January 22, 2024 | No solutions, Only Trade Offs

Happy Monday Morning!

Tiff Macklem and the Bank of Canada are on deck this week. While they’re largely expected to remain on hold, Canadian households suffocating under the weight of higher interest payments will be looking for clues for when relief can be expected. The real estate market will be doing the same, it has already picked up in recent weeks on the narrative of rate cuts. Remember, the housing market largely trades off sentiment. Nobody wants to get stuck in the spin cycle of bidding wars.

Lost in all this hopium though was last weeks disappointing inflation data. Headline inflation ticked back up to 3.4%, but more concerningly the Bank of Canada’s preferred core measures showed no moderation. CPI trim rose higher to 3.7% in December from 3.5% while CPI median was unchanged at 3.6%. Monthly growth in both measures accelerated with 0.4% (seasonally adjusted) increases from November.

Shelter inflation remains the largest contributor to inflation adding a full percentage point to CPI. The housing shortage being stoked by excessive immigration pushed rents up 7.7% and mortgage interest costs by 28.6%.

As we’ve been highlight for some time, population growth is pushing rents higher, which is pushing CPI shelter inflation, which is forcing interest rates higher than they otherwise need to be. Whether you own or rent, we are all paying the price. This is what happens when population growth (demand) exceeds available resources (supply).

We aren’t the only ones pointing this out. A report this past week from the economics team at National Bank suggests “Canada is caught in a population trap that has historically been the preserve of emerging economies. We currently lack the infrastructure and capital stock in this country to adequately absorb current population growth and improve our standard of living.”

Further noting, Canada’s housing supply deficit reached a new record of only one housing start for every 4.2 people entering the working-age population.

As we noted last week, the federal government was aware of the problem two years ago but failed to act. Now that they are getting squeezed by the media, and the polls, action is coming.

Starting later this year, the federal government will assign a fixed number of international study permits to each province, according to a Universities Canada memo obtained by the Toronto Star.

Under the proposed plan, provinces would be provided an allotment from Immigration, Refugees and Citizenship Canada for study permits, and each province would determine how the spots are going to be split among authorized post-secondary institutions within their jurisdictions.

“The number of international student study permits is still undetermined, but IRCC indicated they will aim for a return to more sustainable levels, possibly rolling back international student numbers to where they were at least two years ago,” said the internal letter from Universities Canada.

The response from Canadian colleges went about as well as expected.

Katrina King, a spokesperson for Colleges and Institutes Canada says implementing a cap on international students may seem to provide temporary relief, it could have lasting adverse effects on our communities, including exacerbating current labour shortages,”

“Furthermore, we want to emphasize that students are not to blame for Canada’s housing crisis; they are among those most impacted.”

Are students to blame? Of course not. For profit diploma mill colleges operating above a Burger joint (true story) and poor government policy are to blame.

The growth of non-permanent residents (largely international students) is completely out of control. We’ve added 654,000 people through the first nine months of 2023. That’s nearly five times more than what we averaged between 2017-2022.

Like most problems in life, there are no solutions, only trade offs.

Time to reign in this racket. After all, it might just help your mortgage rates.

Steve Saretsky January 22nd, 2024

Posted In: Steve Saretsky Blog

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