Financial Post - Murtata Haider and Stephen Moranis

U.S. renters “with new leases in January paid a median rent that was 3.5 per cent lower than they would have paid last August,” the Wall Street Journal, using data from Apartment List, reported. Rents have fallen every month over a six-month period for the first time in five years.

By comparison, rents in Canada have been rising quickly. Year-over-year rent increases for one-bedroom apartments were 24.2 per cent in Vancouver and 20.8 per cent in Toronto, according to data. Even in less populous cities such as Kitchener and London in Ontario, rents for one-bedroom apartments were up by more than 25 per cent.

The average annual increase across major rental markets tracked by was about 15 per cent for one-bedroom apartments and 14.4 per cent for two-bedroom apartments.

"However, the problem is not necessarily the higher demand for rental units; it’s Canada’s inadequate rental housing supply."

The worsening rental situation in Canada prompted the federal government to offer low-income renters a one-time $500 rental benefit. By late February, more than 500,000 renters had applied for the benefit, and it is estimated that an additional 1.2 million renters will also apply.

Despite similar demographics and economic structures, the drastically different rental markets in the U.S. and Canada may be explained by the differences in their respective rental housing supplies. Whereas rental housing supplies have been on the rise in the U.S., large housing markets in Canada, with a few exceptions, have not had any meaningful increase in rental housing construction.

The result of this supply-and-demand mismatch has become quite apparent in Canada. Higher mortgage rates and falling housing prices have caused sales to decline since early 2022. A slowdown in the resale market meant that many first-time homebuyers extended their rental tenures for longer than they would have had the markets facilitated their transition to ownership. This resulted in lower rental vacancy rates, which have inadvertently pushed up rents in most housing markets.

However, the problem is not necessarily the higher demand for rental units; it’s Canada’s inadequate rental housing supply.

In the U.S., the Wall Street Journal cited CoStar Group Inc. data that forecasts “the biggest delivery of new supply since 1986” and that “half-a-million new apartments are coming on line” in 2023. “The crush of new apartments will give renters more choices, making it more difficult for landlords to raise rents at rates seen early in 2022.”

The recent decline in rents in the U.S. could be partly because markets reached their upper limit in rent tolerance last year, so a decline in lease renewals followed, putting downward pressure on rents.

In Canada, however, the construction of purpose-built rental housing took a nosedive in the early 1970s and has not recovered to levels commensurate with demand. Back then, 25,000 purpose-built rental units were annually completed in the Greater Toronto Area (GTA), according to a recent report by Building Industry and Land Development Association, an industry group representing the development industry in the GTA, but less than 5,000 rental apartments came on line in 2022.

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

Of course, housing affordability is a more significant concern for low-income renter households than homeowners or those aspiring for homeownership.  For example, renters in the GTA were two to three times as likely to be in core housing need (a metric for housing affordability) than homeowners, according to a recent report by the Centre for Urban Research and Land Development.

The federal and Ontario governments have recognized housing supply as the prime culprit behind worsening affordability. The governments have since identified the need to build millions more homes than what would have been built under business as usual.

It would be wise to target subsidies and incentives to produce affordable rental housing first, so that the shelter needs of those most vulnerable can be met sooner.




Canada’s annual inflation rate fell to 5.2 per cent in February, the biggest drop since the early stages of the pandemic, although grocery prices are still climbing by more than 10 per cent. Financial analysts had been expecting an inflation rate of 5.4 per cent in Tuesday’s report from Statistics Canada. Inflation cooled from a 5.9-per-cent increase in the Consumer Price Index (CPI) in January. The slowdown was the largest since April, 2020.

Inflation is expected to cool further in the coming months. The Bank of Canada projects the annual rate of CPI growth will ebb to around 3 per cent by the middle of the year, then return to its 2-per-cent target by late 2024.  Financial analysts widely expect the central bank to hold its benchmark interest rate at 4.5 per cent in next month’s rate decision, on account of how inflationary pressures are waning.

The Bank of Canada and other central banks are being tested by inflation that remains too high, but also by distress in the financial system, after the collapse of Silicon Valley Bank and the emergency takeover of Credit Suisse. Unlike many of its peers, the Bank of Canada had already moved to the sidelines, putting a “conditional pause” on further increases to its benchmark interest rate. Inflation appears to be cooling more rapidly in Canada than in the United States and Britain.

“With inflation subsiding on both the headline and core measures, the Bank of Canada is in a less awkward position than many others during the recent financial turmoil. That is, there’s really no underlying reason for the Bank to hike further,” Bank of Montreal chief economist Doug Porter said in a note to clients.

“Over all, the Bank’s pause looks prudent, and we expect them to stay at current levels for quite some time, barring a major flare-up in the banking turmoil,” Mr. Porter added.

A noteworthy aspect of Statscan’s report is that the annual inflation rate was weaker than growth in average hourly wages, which rose 5.4 per cent in February from the previous year. It was the first time this measure of wage growth had exceeded inflation in two years. The average Canadian has experienced an erosion of purchasing power over this inflation crisis.






Adequate rental supply is one of many building blocks required to achieve CMHC’s 2030 aspiration—that everyone in Canada has a home that they can afford and that meets their needs. However, rental development lost ground to condominium development between the 1980s and the 2010s. The arrival of short-term rentals in recent years has also had a negative impact on the supply of rental units for local residents.

Financial considerations could be one of many explanations for the modest growth of purpose-built rentals in Canada. Traditional developers of rental units may judge that purpose-built rentals do not yield the same financial results as other types of development. To explore this idea, CMHC commissioned Altus Group Economic Consulting to assess the economics of new private-market and not-for-profit purpose-built rental development in six Canadian Census metropolitan areas (Halifax, Montréal, Toronto, Winnipeg, Calgary, Vancouver). The research examines the financial performance of typical purpose-built rentals in four different scenarios and for three project archetypes.

Part of the financial feasibility challenges found by Altus Group comes from the discrepancy between achievable (i.e. market) and required (i.e. economic) rents in all the markets examined. Economic rent is the rent required to obtain a cash-on-cash return of 10% over 10 years.  The results point to financial feasibility challenges for new private rental apartment projects in the six selected markets.  Land costs, government charges, and underground parking
construction costs constitute some of the significant cost items hindering financial performance. Achievable market rents are also generally not high enough to support development costs
in most markets.

In Toronto, it is preferable to develop mid- and high-end projects than to purchase them, since capitalization rates are lower than yield on cost.  However, rents would need to be 10% (basic project) to 50% (high-end project) higher for projects to achieve a 10-year cash-on cash average return of 10%.  Given the cost of land in Toronto, taking land out of the analysis does significantly improve financial performance and makes some of the project types look more viable. Still, developers started some 4,000 units in Toronto in 2019, the largest number over the 1999–2019 period. This was well above the five-year average of 2,986 units. Starts in 2020 had surpassed the 2019 numbers by September.

Traditional financial performance indicators do not support the development of private-market, purpose-built rentals in the six Canadian markets studied. This
suggests that developers are using other criteria, or that non-traditional developers (such as REITs and pension funds) are driving growth.  The full report shows that land costs remain a prohibitive cost to financial performance. Without land costs, Toronto would offer consistently positive financial results across
project types and across financial indicators.

Market rents are consistently below economic rents (i.e. rents required to make a project financially viable). In other words, market rents are rarely sufficient to cover the development and construction costs of projects, regardless of the project size, location, and quality of the finishes.








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