Soaring Rent and Low Vacancy in Canada's Latest Market Report

The Canada Mortgage and Housing Corporation (CMHC) released its annual Rental Market Report last week. With the national vacancy rate hitting a historic low and rent prices on a relentless climb, renters across the nation are feeling the squeeze. In bustling urban centers like Toronto and Vancouver, the role of condominiums as makeshift rental units reveals a housing landscape in flux, with implications that touch everyone from anxious first-time homebuyers to investors looking to capitalize on the market.

In this 23-minute discussion, Smart Prosperity Institute economist Mike Moffatt and journalist Cara Stern discuss vacancy rates, rent averages and what the numbers really tell us.


Other reading:
Rental Market Report - January 2024 (cmhc-schl.gc.ca)
https://www.bankofcanada.ca/wp-content/uploads/2024/01/mpr-2024-01-24.pdf
https://rentals.ca/
https://www.homelesshub.ca/sites/default/files/attachments/Whitzman-Human_Rights_Based_Supply_Report-EN_1.pdf

Hosted by Mike Moffatt & Cara Stern

Produced by Meredith Martin

This podcast is funded by the Neptis Foundation and brought to you by the Smart Prosperity Institute.

Transcript

Speaker 1: 0:18

Hi and welcome to the Missing Middle. I'm Cara Stern.

Speaker 2: 0:22

And I'm Mike Moffitt.

Speaker 1: 0:24

Last week, the Canada Mortgage and Housing Corporation released its rental market report and it will come as no surprise to many who anyone really looking for an apartment that supplies at an all-time low Prices are at, I believe they're all-time highs. They're up 8% year over year. The nationwide vacancy rate has reached a new low of 1.5% in 2023, and that's the lowest rate since the CMHC began keeping track. So let's start there, Mike. Purposeful rental market has a 1.5% vacancy rate across the country, so what does that tell us?

Speaker 2: 0:56

Well, basically that if you have an apartment building that has 100 units, that one or two of those 100 units will be available to rent. That is exceptionally low. Like you always want to have some inventory, because people move around, they change cities and so on. So normally you would want to have a vacancy rate around that sort of 3% to 4% level. That would be considered sort of a balanced market.

Speaker 1: 1:21

Oh my gosh, we're nowhere near that.

Speaker 2: 1:23

We are nowhere near that. Yeah, we are at 1.5%, and cities that had been higher, like Edmonton, up at 4%, they're starting to converge to this 1.5% level. So what that means is, if you're looking for an apartment right now, there's not a lot of inventory out there and because we have the supply-demand imbalance, it's the reason why that rents are going up 8% 9% year over year.

Speaker 1: 1:50

So why is it so low?

Speaker 2: 1:52

Big thing is population growth. We've had a couple episodes about this with international students and other groups, that our population is growing rapidly but our supply of apartment buildings isn't. I know we're talking about the CMHC report, but there was another report that came out from the Bank of Canada recently, their latest monetary policy report. They had a fascinating chart maybe we can link to it in the show notes, where they show on the same graph. They show population growth and rent growth Over the last few years. The correlation to them is nearly perfect and you see both of them shoot up. The population growth has gone way up and so too has rent growth.

Speaker 1: 2:37

My gut says that population growth. When you have new people into the country, they're more likely to start off renting. Is that right?

Speaker 2: 2:44

Yeah, absolutely, absolutely the people when they get here and that could be permanent residents, non-permanent residents. It takes a while to settle in. It takes a while to earn enough income for a down payment in a house, to develop a credit history and that kind of thing. So, absolutely, the newcomers to Canada very heavily disproportionately rent, so they are affected by far most to the shortage of inventory that newcomers to Canada are really getting hit hard these days.

Speaker 1: 3:16

According to the report, 20% of the rental market is condos. Two per thirds of those are in Toronto and Vancouver. I was wondering if that number seemed right to you. Is it surprising? Is that low, high?

