As the Canadian vacancy rates fall to the lowest point since 2002 for the third consecutive year, housing demand continues to outpace the growth in supply – emphasizing the need for increased rental supply to help ensure Canadians have access to quality affordable housing.
The Canadian housing market has seen a drastic decline in purpose-built rental property vacancy rates within its major city centres over the past few years reflecting a shortage in supply during a time of record-setting population growth, resulting in many students, young families, and newcomers with increasingly expensive rent payments. In Canada, the national vacancy rate for purpose- built rental apartment units declined for the third year in 2019; from 2.4% down to 2.2% for all bedroom types. This has had an impact on rent prices and housing supply because of the lessening supply being unable to match the pace of the growing demand for housing. The lowest vacancy rates in Canada are Toronto and Vancouver, with the strong demand in rental properties causing the vacancy rates to be 1.5% and 1.1% respectively. The Montreal Census Metropolitan Area (CMA) vacancy rate hit its lowest point in 15 years at 1.5%, Halifax is at 1%. Despite the trend, the rates in some other CMA’s remained stable, including Calgary, Regina and Winnipeg which are at 3.9%, 7.8%, and 3.1% respectively.
What is causing the lowering vacancy rates? Strong catalysts include demographic and economic fundamentals; an aging population has seen more seniors downsizing and switching to rental properties. The net interprovincial migration in Halifax was 3,300 in 2019, marking the fourth consecutive year of positive migration. Population growth from international migration is also a contributing factor affecting the increasing demand for rental properties; in 2016, 18,000 new permanent residents have settled in the Halifax region and there has been a growth in international students at the Halifax universities of 4.6% – these are all contributing factors to the rising demand for rental properties because as there continues to be growth in new residents and the aging population looking to downsize, the scarsity of available rental properties continues to grow as well. Understanding Vacancy Rates
Understanding Vacancy Rates:
So, what are vacancy rates? Vacancy rates can be defined as the percentage of all available units in a rental property that are vacant or unoccupied at a particular time. These rates are a great indicator for property owners because they show how their buildings are performing when compared to the area’s vacancy rates. These rates also provide good macroeconomic indicators as they can paint a picture of the broad market conditions. In real estate, the vacancy rate most often represents units that are vacant and ready to be rented, so in the case of low vacancy rates, this would indicate that the supply for rental housing is lower than the demand for rental housing – leading us to conclude that there is a need for added supply of rental properties to the housing market of each respective CMA. Investors can also benefit from vacancy rate information because it can provide a good indicator to determine a potential investments worth by comparing the rates to other comparable properties using relative valuation – for example; let’s say an investor is considering buying a large apartment complex, this investor would benefit by checking the buildings vacancy rate beforehand to make sure people are actually renting at the complex and it won’t be a poor investment. Because I am a student, I like to use these rates to help see the trend in rental prices within my city, Halifax, to know what to expect in the coming years, and to help grasp how my rent compares to other comparable locations.
How Do Vacancy Rates Effect Rent?
Ah yes, the important question to my fellow students and I; how do these rates effect rental prices? According to Shaun Hildebrand, president of the research firm, Urbanation; “I think the story remains the same – there is not enough supply to match the growing demand. If you look at other indicators, such as rent inflation, it suggests the market continues to be quite tight, with rents rising by their fastest rate in almost 20 years.” As per supply and demand, when demand is high and supply is low, it will result in a rise in rental prices because of the market capitalization opportunities for investors and property owners. This can be seen quite prevalently in CMHC’s rental market report which stated that nationally, tighter rental markets were accompanied by strong rent growth, with average rents increasing by 3.9% for a two-bedroom apartment between October 2018 and October 2019, which is much higher than the rate of inflation which is about 2%. This is the fastest pace of same sample rent growth since 2001.
Now, let’s take a closer look at how the decreasing vacancy rates are affecting individual cities; the average rent for a two-bedroom apartment unit in Montreal increased 3.4% to settle at the average price of $855, Calgary increased by 2.2% to settle at the average price of $1,305, Toronto realized the highest increase among the major cities with an increase of 6.1% to settle at $1,562, Halifax increased 3.7% to settle at the average price of $1,202. Vancouver is the only CMA to register lower growth in rent prices from previous years, but nonetheless, still remained above the national average with 4.9% compared to 3.9% and the average rental price being the highest in Canada at a whopping $1,748. Given how profitable the real estate market is at the moment and how tight the market is becoming, developers are beginning to embrace purpose-built construction to a degree unseen in decades. For the first time since 1992, rental completions outpaced those of condos with 53,000 rental units being completed across the country in 2019.
Outlook for the Canadian Rental Market:
As we have seen, rental rates are on the rise as vacancy rates are on the decline; how do we establish affordable housing if the rental market continues to be undersaturated with available rental properties and the demand for affordable housing continues to rise? There are things that must be done in order to combat homelessness, poverty, and unaffordable housing. We can take a look at the amount of rental properties currently available and look into investing into the Canadian rental market to help the rental supply catch the pace of the rental demand, which will act as a catalyst to combat the increasing rise in rental prices. There are also initiatives set in place by CMHC, such as the Rental Construction Financing project, which provides low-cost loans encouraging the construction of rental properties across Canada where housing demand is most demonstrated. This initiative has a total of $13.75 billion in available loans, open from 2017 to the end of 2027. Another initiative that CMHC has in order to combat the rising unaffordable rental prices include the Affordable Housing Innovation Fund which is a $200 million fund that will be instrumental in creating the next generation of housing in Canada. The goal of this initiative is the encouragement of innovative building techniques and new funding models which will support the development of innovative approaches to affordable housing, help create inclusive and accessible communities, and contribute to the fight against homelessness, poverty, and unaffordable housing. As we move forward, we will see there will be a substantial increase in the construction of new rental properties in Canada, as developers will be tasked with supporting the battle against the rising rent, the Canadian rental development industry may prove to be a wise investment for active investors looking for high growth markets.
1] https://www.cmhc-schl.gc.ca/en/media-newsroom/news-releases/2020/canadas-national- vacancy-rate-declines-third-year
2] https://assets.cmhc-schl.gc.ca/sites/cmhc/data-research/publications-reports/rental-market- reports/2019/rental-market-reports-halifax-64387-2020-a01-en.pdf?rev=2797a15c-e25b-48a6- b4d1-a26964484bbd
3] https://www.theglobeandmail.com/business/economy/article-canadas-vacancy-rate-falls-for- third-year-as-tight-rental-market/
5] https://www.cmhc-schl.gc.ca/en/housing-observer-online/2020-housing-observer/canadas-rental- vacancy-rate-declines
8] https://www.huffingtonpost.ca/2019/01/26/renting-vs-buying-why-it-might-be-a-good-time-to- hold-off-on-a-house-purchase_a_23653313/
Born and raised in Halifax, Nova Scotia, Samson Streatch is a fourth year Bachelor of Commerce student majoring in Finance at Dalhousie University. Samson is involved with many societies such as being Group Head for North American Equities for the Dalhousie Investment Society and the Group Head Real Estate for the Dalhousie Business Review. Over the four years of his degree, he has gained knowledge of the financial sector and the Real Estate industry though various internships including RBC and Altus Group. Samson is passionate about the Real Estate industry and will lead the Real Estate division of DBR.