Canadian house prices that remain elevated due to record population growth — but despite restrictive monetary policy — complicate the Bank of Canada’s inflation fight, a top economist said. 

Canada’s annual gains of 1 million residents last year and in 2023, which is the equivalent of the U.S. adding 20 million people over that two-year period, worsen housing deficits and keep shelter prices and inflation high, according to Stefane Marion, chief economist and strategist at National Bank of Canada.

High housing prices and inflation mean the Bank of Canada will likely only be able to cut interest rates by a “modest” 100 basis points in 2024, from five per cent currently, because keeping price gains below three per cent “will be a challenge,” Marion said Wednesday at the Bloomberg Canadian Finance Conference. 

“Home prices are stickier, and that’s a conundrum for the central bank because they were assuming that with higher rates home prices will actually come down,” Marion said. “Population growth is good down the road, but the capacity constraint pushes inflation higher.”

To accommodate that level of unprecedented population surges, he said the country needs to build 600,000 homes each year, compared to a record of about 370,000. “We have a massive supply issue, with demand like we’ve never seen before.” 

The impact of population surges on inflation is reflected in the consumer price index’s shelter component, which continues to accelerate, he said. High costs for mortgage interest and rents are keeping inflation well above the Bank of Canada’s target. Excluding shelter costs, inflation is right around two per cent, Marion said.

High population growth will also mean more government spending on schools, health care, child care and infrastructure, which won’t help with taming inflation. 

“The capacity for the economy to deal with permanent immigrants, plus students, plus refugees, plus temporary workers was just not there,” he said. “We need to recalibrate on the demand side and accommodate supply.”

Canada has an enviable fiscal position, with by far the lowest net debt and borrowing levels of the Group of Seven countries, Marion said. It also spends the least in the G-20 on subsidies for oil, coal and natural gas, he said, citing data from the International Monetary Fund.