Immigration doesn’t have to mean a housing crisis

Population growth is often cited as a driver of unaffordable housing in Canada, and it does play a role. But the data suggest its effect on home prices, unlike rents, may be smaller than we assume.

I compared home prices, incomes and population in 25 of North America’s largest metropolitan areas from 2006 to 2026, using CREA’s MLS Home Price Index and Zillow’s home value index.

Across the Toronto, Montreal and Vancouver metro areas, as well as the 22 largest U.S. ones, the correlation between population growth and home price growth is a moderate 0.4 over 20 years and essentially zero over the past decade.

A weak correlation doesn’t rule out causation, but it suggests population growth isn’t a major cause of unaffordability. It raises demand, but what matters most is how quickly supply responds.

Economists call this the elasticity of supply. Harvard economist Edward Glaeser and his co-authors have shown that where housing supply is elastic, rising demand mostly brings more residents, and where it isn’t, higher prices.

Albert Saiz’s widely cited 2010 study found supply most responsive in Charlotte, N.C., Houston, Dallas and Atlanta, and least in coastal cities hemmed in by water, mountains and regulation. Houston has added about 2.4 million people since 2006, more than Toronto’s 1.8 million, yet its prices rose 99 per cent, against 171 per cent.

City by city, population growth is a poor guide for measuring price growth. For Canada, the 2022 peak and correction make 20 years the better measure. Montreal had the slowest population growth of the three big Canadian metros, about 1 per cent a year, but the fastest price growth, 5.6 per cent annually. Vancouver had the fastest population growth, 1.8 per cent, and the smallest price gain, 4.6 per cent.

In the U.S., the past decade is the cleaner test, since 2006 was the peak of the American housing bubble. Orlando had the fastest population growth of the 22 American cities, about 2.1 per cent a year, while Detroit barely grew, at 0.2 per cent. Yet their home prices rose at almost the same pace, 6.4 and 6.5 per cent respectively. Los Angeles and Chicago even lost people, but their prices still rose 5.7 and 5.2 per cent a year, respectively.

What this analysis shows is that prices are set where supply meets demand. Demand for homes can be speculative, with buyers purchasing homes for investment, or it can be fundamental, driven by population growth. As I showed in an earlier column, speculative demand, fuelled mainly by very low mortgage rates but also by foreign money, especially before 2016 and during the pandemic, was the main cause of Canada’s severe unaffordability.

Heavy regulation, high development fees and, in some places, geography also made Canadian cities less elastic, adding to price growth. To tackle unaffordability, the focus should be on making our housing markets more responsive to demand and guarding against speculative demand, whether it comes from low interest rates or foreign money.

Hanif Bayat, PhD, is the CEO and founder of WOWA.ca, a Canadian personal finance platform.