Thank you, Mr. Chair.

Honourable member, thank you for the invitation to appear at the House of Commons finance committee.

My name is Robert Kavcic, senior economist, BMO, covering analysis of housing market issues in Canada. My remarks and commentary today come from that perspective, as a macroeconomist on the housing market.

Housing affordability is pretty clearly a significant economic and social issue, and largely reflects the imbalance between demand and supply in the market. By most measures, housing affordability hasn't been this difficult from the perspective of a new homebuyer since 1990. Rent growth has also accelerated well in excess of income growth, and looking back at these measures, affordability, I would say, has really become an acute problem over the past three years or so.

In fact, when you look at our affordability measure that accounts for income, interest rates and home prices, it was more or less right in line with the 40-year average as recently as 2019.

The question is what has changed in that short period to cause a major supply-demand imbalance and drive such a dramatic deterioration in affordability. I think one popular narrative is that Canada just isn't building enough homes, but my takeaway from the housing data, from the labour market metrics and in speaking with industry participants across the country in homebuilding is that the industry has been running at pretty well full capacity.

In other words, we're already building almost all the housing that we possibly can in a natural response to market conditions. In the five years through 2019, just as an example, housing completions have averaged just over 190,000 units. In the last three years, as affordability was deteriorating, housing completions rose by about 20%. The current number of units under construction is at a record high in absolute terms or, if you adjust it, in per capita terms.

The supply side of the market isn't getting worse. It's just a matter of not being able to keep up with demand. Part of that demand growth is fundamental. We have very strong demographic demand from the millennial cohort. At the same time, we've seen international immigration rise from about 450,000 per year before the pandemic to almost 1.2 million people in the past year. This is a historic demand shock that does present a challenge to infrastructure, including housing.

To be very clear on this, I do believe that there are long-run benefits to a robust international immigration program. They are significant, and they should be maintained. We've shown an ability to meet housing demand created by that robust permanent resident program, but an additional 800,000 non-permanent residents in the past year has pretty clearly been difficult for the market to absorb on the supply side, and that is acutely reflected in surging rents.

Separately, on the demand side, interest rates were cut to historic lows when the Bank of Canada was easing them during the pandemic shock, until they began tightening policy in March of 2022. Deeply negative real interest rates drove outsize gains in house prices, which bred some speculative psychology in the market. That market psychology drove prices well in excess of underlying income, interest rate and demographic fundamentals, which we think are the root of house prices in the longer term.

Higher interest rates have since broken that psychology and have pulled prices down by 20% or more in some markets, but affordability won't necessarily improve until rates fall further, prices fall further or incomes are allowed to gradually catch up over time. They are, but it takes time.

Putting this all together, in summary, the demand-supply imbalance in housing has been created most acutely by surging demand, and the supply side is really doing all it can to keep up. Measures to improve the responsiveness of housing construction are certainly encouraged. The demand curve, though, seems like it is much easier to move in the short run, so appropriately calibrating demand to match our ability to provide adequate housing supply over time is probably where we have the biggest and, importantly, most achievable impact on affordability pressure in the near term.

Thank you for the opportunity to provide opening remarks. I'd be pleased to answer any questions later on.