Speaker 2: 3:29

Yeah, and it really differs across the country. So, and it's why we use this clunky language called purpose built rental, which is this really clunky term, but it just basically means an apartment unit that is designed to be rented, right, that there's someone who owns the entire building and is renting out all the units when, as condo is basically where each of the individual ownership, each of the individual units have individual ownership. Because of that, we see people who will buy up condo units and rent them out. So it is different across the country. Yeah, in our biggest cities, particularly the GTA and GVA, absolutely a large part of our inventory isn't so-called purpose built rentals, but rather it's condo units that have entered the secondary market.

Speaker 1: 4:22

Is there a correlation between higher prices and it being a condo or is it kind of, I guess, a purpose built rental? I would imagine a purpose built rental would generally be cheaper because they tend to be older buildings in some ways. But also you get the benefit of knowing that it's a purpose built rental. It's not going anywhere, you're not going to have someone wanting to sell to kind of collect on the gains that they've made on it. Does that make sense?

Speaker 2: 4:45

Yeah, there's a little bit more certainty and particularly if you have a purpose built rental that's owned by a large corporation, you're not going to have this kind of thing where you say, oh, my grandmother needs to use the unit, so you need to sort of get out. So there are sort of advantages to having purpose built rentals and, generally speaking, we see people buying up condos and renting them out in markets that have very low vacancies. Right that people see this sort of opportunity and go, hey, we really haven't built that many purpose built rentals so I could go out and buy a condo unit and rent it out, and we've seen that happen across the country. It tends to be. We see it in markets that have very high rents, but it's not necessarily causing the high rents, but rather investors are seeing those high rents and smelling an opportunity.

Speaker 1: 5:36

Is that a good thing, that they're attracted to that and that they're deciding to come and make that investment?

Speaker 2: 5:43

Well, I think you'd rather have purpose built rental right, like if we had to sort of rank order outcomes the highest rank would be having enough purpose built rental, that that wasn't really necessary. But since we're not there yet, then you have this sort of tradeoff where, if you've got investors buying up these condos and renting them out, yeah, that's creating rental stock that otherwise wouldn't exist, which is helpful, but it's also blocking first time home buyers against the market, so it creates this kind of zero sum game of renters versus owners. So it's you can understand why it's happening, and it does have benefits in the sense that it creates rental units that otherwise wouldn't exist, but it tends to be a sign of a broken market. It tends to be a sign of a market that just hasn't built enough purpose built rentals to keep up with population growth.

Speaker 1: 6:38

I want to go through some of the numbers. The average two bedroom rental went up by 8% across the country. The average now is just $13.59. That is every part of Canada and it also includes places that are rent controlled. That's why it's maybe lower than some people would have expected. The condo vacancy rate is 0.9%, so even less. The average two bedroom is up to $2050 across the country. Obviously, we know that they're in some cities they're like it's totally different. In Vancouver the average two bed purpose built rental is $21.81. The average for condos is $25.80. In Toronto the average purpose built rental is $19.40 versus $28.62 for condos. I found it kind of interesting that for average purpose built rentals in Vancouver it's higher in Vancouver than in Toronto, but condos are lower in Vancouver than Toronto. Any idea what's going on there?

Speaker 2: 7:35

Yeah, it's tough to say. I think a lot of it is just due to the differences in the rental stock that you mentioned earlier. British Columbia has been building just as many purpose built rentals as Ontario, despite the fact it's like a third the size. What that means is that the inventory of purpose built rentals in BC is newer. Because it's newer, it tends to be a little bit more expensive. This is why these kind of average data they tell you a lot, but they can also be a little bit misleading. If you've got a city that's rental stock is really old, the rents on those are going to naturally be a little bit older. That's not really necessarily reflective of supply and demand imbalances. It's just that people go okay, I can live in an apartment building from the 60s or I can rent out a brand new condo. A lot of them will choose the other one. These differences are largely due to the relative age of the rental stock versus the age of the condo stock.

