RENTAL HOUSING SHORTAGE TO QUADRUPLE
RBC - Robert Hogue & Rachel Battaglia
Last year, Canada’s purpose-built rental housing stock grew at its fastest pace since 2014. Vacancy rates nevertheless fell to a two-decade low as high levels of in-migration and the loss of housing affordability sparked a record surge in both demand and rents. toronto and Montreal—cities likely to see the sharpest increases in demand due to immigration—experienced the smallest expansions in supply among major Canadian cities. With Canada’s immigration targets set at record levels and affordability poised to remain stretched, the pressure isn’t likely to let up.
The bottom line: Without a significant boost in rental stock, Canada’s rental housing gap could exceed 120,000 by 2026—quadrupling the current deficit. This will tip the housing market into a greater state of imbalance and drive the optimal vacancy rate of 3% even further out of reach.
“By 2026, the rental housing gap could reach more than 120,000 units, nearly four times the estimated shortfall today. Canada will need to add 332,000 units to its current rental stock between now and then to achieve a balanced market with rent stability."
Canada’s stock of rental housing boomed in 2022, growing at 2.4%—the fastest pace since 2014. That boost has never been needed more. With affordability challenges pushing home ownership rates to a 30-year low and annual federal immigration targets set to grow 8% by 2025, strong demand for rented accommodation is unlikely to ease.
The growth in supply has been uneven across the country. Among Canada’s six largest CMAs, the biggest gains in purpose-built rental stock were in Calgary (+7.4%) and Ottawa-Gatineau (+5.5%). The smallest percentage increases were in Canada’s most populous cities—Toronto (+2.1) and Montreal (+1.4%). The latter urban centres are among the most popular destinations for newcomers, welcoming an estimated 32% and 10% of international immigrants respectively last year. The slow growth in rentals in these cities will be especially problematic as demand for rented accommodation continues to outgrow supply.
Indeed, even with last year’s sizeable expansion, Canada’s current purpose-built rental stock is struggling to keep up with demand. The vacancy rate in this category plunged to its lowest point in 21 years in 2022, dipping to just 1.9%. The total decline—120 basis points in just 12 months—represented the steepest single year decrease in more than three decades. And relentless competition for units drove the highest annual increase in rent growth on record. Overall, rent growth for a 2-bedroom purpose-built unit rose 5.6% with jumps in Gatineau (+9.1%), Toronto (+6.5%) and Calgary (+6.0%) among the highest in Canada last year.
And that isn’t the worst of it. A closer look at the rental condo market in some of Canada’s larger cities reveals an even tighter squeeze. Condo rental vacancy rates in Ottawa-Gatineau (0.7%), Toronto (1.1%), and Calgary (1.8%) are among the lowest in the country—suggesting intense competition that will only add pressure to rents.
The rapid absorption of these new units highlights the severity of the “rental housing gap”—that is, the difference between the projected rental stock at the current rate of increase and the rental stock required to achieve balance (or a 3% vacancy rate) while keeping up with future demand. It also demonstrates the blistering speed at which the appetite for rented accommodation is growing. With high levels of in-migration and a widespread shift to rental housing continuing due to affordability struggles, we don’t see Canada returning to that optimal 3% vacancy rate without a significant acceleration in supply.
We estimate there is already a 25,000—30,000-unit deficit in Canada’s purpose-built rental stock. This shortfall is likely to grow exponentially over the next four years as demand soars.
By 2026, the rental housing gap could reach more than 120,000 units, nearly four times the estimated shortfall today. Canada will need to add 332,000 units to its current rental stock between now and then to achieve a balanced market with rent stability. That would represent roughly a 20% increase in the annual pace of construction achieved in 2022 (when 70,000 rental units were completed).
Turning condo units into rentals, converting commercial buildings and adding rental suites to existing homes would certainly help ease the pressure. But these responses are unlikely to be enough. The best way to meet current and future demand, as well as provide stability (and hopefully greater affordability) in the rental market is to considerably grow the supply of purpose-built rentals.
CFR Takeaway.....
This is a very interesting article and we here at CFR have been telling our Buyer clients the same story. The Ontario example is no different. The bulk of the immigration spoken of herein is coming to Ontario. We are today only building 10% rental stock of what we truly need. In Economics 101 when supply remains constant or limited and demand increases - PRICES GO UP. People today are pointing out the double digit increases in apartment rents. They have seen nothing yet. Buyers must be aware that the multi family market is going to see almost zero vacant and substantial rental growth. Which will translate into values moving up and up.
Today is the right time to take advantage of the current market pause, especially if you believe that interest rates will come down in the short term. If rates come down say 2-3 years from now that building you could by today will have much higher rents and the cap rate then will be lower than today so you will just pay more for it. Buy today and take the short term hit due to higher rates. You could be better off in the long run.
I have been through 3 recessions. Those Buyers that took advantage of market opportunity at the right time did very well.
RENT CONTROLS LEAD TO LOWER SUPPLY
FINANCIAL POST -
Many housing advocates champion rent controls as a panacea for rising rents, but a wealth of empirical evidence indicates that while such controls may offer temporary respite to current tenants of controlled units, they invariably inflict long-term damage on future renters. This is because landlords grappling with rents that don’t cover improvement costs often neglect maintenance, leading to a decline in housing quality. This neglect is not just a theoretical possibility, but a real-life consequence of rent controls. More importantly, rent controls discourage new construction by dampening investor enthusiasm since they fear future revenue limitations.
