Foreign workers, students driving up rent costs, bankers say

If the province wants to get a handle on inflation — particularly in rental rates — it needs to urgently dial down the number of international students at its post-secondary institutions, some of the country's top economists are warning.

The chief economists of the country's big banks gathered for a panel talk hosted by the Economic Club of Canada this week to offer their forecasts for 2024.

Among them was that inflation, while down from the highs of 2022, will remain a challenge for the Bank of Canada.

The days, before and during the COVID-19 pandemic, of the Bank of Canada using ultra-low interest rates to put upward pressure on inflation to reach its two-per-cent target, were a "hangover" from the 2008 financial crisis, according to BMO Financial Group's chief economist, Doug Porter, and they are likely not coming back.

However, interest rates will likely come down to a new normal of a couple of percentage points lower than the current overnight rate of five per cent, he said.

Most of the chiefs agreed they expect a reduction of about 1.5 percentage points this year — although whether that would begin in the spring or fall of 2024 was debated — because the Bank of Canada will have to ease back on the stress higher rates are putting on mortgage holders.

There was a broad consensus that shelter costs, both mortgage and rent, are among the strongest remaining contributors to inflation. 

"Rents are rising at about seven per cent, year over year. If you look at the three-month trend, it's accelerated to 11 per cent annually — it's not gonna go away," said Beata Caranci, chief economist at TD Bank Group, citing structural problems in the housing market, in part caused by the influx of temporary foreign workers and students.

CIBC chief economist Avery Shenfeld specifically pointed the finger at the province: "The provinces have cut back funding to universities and post-secondary institutions, and said, 'Just charge those immigrant students more," he said.

In Ontario, the Ford government mandated a 10 per cent domestic tuition cut in 2019 followed by a freeze and froze funding at the same time. 

"This isn't just like the University of Toronto bringing future doctors and so on," Shenfeld continued, characterizing the problematic schools as "branch plants" of Ontario colleges hosted in office buildings in Toronto, "where they're just basically all foreign students, and it's just really a tuition-making machine."

"Many of these people are not going to end up being able to stay in Canada, but while they're here, they need housing. So, I think there's some urgency here, if they want to get progress on bringing rent inflation down, I do think we have to dial this down."

In response, a spokesperson for Colleges and Universities Minister Jill Dunlop issued a statement recognizing "the critical role that international post-secondary education plays in fostering the talent, skills, and future prosperity of the province."

The province is reviewing the recommendations from a blue-ribbon panel, said Liz Tuomi, Dunlop's press secretary. Those include an immediate 10 per cent increase in funding for post-secondary education and an end to the tuition freeze.

"Included in this review is how funding for colleges and universities will proceed in the 2024-25 school year, as well as creating ways to enhance supportive learning environments that prepare students for great careers," the statement continued. "The government will continue to work with sector partners to identify ways to support and enhance international students’ learning experiences and labour market outcomes."

During the province's annual pre-budget consultations, the Council of Ontario Universities warned that about half of the province's schools are running deficits.

There's a federal component as well: the federal government approves student visas, and it has warned it is preparing to limit the number of visas it approves. It issued more than 500,000 student visas in 2023.

In 2023, as of Oct. 1, the country brought in 455,000 new permanent residents and gained more than 650,000 net new non-permanent residents, according to Statistics Canada, which also shows the country's population increased by 3.2 per cent from the fourth quarter of 2022 to the fourth quarter of 2023.

Those numbers include temporary foreign workers, and Caranci said there's a lesson there for the federal government to learn: it should be careful about complaints from some corporations about having trouble finding workers and needing to use the temporary foreign worker program.

Jean-Francois Perrault, Scotiabank's chief economist, said the policy has harmed the country's productivity because it incentivizes companies to invest in labour rather than capital stock.

Stéfane Marion, chief economist at the National Bank of Canada and National Bank Financial, put it bluntly: Canada has "fallen into a population trap" for the first time. That occurs, he said, when population growth means labour growth outpaces capital investment, so an increase in living standards is no longer possible. 

Marion and Caranci both warned that the mismatch between immigration and the country's ability to absorb it risks undermining the consensus for immigration in the country, and that Canada still needs strong immigration.

"We need to continue to keep immigration strong but at the same time we need to do a better job of integrating immigrants into the economy, to get them paid for what their education and skill levels are," said RBC chief economist Craig Wright said. "Going forward, I think we can do both. We can have strong immigration flows — and we need it, given our labour force dynamics — but we need to do a better job of tying them into the economy and getting the lift to productivity."

Caranci warned about the consequences of mishandling the balance between immigration and housing: if the shelter costs hold at an inflation rate of six per cent, it would mean that everything else would have to remain at zero, which would mean a recession. 

“Frankly, I’m a little surprised we screwed it up because we sit in such a privileged position in Canada,” she said. Unlikely many countries, Canada does not have a high level of illegal immigration or refugees fleeing over its borders and has been in a position to design its own system, which worked well until recently.

"We put it in place, we implemented it, and we still screwed it up."