arrivals.
The authors believed the small effect of immigration was because out-migration of the native-born from the neighbourhoods where new immigrants usually settle softened the impact on housing markets. Furthermore, an increase in new housing construction in response to higher demand also moderated the effect of immigration.
While Akbari and Aydede’s findings suggest that immigration is unlikely to be a driving force in the rapid escalation of housing prices in Canada, recent research suggests that wealthy immigrants can be responsible for price escalation in choice neighbourhoods.
Writing in the journal Real Estate Economics, Andrey Pavlov of Simon Fraser University and Tsur Somerville of the University of British Columbia found that the unexpected closure of an investor immigration program “had a negative impact on house prices of 1.7 — 2.6 per cent in the neighbourhoods and market segments most favored by the investor immigrants.”
Immigrants are responsible for the lion’s share of population increase in the Vancouver Metropolitan Area. Also, British Columbia has been the choice destination for investor immigrants. The investor immigration program, which has been running since 1986, was suddenly suspended in 2012 and eventually closed in 2014.
The program’s closure allowed the researchers to determine whether housing prices in Vancouver neighbourhoods favoured by wealthy immigrants declined as a result. The authors found that high levels of wealthy immigrants in select Vancouver communities contributed “to higher relative neighbourhood house prices.”
The effect of immigration is also extended to rental markets. A paper in the journal Economic Issues by Ehsan Latif of Thompson Rivers University found that an increase in immigration relative to the size of the province’s population had a small impact on housing rents. The author believed that out-migration of the native-born from areas where immigrants settle could be the reason for a minor increase in rents from immigration.
Research in Canada has shown that the overall impact of immigration on housing markets is modest at best in most cases. The effect could be substantial in the case of wealthier immigrants destined to select neighbourhoods.
The more important realization is that an absence of immigration would result in a declining population and aging of the workforce, which could have a much larger negative impact on Canadian housing markets.