Speaker 1: 8:38

I just want to remind people that when they say the average purpose built rental in Toronto is 1940 right now, that includes people who have been there 20 years or paying way below market. It's all people who are rent controlled, along with people who are moving in today. Obviously, I don't think you can find a two bedroom in Toronto for 1940, even though that's the average. Everything I've been seeing has been closer to like 3,000 almost. I don't think that exists. It's kind of a misleading stat in some ways when people see that, because you can't actually get that nowadays.

Speaker 2: 9:10

Yeah, absolutely. That's always really important to look at. What is the data actually telling you? There is another site called rentalsca that publishes a monthly rent report just on new leases. It gives you an idea of what new renters are actually paying. That tends to be a lot more volatile. That tends to go up higher in good times and can actually fall further in bad times because of that sort of because it's not including all of those people who have been in a rent controlled unit for 20 years, which can absolutely change that average. It's really important to to differentiate what we're talking about. Is it like average rents across the board, or is it average rents for new tenants? And for new tenants, absolutely? It's a lot higher these days.

Speaker 1: 10:04

I know when politicians talk about affordable rentals. One thing I had learned was that the city of Toronto, for example, will say that a the affordable rental unit can be up to 100% of the average market rent, and I thought that's so weird. How can it be 100% of that and be called affordable? But they're saying it has to do with exactly those numbers when you consider the rent control as well. So I see often there are some affordable housing projects in Toronto that I've followed that will say we're aiming for 100% of average market rent, so we're affordable, or 80%, even if they're lower. And it's such a weird way of calculating it and that's, I guess, how they calculate affordable rentals versus looking at a gear to income. It's just compared to the market rent. It's kind of interesting.

Speaker 2: 10:47

Yeah, no, absolutely. I was reading a report by Carolyn Weitzman and I think most of our listeners and viewers would know her, one of the really bright minds on Canadian housing and she was talking about this definition of affordability. It was a report that she had put together for the federal government and, when it comes to the CMHC, I think they have six or seven different definitions of affordability, depending on the program that's used. Some of them are based on market conditions, some of them are based on income. So, yeah, you get this kind of alphabet soup of definitions. In my mind, it should be based on incomes, right, like if imagine rents skyrockets, go $10,000 a home, $10,000 a month for rent, if some place is renting for $8,000, nobody in their right mind would say, oh well, that's affordable, that's 80% of market rents and by the definition of some politicians it totally is right.

Speaker 2: 11:54

It totally is, and not just politicians, but some of our affordable housing programs. So, yeah, it's never really made that much sense to me. I think we should be looking at incomes. The challenge is, when you do look at incomes in a city like Toronto or Vancouver, you just basically end up concluding that nothing is affordable. But for anyone that's kind of at median income levels or below that, they end up paying far more than 30% of their monthly income in rent.

Speaker 1: 12:25

Yeah, I feel like that's why they changed it. I know Carolyn's talked about that before how it used to be that they would actually use a gear to income and then now it kind of changed over time and I guess it makes it easier to hit the goals, but it doesn't make it easier for people to be able to afford rentals anymore.

Speaker 2: 12:39

Well, exactly Because that's what I care about at the end of the month. Right, it's like okay, what is this place costing me relative to how much I'm making, and how much do I have left at the end of the month? 80% of super expensive is still super expensive, particularly if I'm not making that much money. So, yeah, it does feel like a definition that's far more useful to politicians than to renters.

Speaker 1: 13:05

I know that the vacancy rate in Montreal is also 1.5%, but their average two-bedroom purpose-built rentals is only $1,096, and their condos are $1,642. And I was just curious if you know what's going on there, because I know that Montreal kind of bucks the trend a little bit, but is the vacancy rate concerning that? That might not last.

