While the dramatic impact of higher lending rates on the housing market is well documented, developments in the rental market have not received nearly as much attention.
As anyone who has recently signed or attempted a lease can attest, rents are rising at an unprecedented rate across Canada.
According to data from rental housing website Rentals.ca, analyzed by data firm Urbanation, the average rent in October across Canada was $1,976 for all types of properties, from bachelorette pads to two-bedroom apartments. That’s an increase of 11.9 percent, well ahead of Canada’s inflation rate of 6.9 percent.
The gains aren’t even national, either, as Atlantic Canada saw rents rise at a staggering 32.2 percent last year. Ontario, British Columbia and Alberta recorded increases of 17.7 percent, 15.1 percent and 13.2 percent, respectively.
Other regions saw increases slightly below the national average, but in almost every market across the country, renters are facing a huge cost hike to keep a roof over their heads.
Calgarian Kellie Knight knows this all too well. She rents a two-bedroom apartment in town for $2,200 a month. That’s a jump of about $500 from what she was paying for a similar unit just before the pandemic. And it’s bad enough that her rent is now eating up about half her monthly income — far more than financial experts say is advisable.
“I was shocked by how much the prices had gone up and had to rearrange my budget very quickly to make today’s rent work,” she said in an interview with CBC News. “If you’re spending more than half your monthly salary on rent, you’re not saving anything for a down payment.”
Still, she was glad she recently signed a two-year lease to secure that price because it gave her some respite from the uncertainty she would have faced if she had to move.
“I moved here from Los Angeles and if you told me at the time that I was paying LA rents in Calgary, I would have thought you would be insane,” she said.
imbalance of supply and demand
Typically, a slowing real estate market could be good news for tenants, as landlords may be more eager to find good tenants. But that’s not happening right now for a reason Canadians have become very familiar with in the pandemic: supply and demand.
“Interest rates are actually working to increase rental inflation because a lot of people aren’t buying, so they’re renting more,” said CIBC economist Benjamin Tal.
People who would normally like to own property are being pushed out of the market by higher lending rates, leading them to either enter or stay in the rental market.
“Normally they would exit the rental market [and] be a homeowner,” Tal said. “But if they don’t move out of their apartment, they’re going to occupy the available supply… that’s like new demand.”
When demand increases, it is often met by a corresponding increase in supply, but that is not happening at present because builders and owners fear the risk.
“Developers are canceling projects because of construction costs,” Tal said. “Investors are no longer investing in real estate due to higher interest rates.”
Tal says that prior to the recent housing slump, about half of Toronto’s new condos were owned by investors. Most of them were rented out, but the sudden increase in mortgage rates on these units now makes them unprofitable, so these investors are selling them — often to people who plan to live in them themselves.
“Higher interest rates reduce the incentive to invest in real estate, especially condos,” he said. “So if you don’t have those units, that’s another factor that drives up the cost of renting the remaining units.”
Faced with higher mortgage costs and lower prices, investors basically have two options: sell and delist, or raise the rent. And either option isn’t good news for renters.
Landlords are not motivated to keep rental stock
Charlene Irwin is a landlady in exactly the scenario Tal described.
She owns a condo in the north Toronto suburb of Thornhill that she rents out to pay the bills. But her mortgage expires in December, and based on the new rates, her payments will likely double — and that’s not even taking into account things like condo fees and other utilities.
“Even if I rented the unit for $3,000 a month, which seems like the usual price, there’s no gain,” she told CBC News in an interview.
And even if she does manage to break even on paper, Irwin says it’s not worth the risk of a tenant letting her down and not paying rent for up to a year while she goes through the eviction process.
Irwin had hoped to sell her unit before new mortgage rates take effect next month, but so far she has been unable to find a buyer at her asking price.
“If you’re talking about a situation like mine where there’s not going to be any margin at all, what’s the motivation for keeping rental stock in Ontario?”
Effects of the rental price brake
The rapid escalation of rents is taking place almost everywhere in the country.
Hannah MacDonald, a student at Dalhousie University in Halifax, shares a house with four other roommates. They currently pay $2,700 a month, but their landlord recently told them he plans to increase their rent by 22 percent to $3,300 when their lease expires in May.
“We’re basically in a bind because, as full-time students, it’s just not in our budget,” she told CBC News. She said they have two months to decide whether to hand in their notice and move, but their preliminary research into alternatives suggests very little is available.
“There are almost no vacancies now because everything gets snapped up so quickly and people are basically desperate at this point,” she said.
“We’re kind of stuck between a rock and a difficult spot at the moment.”
Halifax has a form of Rent brake, which limits the increase to two percent per year in most cases, but MacDonald is unsure if their situation qualifies.
A spokesman for the provincial government told CBC News that while they are unaware of their specific case, generally anyone on a fixed-term lease, which McDonald and her roommates are, would be covered by the cap.
“The rent cap applies to tenants who have a residential lease … and take out another fixed-term lease in the same rental unit,” the government said.
Tenants often demand rent controls, and while this can help at an individual level, Tal says rent caps worsen the overall rental picture because they reduce incentives to build more units.
Tenants’ rights advocates argue that a rent cap is needed more than ever amid the specter of high inflation. Even where it exists, there are loopholes. In Ontario, for example, a landlord can only increase the rent without special approval from the province’s Landlord and Tenant Board 2.5 percent for 2023.
However, this only applies to units that have already been occupied, while vacant units can be rented out for an amount set by the landlord. “In the last five years, we’ve seen the rents of the apartments in our building double with minimal improvements,” the Toronto Tenants’ Protection Agency said says Shelly Dunphy. “We see homes that sit empty for months because families just can’t afford to pay.”
Tal said rent control laws might make sense for older buildings or for existing tenants, but he argues a blanket cap on rent increases would make the problem worse. “We need more supply, not less supply – and rent control can have the opposite effect.”
By imposing hard caps on rent increases, Tal said, “you protect current tenants at the expense of future tenants.”
Given the lead times involved in building new projects and the bureaucracy associated with breaking ground, Tal does not see the situation resolved any time soon.
Need to change mindset around renting
But aside from the very real logistical issues facing Canada’s rental market, the biggest of them all could well be psychological.
“We have to create a situation where if you’re 35 years old, you’re married, you have two children and you live in rented accommodation, there’s nothing wrong with you,” Tal said. “That’s the mentality that we should develop in this country – like it’s in places like Manhattan, Berlin, London.”
The federal government recently announced aggressive new immigration targets that could soon be met Half a million new skilled workers come to Canada each year — a development that Tal said could be a boon to Canada’s economy.
But unless the housing market problems are fixed, Tal said, it will all be for nothing.
“We assume that the immigrants will arrive, but if they can’t afford to live in Toronto, Vancouver and many other cities because rents are going up and housing prices are going up, they won’t come,” he said he.
“We are facing an affordability crisis, [and rent] must be part of the solution.”