Canada is slashing the number of immigrants it welcomes into the country and experts believe it could significantly reduce demand in the country’s housing market over the coming years. 

In October, the government announced plans to reduce the projected number of new permanent residents and non-permanent residents by more than 900,000 over two years—resulting in a 0.4 per cent decrease in population by 2026, with  “modest” growth resuming in 2027. 

Robert Hogue, chief assistant economist for RBC, notes that this substantial reduction will help to narrow Canada’s housing gap, however, while the change may alleviate some immediate demand pressures, it will not resolve the long-standing affordability crisis.

Hogue explains that reducing the influx of non-permanent residents will slow household formation—a key driver of housing demand. His forecast suggests nearly 400,000 fewer households—a 46 per cent drop—will be formed over the next three years compared to previous projections. 

“Canada will now get a golden opportunity to reduce the housing shortage…” Hogue says, provided the current pace of homebuilding can be maintained or, ideally, increased.

Rental markets and investor demand

The RBC economist notes the policy will likely cool Canada’s rental market, especially in Toronto and Vancouver, where rental demand spiked due to rising international student enrollment. With fewer newcomers, vacancy rates may increase, which could ease some pressure on rental prices. 

Lower immigration may also influence investor demand for residential properties. Hogue expects some investors, anticipating less growth in rental income, could reconsider future investments in condos and apartment buildings. 

Rate cuts and pent-up demand

Despite a potential cooling in the rental sector, Hogue foresees strong demand for homeownership. He points out that anticipated interest rate cuts could stimulate housing demand in the coming years, as the Bank of Canada responds to economic conditions and an uptick in unemployment.

Since interest rates began rising in 2022, pent-up demand among prospective homebuyers has continued to grow. Hogue believes lower borrowing costs will encourage more Canadians to enter the housing market.

Temporary relief 

While lower immigration targets might ease the housing supply gap, they won’t “instantly rebalance the market,” Hogue warns. RBC estimates that housing supply has lagged behind household formation by 545,000 units between 2015 and 2023, a gap that will take “years to undo.” High construction costs remain a barrier to increasing the supply of affordable housing, especially in Canada’s largest markets.

Some relief may come in the rental sector if vacancy rates rise and more purpose-built apartments are completed, though ownership affordability in major cities will take longer to improve. 

“Much of the affordability improvement we foresee in the period ahead will come from lower interest rates and growth in household income. But, both point to only a partial reversal of the massive loss in affordability during the pandemic.”