Canada’s rental housing market lags US, causing a lot of problems

By
Millicent Wong
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  1. property

Residential rents have fallen in most US cities while skyrocketing across Canada

Apartments for rent in Ottawa. Apartments for rent in Ottawa. Photo by TONY CALDWELL/Postmedia Files

The rental markets in the United States and Canada could not be more different, particularly in terms of residential rents, which have fallen in most US cities while rising sharply across Canada.

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US tenants “with new leases in January paid an average rent that was 3.5 percent lower than last August,” reported the Wall Street Journal, using data from Apartment List. Rents have fallen every month for six months for the first time in five years.

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By comparison, rents in Canada have risen rapidly. According to Rentals.ca data, annual rental growth for one-bedroom apartments was 24.2 percent in Vancouver and 20.8 percent in Toronto. Even in less populous cities like Kitchener and London, Ontario, one-bedroom rents rose more than 25 percent.

The average annual growth across the major rental markets tracked by Rentals.ca was approximately 15 percent for one-bedroom apartments and 14.4 percent for two-bedroom apartments.

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The deteriorating rental situation in Canada prompted the federal government to offer low-income renters a one-time rent subsidy of $500. By the end of February, more than 500,000 tenants had applied for the benefit, and it is estimated that another 1.2 million tenants will also apply.

Despite similar demographic and economic structures, tThe drastically different rental markets in the US and Canada can be explained by the differences in their respective rental housing supply. While the supply of rental housing has increased in the US, the major housing markets in Canada have, with few exceptions, not experienced any significant increases in rental housing construction.

The result of this mismatch between supply and demand has become clear in Canada. Higher mortgage rates and falling home prices have caused sales to fall since early 2022. A slowdown in the resale market meant that many first-time homebuyers extended their rental periods longer than markets would have eased their transition into ownership. This has resulted in lower rental vacancy rates that have inadvertently pushed up rents in most housing markets.

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However, the problem is not necessarily the higher demand for rental housing; it is Canada’s undersupply of rental housing.

In the US, The Wall Street Journal cited data from CoStar Group Inc., which forecast “the largest shipment of new homes since 1986” and “half a million new homes coming online” in 2023. “The rush of new homes will give tenants more choice and make it harder for landlords to raise rents to the rates seen in early 2022.”

The recent drop in US rents may be due in part to markets hitting their rent tolerance ceiling over the past year, which has been followed by a decline in lease renewals, putting pressure on rents.

In Canada, however, the construction of purpose built rental housing took a nosedive in the early 1970’s and has not recovered to levels commensurate with demand. At the time, 25,000 purpose-built rental units were being completed annually in the Greater Toronto Area (GTA), but fewer than 5,000 rental units came online in 2022, according to a recent report from the Building Industry and Land Development Association, an industry group that represents the development industry in the GTA.

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The decline in rental housing is even more dramatic when one considers that the previously higher supply of rental housing was for a much smaller population base in the GTA, whose population has increased significantly since the early 1970s.

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Of course, housing affordability is a more important concern for low-income tenant households than it is for homeowners or those looking to own their own home.

For example, renters in the GTA were two to three times more likely to have basic housing needs (a measure of housing affordability) than homeowners, according to a recent report by the Center for Urban Research and Rural Development.

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The federal and Ontario governments have identified housing supply as a key driver of affordability deterioration. Governments have since recognized the need to build millions more homes than would have been built in normal business.

It would be prudent to target subsidies and incentives towards the creation of affordable rental housing first, so that housing needs for the most vulnerable can be met sooner.

Murtaza Haider is Professor of Real Estate Management and Director of the Urban Analytics Institute at Toronto Metropolitan University. Stephen Moranis is a real estate industry veteran. They can be reached at the Haider-Moranis Bulletin website, www.hmbulletin.com.

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