Speaker 2: 13:27

Yeah, and we've seen rents go up in Montreal as well. Montreal, and Quebec in general, tends to have lower rents and a lot of that again is due to the supply-demand dynamics, that Quebec tends to be one of the slowest growing provinces population-wise, but also from a regulatory point of view it has a really good environment for building apartment buildings. The fees and charges tend to be lower than Ontario. Their planning system is a little bit more permissive, a little bit more responsive to actually getting stuff built. So I think they are worth looking at, not just on the population growth side but really their ability to build up apartment buildings. But even now in Montreal we're seeing those rents go up. That construction still isn't keeping up with the growth in the greater Montreal area.

Speaker 1: 14:31

I know that some of the places in Quebec I don't know if it's all of it or just Montreal, but I know that there's some vacancy control, meaning that the people who, when someone moves out the landlord, can't jack up the rent the way they do in Ontario, they have to keep it to a certain amount. How much of a role does that play?

Speaker 2: 14:50

It tends to be a little bit more complicated, but yeah, overall, the Quebec system that the rent control is based on the unit, not based on the tenant. These type of rules tend to advantage existing renters because they can't they're not going to see their rents jacked up and they can sometimes find other places to go. The challenge is that it might be hard to get new units built. Now Quebec's been again able to avoid that, partly because their population hasn't grown as fast, but partly, again, their taxes and fees and charges and regulations tend not to be as onerous as Ontario. That's allowed them to have this more restrictive system and still get apartment buildings built.

Speaker 1: 15:38

I wanted to look into Alberta a little bit, because there the rental report said that high interprovincial migration contributed to the increases in Calgary and Edmonton. I always hear people say if you can't afford Toronto, if you can't afford where you're from, just move. That's what people do. I always respond. Well, that just exports the housing crisis and that's what's happening here. Right.

Speaker 2: 15:59

Yeah, that's absolutely what happened here. That's not unique at all. You look at my hometown of London, ontario. The reason why home prices have gone up so much in the last decade is in part because of families doing the drive until you qualify thing, where they leave the GTA and drive as far as they need to go in order to find a house. Lately, the last few years, they've ended up in London. So absolutely.

Speaker 1: 16:24

They fly till they qualify to get to Alberta. Why do they?

Speaker 2: 16:26

qualify these times? Yeah, absolutely. You see that, particularly if you look at the data, it tends to be people who had just the age at which you just finished college or university and are getting their first job. And last course, I taught with my students I heard this a lot that a decade ago my students and I teach fourth year undergrad, so they're all going onto the job market. I would hear that they were just looking for the best job possible period. Right, and they'd go. Okay if the best job's in Toronto or New York or Vancouver that's where I'm going to go.

Speaker 2: 16:59

Nowadays they consider the cost of living far more so and they'll be willing to take a lower income job or a job that might not have the best career pathway if it's in a location that is far more affordable, if they're not going to go broke for the next, the first four, five, six years of their career. So what I'm seeing from my students is a lot of them were considering going to Alberta. Some of them were from Alberta to begin with, but even if they weren't, they were considering going there, or they were considering going to the US or like a place like Denver or Houston. You know, those kind of big but somewhat secondary markets that still have affordable home prices. So absolutely that we're seeing those high rents and high home prices from the GTA and GVA spread all across the country.

Speaker 1: 17:49

That's kind of sad if they're all moving to the States because Canada's investing money into students by subsidizing their tuition, so then it's like a reach of subsidizing people so we can help the workforce in America. That's kind of a sad thing.

Speaker 2: 18:02

Yeah, there is real concern about brain drain. Now the numbers haven't really shown that. We're hitting massive levels of that yet and we have in Canada's past that if you look at the early 1990s there really was an exodus of young professionals out of Canada to places like Arizona, you know particularly the American South. It doesn't seem to be happening yet at quite the same levels. We'll have to see next time Stackhand comes out with data. But at least anecdotally we're hearing this happening more and more and more. I think it's going to eventually show up in the data.

