Over the past two years, Canada has witnessed an unprecedented surge in its population which has recently garnished a lot of attention due to its significant consequences on various aspects in the country. This surge has been fueled by headlines surrounding escalating home prices and rising rents, leading to a further exploration of its implications on infrastructure, the economy, inflation rates, and interest rates.
The roots of this population surge can be traced back to the government's aggressive immigration policies, resulting in a staggering increase of 1.2 million people in the past 12 months alone. The immediate effects have been felt in the real estate sector, with rental rates reaching all-time highs just four months ago. Additionally, the healthcare system is strained, schools are overcrowded, and the electrical grid in British Columbia recently hit an all-time high approaching its maximum capacity!
This population boom has thrust Canada into what is termed a "Population Trap," where rapid growth outpaces the ability to maintain living standards due to insufficient infrastructure and housing plans. The government's seemingly forgotten lessons from the extreme monetary policy changes during the COVID-19 pandemic are now mirrored in immigration policies, creating a situation with long-term consequences.
The housing market, in particular, is grappling with the challenge of absorbing this unprecedented rate of growth. The supply deficit has reached alarming levels, with only one housing start for every 4.2 people entering the working-age population, compared to the historical average of 1.8. Despite government initiatives, housing starts in 2023 were 7% lower than in 2022, falling far short of the required 150% increase.
Economically, Canada finds itself in a precarious situation as policymakers grapple with the implications of population growth on GDP. The capital stock (on a per-capita basis) has been trending downward since the mid-60s. All signals point to it collapsing in 2023, leading to stagnant growth in real GDP per capita terms. This situation, referred to as the "Population Trap," is typically seen in emerging economies, not established ones - raising concerns about Canada's economic prosperity.
We also delve into the recent Consumer Price Index (CPI) data, pointing out the rising inflation rates attributed to factors such as base-year effects with gasoline and escalating shelter costs, particularly rents. The potential for higher interest rates in the short run is becoming more real and the long-term strains on housing, healthcare, and education systems (because of immigration policies) emphasize the need for a better plan to tackle these challenges.
Other short-term problems are presenting themselves as another Vancouver high-rise project has moved into receivership. This story sheds light on the challenges of developing housing supply amid stringent regulations and the large financial risks faced by developers. Overall, this weeks podcast paints a comprehensive picture of Canada's current demographic and economic landscape, highlighting the urgency for more logical and strategic policies to navigate these challenges successfully.
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