Rents are continuing to slide in Canada. What does that mean for the mortgage market?

It’s a trend that’s been welcomed by hopeful first-time homebuyers and cursed by landlords and investor-owners over the past year: a slow but steady decline in average rents across Canada, a phenomenon at least one banking giant says is likely to continue for a while yet.

That’s a sharp reversal from a reality that prevailed for much of the last 15 years. In 2022, rents surged at a record pace, according to the national housing agency, jumping by 5.6% nationally compared with the previous year as vacancy rates plunged. In major markets and bigger cities, the trend was even more pronounced.

That meant a boon for real estate investors and owners of rental properties who saw the market rate for their properties jump. But there was a bigger knock-on effect: spiking rents squeezed savings power and presented fresh challenges for younger Canadians and hopeful buyers already priced out of the housing market.

What’s behind the downward trend of rents?

For a while, it seemed that rents would never stop climbing, with demand sky-high in cities like Toronto and Vancouver and supply continuing to dwindle.

But a host of factors have come into play over the past three years to buck the trend, with the federal government tapping the brakes on the number of new immigrants arriving in Canada – suddenly putting a lid on demand – and banning foreign non-resident buyers from snapping up residential properties.

Climbing interest rates since 2022 also dramatically reduced the appeal of rental properties for owner-investors because monthly borrowing costs in many cases were suddenly higher than the amount of rental income they could generate.

That’s created a perfect storm for the rental outlook and whipped up a condo market crisis in Toronto, where a glut of empty units is suddenly sitting on the market even as rents and prices continue to fall.

For Toronto-based mortgage broker Joanna Lang of Outline Financial, rents and condo demand don’t look like they’ll rebound anytime soon.

“We had a portion of borrowers in the condo market who were foreign investors. That’s all gone, and also the foreign students and work permits,” she said. “Our immigration numbers were growing at a crazy rate, which needed to be corrected, but we’ve had a very sudden big swing when you look at 1.5 million people down to less than half a million.

“We had rates skyrocket. We had all those other factors happen all at the same time, and it’s going to take some time for the market to work through it.”

Falling rents: A trend that’s likely to continue for a while

Royal Bank of Canada (RBC) cautioned last week that rents across the country will likely continue to slide before the correction finally runs its course.

The national rental vacancy rate could tick above 3% this year, the bank said in a report, putting further downward pressure on asking rents (but not, crucially, for tenants who are already in place).

Higher rents on existing tenants have contributed 3.1 percentage points to the latest overall increase, RBC said, with the average rent paid for a two-bedroom apartment still increasing by 5.1% over the whole of last year.

That signals a mixed picture for would-be first-time buyers. Renters who decide to move will probably find a better deal – particularly in Toronto and Vancouver – but those who remain in place might not see their savings potential change significantly.

Specifically in Ontario, though, another factor could keep rental prices in check: a pivot by the provincial government into the conversion of unused condo units to rental apartments.

Towards the end of March, the Ontario government said it was ringfencing $300 million through the Building Ontario Fund to transform around 2,200 condos into long-term rental housing, with about 550 of those homes capping rents at 30% of the median household income in the Greater Toronto Area (GTA) or 25% below market rates, whichever is lower.

That’s a significant step, according to Lang. She doesn’t see rents cratering or soaring again in the immediate term – but believes the picture will generally appear favourable for renters, and somewhat bleak for investors, for the foreseeable future.

“Look at the different real estate surveys. A lot of them predict that it might get a little bit worse before it gets better,” she said.

Source CMP
Fergal McAlinden