Rental construction is starting to boom again, but it won’t be enough to satisfy big-city demand
After decades in the doldrums, rental housing construction is starting to pick up again in Canada.
Statistics Canada data shows an increase in the number of purpose-built rental (PBR) units under construction in urban regions, where the demand for rental housing has been high.
The increase in PBR construction is led by the Montreal Census Metropolitan Area (CMA), where the share of renter households is the highest among the major cities in Canada. The Vancouver CMA follows Montreal with the second largest number of PBR starts.
PBR construction also saw a moderate increase in the Toronto CMA, but at a level not nearly commensurate with the substantial unmet demand characterized by ultra-low rental vacancy rates and rising rents.
Statistics Canada reported 45,569 rental starts for all CMAs from January to November 2019. For the same period in 2018, rental starts stood at 36,796 units. That works out to a 25 per cent increase.
The increase in rental starts in 2019 is a continuation of the trend that has been building since 2009, when housing markets started to recover after the Great Recession. However, rental construction got a significant boost in 2015 when rental starts increased by more than 50 per cent from the year before.
The federal Liberals and some provincial governments have put in place regulations to spur rental construction. While the incentives seem to be working in some places, additional measures are needed to bring PBR construction in line with the pent-up demand for rental housing.
The recent resurgence in rental construction, though welcome, falls considerably short of the rate at which rental units were being built in the early seventies, when rental construction began to nosedive. Changes in tax regulations and the introduction of rent control as vacancy decontrol disincentivized investors who left the rental construction business in droves.
At the same time, the emergence of condominiums provided an alternate channel to supply additional housing stock for rental purposes.
A lack of enough supply of no-frill PBR units (with relatively lower rents and guaranteed long-term rental tenure) and their partial replacement by rental condominiums with relatively expensive rents created two distinct challenges in growing cities like Vancouver and Toronto.
First, the rental vacancy rates reached alarmingly low levels with some large urban centres reporting vacancy rates as low as one per cent. Second, rents continued to rise at an accelerated pace. Even in jurisdictions like Ontario, where the provincial government imposed new restrictions on rent increases in 2017, rents in urban markets rose unabated.
Developers and investors have finally started to respond to rising rents and falling vacancy rates in urban rental markets. Montreal, with over 12,000 rental starts and Vancouver with over 6,000 starts, led PBR construction in 2019. Toronto reported only 4,000 rental starts in the first 11 months of 2019.
Are places like Toronto doing enough to meet the unmet rental housing demand? A report by RBC Economics believes additional incentives are needed to meet the growing rental demand in Toronto. While recognizing the growth in PBR supply, the report still noted that “rental supply is unlikely to come close to demand in the coming years.”
The RBC report estimated that renter households in Toronto will continue to increase annually by 22,200 until 2023. In Vancouver, renter households are expected to increase each year by 9,400. The numbers suggest that even increased rental supply is unlikely to meet the even faster-growing demand for rental units.
To bring the rental vacancy rate close to three per cent, an indicator of a “balanced” rental market, the report observed that the rental housing stock in Toronto must grow by 26,800 units per year. With under 5,000 rental units constructed last year, one does not expect the gap to close anytime soon.
In the last federal election, the Conservatives, Liberals and NDP put forward several proposals to increase the supply of PBR housing in Canada. It is time to implement the best and most practical ideas to expedite large-scale construction of rental housing.
Local, provincial and federal governments must help eliminate or reduce the financial and institutional barriers that have kept the rental construction lagging the demand since the seventies. Given the enormity of the challenge, band-aid solutions will not work.
Murtaza Haider is a professor of Real Estate Management at Ryerson University. Stephen Moranis is a real estate industry veteran. They can be reached at www.hmbulletin.com.