We reviewed the studies cited by the author and found they all unequivocally demonstrated that rent controls contribute to a slowdown in rental supply, thus hurting the very people that rental advocates intend to help. A review of previous research led KPMG to conclude that “rent control has generally been found to have reduced rental supply due to the limits on rent prices.” This is a clear indication that rent controls are detrimental to rental supply. A subsequent econometric analysis by KPMG revealed that the “relationship between the tenancy deregulation regime (rent control) and rental starts is negative; this follows (the) theory that rent control policies tend to dissuade supply since the investment return is limited by the policy.”
Rent controls impose other distortionary consequences on labour markets. Those residing in rent-controlled units are less inclined to relocate even if better employment options are available elsewhere, thus restricting their long-term labour market outcomes.
From the early 1970s to the 2000s, purpose-built rental construction declined and remained low. Rent controls introduced since the mid-1970s are partly to blame. The recent resurgence in rental construction is welcome, but it is far less than the market demands and is concentrated in high-end rentals. For a rebound in rental construction to match the numbers observed in the early ’70s, many administrative changes are needed, such as eliminating rent controls from market-based units. At the same time, the government needs to invest in non-market dwellings to assist those who have been priced out of the rental market.
The provision of affordable rental housing is a public sector responsibility. Shifting this burden onto the shoulders of private landlords is an example of the state shirking its responsibilities while hurting the long-term interests of renter households.
TORONTO SPRING HOUSING STARTS
CMHC
Housing starts in the Toronto census metropolitan area (CMA) numbered 47,428 units in 2023. This marked a 5.1% increase over 2022 (45,109 units) and the second-
highest level on record (behind 2012). Most of the annual increase was attributable to the first half of the year, with momentum slowing after. the pace of construction declined significantly in the second half of the year, however, as factors such as higher construction costs and interest rates increasingly weighed on apartment projects.
Purpose-built rental apartment starts reached 9,677 units in 2023, double their year-before level (4,527 units). As with condominium apartments, most units (82%) were started in the City of Toronto. The surrounding municipalities of Mississauga, Brampton, and Vaughan, which are reasonably close to Toronto’s downtown core and where land costs are lower, accounted for much of the rest (14%). Rental apartment starts in 2023 were at their highest level according to data going back to 1990. Still, industry sources report some projects didn’t move forward or were placed on hold until development conditions improve.
despite strong demand-side fundamentals, developers have been facing several supply-side challenges that are impeding
the provision of rental housing in the Toronto CMA:
• Limited and costly residential vacant land, particularly in the City of Toronto, where most rental construction in the CMA is concentrated, would force rents to be high. Often, these rents would be too high for the market, and this situation stops some projects from moving forward.15 In some municipalities within the CMA, here land is more accessible, access to infrastructure has been noted as a constraint.
• CMHC and Statistics Canada’s Municipal Land Use and Regulation Survey found approval timelines for new developments in the Greater Toronto Area (and the Greater Vancouver Area) to be the longest in the country. Long timelines end up adding costs to development (for interest on loans, equipment rentals and labour, for example), as do government fees levied on new construction.
• The rapid rise in construction costs and interest rates in recent years has lowered expected returns and increased the amount of equity developers need to bring to a project. Bringing equity to a project is especially challenging for rental developments, which don’t benefit from equity accumulated through pre-construction sales.
• Fast-rising operating expenses (for insurance and utilities, for example) are a significant risk to the expected return of projects.
• While labour markets eased somewhat in 2023, builders indicate that constraints on skilled labour capacity will resurface once development conditions improve.
According to our Rental Market Survey, vacancy rates declined to 1.4% and 0.6% for purpose-built and condominium rental apartments, respectively, in 2023. Persistent tightness has spurred accelerating rent growth, which rose to 8.8% for 2-bedroom purpose-built apartments. This was the largest increase registered since 2000. All of this shows that demand has run well ahead of supply for many years, and more supply will be needed to address the mismatch.
995-997 LANSDOWNE AVENUE - TORONTO - $7,250,000 / $402,000 PER SUITE / 4.50% CAP RATE
This is the sale of two frame house form walk up rental apartment buildings with a total of 18 suites.roof and balconies. Both buildings are three stories plus basement and have brick and siding exterior, double windows and flat roofs. The buildings were gutted and renovated about 5 years ago and were 100% occupied at the time of sale. There is surface parking. This property was fully marketed and the buyer was Non Profit housing group.
888 WHITEFIELD DRIVE - PETERBOROUGH - $11,900,000 / $440,500 PER SUITE / 4.35% CAP RATE
This is a 3 storey free standing frame rental apartment building containing 27 suites. The asset was built in 2017 and include 2 one beds, 22 two beds and 3 three beds. It has a brick exterior, double windows and pitched roof. There are surface parking spaces and the building has balconies and is a walk up. The property was fully marketed and sold to a private apartment investor.
41 RIVER STREET - TORONTO - $26,200,000 / $875,000 PER SUITE
This is a 5 storey free standing rental apartment building containing 3 commercial units on the main floor and 27 residential suites above. Built in 2022, this concrete building has a brick exterior, double windows, elevator and flat green roof. This project won the Toronto Urban Design Award for "best infill project 2023". Smart building technology includes: EV charging stations; bluetooth and remote access door locks; remote fire and leak detection; geothermal heating and cooling. The building is entirely electric and tenants pay their own hydro. The property was fully marketed and sold to a private apartment investor.
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