I’m Steve Fudge – Welcome to Canadian Real Estate, Housing & Home!
Today I’m sharing one of my recent blogs from my site Urbaneer.com about Canada’s history with rental apartments – Read on!
APRIL 2024
It’s well-known that Canada is in a housing crisis, with supply trailing far behind swelling demand.
The rental market is particularly affected.
The rental market is becoming more and more unaffordable, as demand is amping up thanks to multiple and simultaneous factors: an increase in immigration policy and rapid population growth, an increase of would-be homeowners pushed out of the housing market, competing for rentals, because of unattainable housing prices and an a sizeable, along with an aging population turning to rental accommodation. It’s a crowded pool.
The State Of The Rental Market
The issues around the rental market are front and centre in Toronto – and far-reaching – as evidenced by the frequent headlines
The CMHC report referenced in this CBC article entitled, “Rent Prices Soared In 2023 As Canada Saw Lowest Vacancy Rate On Record“. The report shows that country-wide, vacancy rates are the lowest they have been on record, meaning since CMHC started tracking these metrics in 1988. According to the report, purpose-built rental apartments (PBR) were at a 1.5 per cent vacancy rate during the first two weeks of October 2023, which is down from 1.9 per cent during the same time a year prior, which had actually been the lowest level in two decades at that point.
And as vacancy gets tighter and tighter, rent prices are growing and growing.
That this is happening comes as no surprise to CMHC, acknowledging that while there is an awareness of the problem and an attempt to push supply into the pipeline (across the country purpose-built rental supply has in fact increased), it is woefully short of the need.
And it is only expected to get worse, as supply scrambles to keep up.
CMHC points to delays in projects, due to hurdles with financing, as well as a chronic lack of labour to complete the projects as two major anticipated barriers to keeping the pace for new supply.
This report from RBC – “Proof Point: Canada’s Shortage Of Rental Housing Could Quadruple By 2026″ – outlines the fact that, although purpose-built rental construction grew at the fastest pace since 2014 last year, the vacancy rate fell to a two-decade low, emphasizing the opposition in these trendlines.
If this imbalance continues, RBC projects that the rental housing shortfall could exceed 120,000 by 2026 —quadrupling the current deficit.
Although new project development in Canada has ramped up, it has not been enough to stem, or even slow the tide.
While it is easy to blame the current situation on the forces driving demand, the lack of purpose-built rentals is a long-time problem in Canada. The spotlight currently on this issue is perhaps a bit brighter because of the depth of the problem – but it has not happened overnight.
Canada Has A History Of Lacking Purpose-Built Rentals
As I outlined in my post “How Mid-Century Modern Apartments Housed The Post-War Immigration Boom In Toronto”, the last mass production of purpose-built rentals was in the 1940s-1960s, coinciding with a surge in immigration in the Post-WW II period, also coincidentally during a housing crisis that smacks of our current dynamic.
There were 500,000 purpose-built rental apartments constructed over 23 years.
In the 1970s, rent control and other policies to aid with affordability were introduced. In the 1980s, the provincial government became more active in housing policy, while the federal government largely stepped back their housing investment. Rent control was repealed and re-introduced and repealed cyclically throughout the decades, depending on who was in government.
PBR development in Canada dropped significantly in the 1970s, mostly due to taxation changes, reforms that affected Capital Cost Allowance, tax incentives and notably (and costly) GST/HST being applied to PBR development.
Similarly, in the 1980s, rental income was deemed passive income, making it taxable at a higher level. At the same time, more investment products were introduced into the marketplace (including RRSPs). With the additional taxes, along with more investment options, rental properties became less attractive.
Instead of PBRs, condo development became prevalent, in part because policy was more supportive to condo developers, and because the economic climate seemed to favour this type of housing.
What’s Slowing Down The Creation Of Purpose-Built Rentals Today?
This Linked In post from Well Grounded Real Estate summarizes the challenges faced in recent history by PBR development, with a really great infographic. This Twitter post from Daniel Foch adds insight as well.
