WHY RENTS ARE GOING AND KEEP GOING UP
There are several reasons for rent growth in Canada. The cost of nearly every item has increased. Generally speaking, growing demand ∝ rising rents. Moreover, COVID has set a higher demand for rental apartments. The most contributing factors are the rising need for adaptability and the shortage of cheap homes.
The rent increase is particularly true in the two most expensive markets, Vancouver and Toronto, where the annual rent rise has increased by over 24% in each province of Canada.
So why are rents likely to skyrocket? Let’s quickly review some of the main causing elements.
"The median rent in Canada is $2045 monthly, up about 22.1 % since 2021."
The burden on Canadians’ pockets has been brought on by current early inflation rates and is projected to be 7%, according to an August 2022 Report. Yes, inflation has indeed given Canadians a lot of trouble. The price of everything is touching the sky. You can’t buy expensive groceries, outfits, building supplies, cars, gas, and other things now. Unfortunately, rising rental costs appear to be the trend. Many people think that rising mortgage payments for owners caused a rise in rental rates, which were then passed on to tenants. The situation is more closely tied to demand and supply than to increased interest costs.
Over the past few years, the Canadian property market has experienced extreme ups and downs. The median rent in Canada is $2045 monthly, up about 22.1 % since 2021. The rental market appears to be especially harsh from the standpoint of tenants, and it may be easy to assume that this is all due to property speculators. In fact, inflation has caused a complicated snowball effect that has led to Canada’s soaring rent costs. Higher interest rates and a decline in mortgage appetite are both results of inflation.
The average inflation rate has decreased but is still high, 6.9% by the end of September and 8% yearly. The economic growth has been only a little above 5%. In response, the government raised the basic interest rates from 0.25% to 3.26% till now.
Shortage Of Construction
Tenants make up over 4.5 million (30%) houses in Canada, and the stress is growing. New apartments need to be constructed quickly enough to satisfy the growing demand in Canada’s main urban areas and small and large communities. Rent prices are going up, and the availability rate is going down; thus, demand is still growing. In Toronto, availability rates for newly constructed rentals dropped below 2%; in Vancouver, it dropped to 2.7%; and in Calgary, it dropped to 5% in 2022.
Investors are less likely to participate in new rental apartment development, formerly a profitable way to enter the real estate market.
To get job opportunities and spur financial growth, Canada has to bring in a huge number of immigrants, but they’re also not a lie that there are not enough homes available to house them all. Even Canadians are now facing these difficulties. However, the rapid absorption has impacted the real estate market in Canada. According to analysts at the Bank of Nova Scotia, this rental stock is the worst among G-7 nations.
Home values in Canada’s largest cities rose due to rapid urbanization, a lack of available homes, and cheap lending rates. This led prospective buyers to explore outside of the country. This led to price increases in remote, smaller places that were not used to property bubbles.
Increasing Interest Rates
Following the Bank of Canada’s decision to raise its inflation target by a whole percentage level, Canada’s policy interest rate rose to 2.49%, slightly higher than 0.2% at the year’s start. In 2022, mortgage interest rates increased due to the federal reserve adjusting its banking systems. This tendency may have a variety of effects on multiple residential markets. A person or family may purchase an apartment or rent it according to a single-family.
Hence, rental apartments have high demand, especially in communities of single-family homes, and are rising. Meantime, rental market prices have increased due to interest rate growth and a slowdown in the real estate market.
Increasing Demands From Millennials & Baby Boomers
Many millennials may need to consider keeping a home and yard their primary concern. However, baby boomers approaching retirement age might need more time to be ready or able to upkeep a sizable house or lawn. Renting is quite common among this group of people. Baby boomers are making the decision to relocate to a rental flat after selling the homes where they have raised their families. On the other hand, Millennials are ready to rent out these flats instead of owning a property.
GDP UP BUT ONLY JUST
Real gross domestic product (GDP) increased 0.3% in May, following a 0.1% uptick in April. Services-producing industries were up 0.5%, while goods-producing industries partially offset the increase with a 0.3% decline in May. Overall, 12 of 20 industrial sectors posted increases.
A rebound in wholesale and public administration helped boost GDP, with the latter bouncing back in May as most federal government workers who were on strike returned to work by the end of April. Moreover, gains in manufacturing and real estate and rental and leasing also helped boost growth. Meanwhile, mining, quarrying and oil and gas extraction was the biggest detractor to growth in May, as many companies, specifically in Alberta, reduced operations as a result of forest fires in the province.
Easing of supply chain issues with respect to semiconductor chip supplies, which became prevalent during the COVID-19 pandemic, aided in the increases of both the manufacturing and the wholesale sectors, especially subsectors involved in the automotive supply chain.
Manufacturing advanced 1.6% in May, its largest gain since October 2021, with both durable (+2.1%) and non-durable (+1.0%) goods manufacturing increasing. Durable goods manufacturing was up for the fourth time in the last five months, led by transportation equipment manufacturing (+2.2%) and machinery manufacturing (+3.0%) in May. Wholesale trade advanced 2.9% in May, as seven of nine subsectors grew. Machinery, equipment and supply wholesalers sharply increased by 6.3%, the largest monthly expansion since June 2020.
Motor vehicle and motor vehicle parts and accessories wholesalers advanced 6.0% in May 2023, reflecting increases in imports and exports of motor vehicles and parts.
The construction sector contracted 0.8% in May, following a 0.2% increase in April and no change in March, as almost all subsectors posted declines. Residential building construction (-1.8%) contributed the most to the decrease, driven by declines in home alterations and improvement and construction of new single-detached homes.
CANADIAN PROPERTY VALUES DECINING
The global value of professionally managed real estate fell by 4.1 per cent last year relative to 2021, representing a USD $600 billion year-over-year drop. Canada’s weight in those holdings likewise fell, slipping to ninth among the 37 countries MSCI tracks in its annual summary of global and regional market size.
For 2022, MSCI pegs the professionally managed real estate universe at USD $13.3 trillion. Canadian inventory contributes USD $403 billion (CAD $532 billion) to that total, down by USD $44 billion since 2021. After ranking eighth in 2021, Canada was surpassed by Hong Kong last year. Meanwhile, the United States expanded its dominance atop the chart with a USD $90 billion increase, pushing the value up to USD $5.375 trillion or 40.3 per cent of the global professionally managed market.
After the U.S., China, Japan, the United Kingdom and Germany are the next largest markets. These five collectively make up two-thirds of the global market size, while France, Australia, Hong Kong, Canada and Switzerland round out the top ten, accounting for roughly another 17 per cent of the total.
“The decline in activity feels more intense as it comes on the back of a record 2021, when the U.S. in particular saw a surge of deals. From the second half of 2022 onward, however, we have recorded declines in deal volume of more than 50 per cent in all three global regions,” René Veerman, MSCI’s head of real assets, notes in the introduction to the report. “A slowdown of this scale inevitably impacts valuations, but whereas we have seen transactions consistently decline globally, valuations have adjusted at different speeds from country to country. The U.K. led the price adjustment, followed by continental Europe, but the U.S. and Asia Pacific, particularly, have lagged.”
THE APARTMENT GROUP
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LORENZO DIGIANFELICE, AACI
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