Speaker 1: 18:38

I remember seeing the ad campaign telling people in Toronto to move to Alberta. It was all over the subways. It would say like this is how much a home is in Ontario, this is how much it is in Alberta. Move to Alberta. And I guess that some people must be doing that. But that also kind of seems like a way to get housing prices out of control very quickly when so many people are moving, and I was trying to figure out why is the government encouraging that? Do they want home prices to go crazy?

Speaker 2: 19:04

Yeah, this is a classic be careful what you wish for. So no, I don't think it has anything to do with home prices at all. I think it has to do with labor shortages, or at least perceived labor shortages. So, for instance, in the last Alberta election, the Alberta NDP were also talking about giving citing retention bonuses to nurses and other healthcare workers that if you moved from Ontario to Alberta and you work in the healthcare sector, not only would you get cheaper housing, but they would actually give you financial benefit of financial top-up. So that's what they were trying to do was address these labor market issues and I think that's kind of a microcosm of everything we've seen over the last decade in Canada. You know again, whether it be the international student issues or the increases in immigration targets, none of that was designed to juice the housing market. It was designed about real concerns about our labor market. You know real concerns about, you know, the so-called gray tsunami of retiring people and how we were going to have enough people to replace them. So that's what it was all about. But you know it does have these secondary effects on the housing market, particularly if you don't put in the conditions to actually get enough houses built.

Speaker 2: 20:22

It's a lot of college and university students who have finished their studies and they're out looking for their first job. A lot of 21, 22, 23-year-olds who are moving out there in that combination of, you know, lower rents and you know their economy has done pretty well over the last few years, so they've been attracting a lot of people. They also had more births over the last, you know, 15 to 20 years. Their birth rate tended to be higher than other provinces. So you know, you've just got more people graduating into that 15, 16-year-old cohort. So, yeah, alberta's got a lot of really young people, which I think is fantastic for their economy and their culture. But, boy, they got to start building enough apartments for everyone or they're going to have the same problems that we've been having in Southern Ontario.

Speaker 1: 21:09

If the government wanted to try to find a quick solution like what's the fastest way to improve rental prices?

Speaker 2: 21:16

Well, I think there's a lot of what they did on the international student side. I think those are. You know what they're looking for. You know, I think that we are going to have to give more supports to low-income renters. We might see that in budget 2024, you know, additional rent subsidies and that kind of thing. You know, those are all kind of short-term fixes. I think in the longer term, we just need to build more apartment buildings.

Speaker 1: 21:40

Yeah, those short-term fixes. I look at those and I think, whenever I hear about them, the government giving money to low-income renters I always think, well, that's just passing it along to the landlords, making sure the landlords still get paid right.

Speaker 2: 21:52

Well, yeah, and that's one of the big challenges. Now, I still think we need to do this, particularly at the lower end. And you know, here in Ontario, increasing the rental allowance for ODSP in Ontario Works is massively overdue. So I do think we need to do those things. But I think your concerns are real. That, you know, is this kind of just a flow through to landlords. I think in the long run we just need to build more apartment buildings and you know we've seen the federal government act on this.

Speaker 2: 22:19

You know eliminating the GST on purpose-built rentals. You know we need the provinces to follow suit. We need to do more on zoning. We've got to eliminate parking minimums, which I know is one of your my favorite topics. That would go a long way to creating affordability on building new rentals. But that's the challenge that you point out is that all of the immediate solutions are on the demand side, because it takes a while to build up that supply. But we're going to have to do it or you know you and I are going to be having this conversation, you know, five, 10, 15 years from now.

Speaker 1: 22:53

Oh, I hope not. I hope it's fixed long before that I hope we can talk about something else. That's all for us today on the Missing Middle. Thanks so much for watching and listening and thanks, as always, to our amazing producer, meredith Martin.

Speaker 2: 23:06

And please like and subscribe and leave a comment. We'd really love to hear from you.

Speaker 1: 23:10

See you next time.