The infographic compares the costs associated with PBR and with condo development.
As the post explains, the big reason why there are so few purpose-built rentals, relatively speaking has to do with costs and the high amount of equity required for financing. Condo developers require 15 percent equity down, while PBR developers require 35 percent for financing.
That’s because of the additional costs for PBRs brought on by GST/HST, no cash from deposits/deferred costs, as there would be under the condo model, especially with pre-construction sales.
As the infographic demonstrates, land costs and loan amounts are similar, but it is all around costlier for PBR development- and potentially riskier because of the longer-term time horizon.
In short, it is more appealing under current policy and modelling, for developers to build a condominium building vs apartments.
In times of economic uncertainty, the condo development option can be more appealing as well, as investors/developers take their profits sooner. Purpose-built rental, of course, will see an ROI in rental income, but it can take a significantly longer time horizon.
In terms of financing, there are extra costs with PBR include mortgage insurance, loan insurance, and mortgage financing vs. condo development, although PBR developers generally see those as the cost of doing business
Both condo developers and PBR developers would be competing for the same land upon which to build multi-family dwellings, with condo builders often outbidding PBR developers, as until recently, condos have seen to be more lucrative because of the average sales prices, able to absorb paying higher amounts for the land.
And of course, profitability in PBR would be dependent on being able to generate market rents to compensate for the extra costs- which had not necessarily been the case, until the rental market went off on a tear in recent years. But the market fluctuates over time, which could be a potential risk to bear.
The Reality Of Today’s Rental Market
A Toronto Star article – “Regular Families Will Never Again Be Able To Buy A House In Toronto – But We Can Still Fix The Housing Crisis. Here’s How” – talks about a common, but substantial challenge faced by renters in Toronto at the moment: they are being evicted at an uncommon rate and for a variety of reasons.
In the “old” days, that would be inconvenient and the timing might not be ideal, but today, not only is challenging for evicted renters to find a place at all, rents have skyrocketed so much that people may find themselves unable to afford adequate shelter.
This article brings forth an interesting point too. Obviously, high rents will lock out a certain portion of the community, who become unhoused. But for a large part of the population, they are technically able to pay higher rents, but that doesn’t mean that they can afford them; an unhealthy chunk of their income is going towards housing, meaning that something else will need to be sacrificed, which could result in food insecurity or an inability to save money for a rainy day. This creates a tremendous financial vulnerability, which can have a widespread impact.
Case in point, according to CMHC, rent arrears climbed by just under a staggering 20 percent last year!
This article also highlights the role that the rental market has as the foundation upon which the property ladder is built, and with its current conditions (demand far, far outpacing supply, coupled with unaffordable rents) creates a rickety platform, that has an impact on stability on each rung of the ladder.
Renters are not stepping onto the property ladder as they would have done historically, which was a semi-reliable way of freeing up supply. (Do you now see the ripples of this issue moving outward in concentric circles through the housing markets? It’s very concerning.)
The article points to Sweden as a success story. The country was in dire need of a substantial amount of housing in a hurry during a population boom in the 1960s. They committed to building 1 million new homes over the decade that followed. Not a lot by today’s standards, but at that time, the entire population of Sweden was 8 million people.
And they did it. By 1974, they’d created a spread of different housing types – single family, PBR, student housing and more- to house different parts of the population, which really is the social housing ideal.
Sweden did this, not just by making creative use of every nook and cranny land-wise, but by exploring alternative, more cost-effective construction methods to mass produce while retaining quality. Namely, offsite building.
This is a possibility in Canada as well.
Tight Rental Market Is Affecting Housing On A Larger Scale
It’s not just affordability and shelter at stake. This pressure on the rental market has ramifications on the housing market as a whole.
There are those for whom renting is a choice, but for many, renting is a gateway to homeownership, amassing a downpayment
A CTV news article entitled, “Is It Cheaper To Rent Or Buy A House With A Monthly Mortgage In Canada? Prices Analyzed In 26 Markets” talks about how in most Canadian cities, it is still cheaper to rent a home than to purchase one, but also points out that supply alone will not fix the affordability issue.
It highlights the traditional role that rental housing plays in the property ladder, as it is where homebuyers lived before, they became homeowners, amassing downpayment.
But with the extremely high cost of living, much of that being directed towards high market rents, amassing that downpayment is a decades-long endeavour, while housing prices continue to climb.
Furthermore, on the other end of the traditional property ladder, people traditionally downsized and transitioned into less expensive, or in many cases, rental housing, realizing the return on their investment, while also keeping the natural flow of properties going through the property ladder cycle.
This isn’t happening anymore, as this article points out, as the whole model was based on the idea that a person could sell at the top of the property ladder and live more cheaply- and that is not the case at all now, with sky-high rents. So, as this article puts very succinctly, the current rental model, where supply is lacking and rent prices are so high relative to income, it hinders both the young and old alike.
So… Solutions?
This article from RENX highlights a panel discussion between industry leaders – “No Quick Fix For Purpose-Built Rental Shortage: Industry Execs”. It looks at some possible solutions to the lack of purpose-built rentals.
The primary proposal from several bodies addresses the financing and taxation side of the issue. They propose enticing PBR developers using strategies that range from deferring HST/GST to reducing development charges.
There have also been suggestions of further zoning changes, to permit higher-density residences in current residential areas. This expands on last year’s changes for multi-plexes, which I discussed here: As-Of-Right Multiplexes Create Missing Middle Options For Toronto Real Estate.
There is a call too for more innovation when it comes to construction to make it more cost-effective. This could involve off-site construction or using alternative materials.
One solution that has been mulled over is using existing office space, as there is still a substantial amount of vacant office property post-pandemic. While this is indeed a possibility, there are some logistical challenges in converting office space- mostly related to functional design and the cost of adding residential must-haves like kitchens and more bathrooms. One complaint is that offices typically have larger floor plates, which may not easily convert to smaller suites, suitable for an apartment.
They also point to delays with trades to get these projects done, which ends up costing them money. In addition to helping with financing conditions and tax breaks, a concerted effort to train and supply labour to keep projects on timelines will make them more cost-effective and therefore more feasible for developers.
Other less popular ideas – particularly amongst developers – relate to converting existing condos or condo projects to rentals.
Here are some more articles that shine a light on the crisis around the lack of purpose-built rentals: Rent Prices Rose In 2023 As Canada Saw Lowest Vacancy Rate Since 1988: CMHC”, “As For Canada’s Fragile Housing Market, More Turbulence Ahead.”
Part of knowing how to navigate a challenging market is understanding the economic forces at play – and how they may shape the market, and the opportunities that will emerge. With decades of experience, through all of the market conditions, I have a unique perspective to offer. I’m here to help!
Here are some of our past blogs relating to renting and apartments On Urbaneer:
Dear Urbaneer: What’s Up With The Toronto Real Estate Rental Market?
Dear Urbaneer: So Why Are There New Airbnb Regulations For Toronto?
How To Navigate The Economy Of Short-Term Rentals In Toronto
Dear Urbaneer: How Do I Find And Keep Good Tenants
Dear Urbaneer: Should I Seek A Home With Rental Potential?
The Other Side Of Rent Control And Toronto Real Estate
Want to have someone on your side?
Since 1989, I’ve steered my career through a real estate market crash and burn; survived a slow painful cross-country recession; completed an M.E.S. graduate degree from York University called ‘Planning Housing Environments’; executed the concept, sales & marketing of multiple new condo and vintage loft conversions; and guided hundreds of clients through the purchase and sale of hundreds of freehold and condominium dwellings across the original City of Toronto. From a gritty port industrial city into a glittering post-industrial global centre, I’ve navigated the ebbs and flows of a property market as a consistent Top Producer. And I remain as passionate about it today as when I started.
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Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
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