Why Canada Lacks Purpose-Built Rentals & Other Shelter Issues

Real Estate

 

 

Welcome to my blog on housing, culture, and design! I’m Steve Fudge and I’m celebrating my 34th year as a realtor and property consultant in Toronto, Ontario, Canada.

It’s well-known that Canada is in a housing crisis, with supply trailing far behind swelling demand.

The rental market is particularly affected.

The rental market is becoming more and more unaffordable, as demand is amping up thanks to multiple and simultaneous factors: an increase in immigration policy and rapid population growth, an increase of would-be Buyers pushed out of the housing market because of unattainable housing prices, and aging boomers downsizing into rental accommodation. It’s a crowded pool.

 

 

The State Of The Rental Market

The issues around the rental market are front and centre in Toronto – and far-reaching – as evidenced by the frequent headlines

The CMHC report referenced in this CBC article entitled, “Rent Prices Soared In 2023 As Canada Saw Lowest Vacancy Rate On Record“. The report shows that country-wide, vacancy rates are the lowest they have been on record, meaning since CMHC started tracking these metrics in 1988. According to the report, purpose-built rental apartments (PBR) were at a 1.5 percent vacancy rate during the first two weeks of October 2023, which is down from 1.9 percent during the same time a year prior, which had been the lowest level in two decades at that point.

And as vacancy gets tighter and tighter, competition is ensuring rent prices are growing and growing.

That this is happening comes as no surprise to CMHC, acknowledging that while there is an awareness of the problem and an attempt to push supply into the pipeline (across the country purpose-built rental supply has increased), it is woefully short of the need.

And it is only expected to get worse, as supply scrambles to keep up.

CMHC points to delays in projects, due to hurdles with financing, as well as a chronic lack of labour to complete the projects as two major anticipated barriers to keeping the pace for new supply.

This report from RBC – “Proof Point: Canada’s Shortage Of Rental Housing Could Quadruple By 2026” – outlines the fact that, although purpose-built rental construction grew at the fastest pace since 2014 last year, the vacancy rate fell to a two-decade low, emphasizing the opposing directions of these trendlines.

If this imbalance continues, RBC projects that the rental housing shortfall could exceed 120,000 by 2026 — quadrupling the current deficit.

Although new project development in Canada has ramped up, it has not been enough to stem, or even slow the tide.

While it is easy to blame the current situation on the forces driving demand, the lack of purpose-built rentals is a long-time problem in Canada. The spotlight currently on this issue is perhaps a bit brighter because of the depth of the problem – but it has not happened overnight.

 

 

* The City Park apartments, completed in 1957, was the first Modern, post-war apartment complex built in Toronto. Spacing Magazine.

 

Canada Has A Historically Lacked Purpose-Built Rentals

As I outlined in my piece How Mid-Century Modern Apartments Housed The Post-War Immigration Boom In Toronto, the last mass production of purpose-built rentals was in the 1940s-1960s, coinciding with a surge in immigration in the Post-WW II period, also coincidentally during a housing crisis that smacks of our current dynamic.

There were 500,000 purpose-built rental apartments constructed over 23 years.

In the 1970s, rent control and other policies to aid with affordability were introduced. In the 1980s, the provincial government became more active in housing policy, while the federal government largely stepped back its housing investment. Rent control was repealed and re-introduced and repealed cyclically throughout the decades, depending on who was in government.

PBR development in Canada dropped significantly in the 1970s, mostly due to taxation changes, reforms that affected Capital Cost Allowance, tax incentives, and notably (and costly) GST/HST being applied to PBR development. Plus all the real costs for all new housing like permit fees and development charges.

Similarly, in the 1980s, rental income was deemed passive income, making it taxable at a higher level. At the same time, more investment products were introduced into the marketplace (including RRSPs). With the additional taxes, along with more investment options, rental properties became less attractive.

Instead of PBRs, condo development became prevalent, in part because it was more lucrative for developers, and because this was a time when Baby Boomers were learning how to grow their wealth by building investment portfolios. Those who were wary of investing in the volatility of the stock market believed purchasing bricks and mortar was a safer more sound investment at a time when inflation was stoking the fears of the middle-class who were obsessed with preserving their savings.

 

 

What’s Slowing Down The Creation Of Purpose-Built Rentals Today?

This Linked In post from Well Grounded Real Estate summarizes the challenges faced in recent history by PBR development, with a really great infographic.  This Twitter post from Daniel Foch adds insight as well.

The infographic compares the costs associated with PBR and condo development.

As the post explains, the big reason why there are so few purpose-built rentals, relatively speaking has to do with costs and the high amount of equity required for financing. Condo developers require 15 percent equity down, while PBR developers require 35 percent for financing.

That’s because of the additional costs for PBRs brought on by GST/HST, no cash from deposits/deferred costs, as there would be under the condo model, especially with pre-construction sales.

As the infographic demonstrates, land costs and loan amounts are similar, but it is all around costlier for PBR development – and potentially riskier because of the longer-term time horizon.

In short, for a long time, it has been more appealing under current policy and modeling for developers to build condominium buildings versus rental apartments as the developer, capital investor, lender, and even the speculator looking to assign their purchase in advance of registration (although they could buy shares in a REIT) take their profits sooner. Purpose-built rental, of course, will see an ROI in rental income, but it can take a significantly longer time horizon. There’s also the risk that a provincial government in the future implements rent control.

In terms of financing, there are extra costs with PBR including mortgage insurance, loan insurance, and mortgage financing versus condo development, although PBR developers generally see those as the cost of doing business

Both condo developers and PBR developers would be competing for the same land upon which to build multi-family dwellings, with condo builders often outbidding PBR developers, as until recently, condos have seen to be more lucrative because of the average sales prices, able to absorb paying higher amounts for the land.

And of course, profitability in PBR would be dependent on being able to generate market rents to compensate for the extra costs – which had not necessarily been the case, until the rental market went off on a tear in recent years. But the market fluctuates over time, which could be a potential risk to bear.

Still, given my points in Is The Toronto Condo Market In A Precarious State? now may be the time developers convert their proposed condos to purpose-built rentals and sell them to The Financial Landlords Of Toronto Real Estate.

 

 

The Reality Of Today’s Rental Market

A Toronto Star article – “Regular Families Will Never Again Be Able To Buy A House In Toronto – But We Can Still Fix The Housing Crisis. Here’s How” – talks about a common, but substantial challenge faced by renters in Toronto at the moment: they are being evicted at an uncommon rate and for a variety of reasons.

In the “old” days, that would be inconvenient and the timing might not be ideal, but today, not only is challenging for evicted renters to find a place at all, but rents have skyrocketed so much that people may find themselves unable to afford adequate shelter.

This article brings forth an interesting point too. High rents will lock out a certain portion of the community, who become unhoused. But for a large part of the population, they are technically able to pay higher rents, but that doesn’t mean that they can afford them; an unhealthy chunk of their income is going towards housing, meaning that something else will need to be sacrificed, which could result in food insecurity or an inability to save money for a rainy day. This creates a tremendous financial vulnerability, which can have a widespread impact.

Case in point, according to CMHC, rent arrears climbed by just under a staggering 20 percent last year!

This article also highlights the role that the rental market has as the foundation upon which the property ladder is built, and with its current conditions (demand far, far outpacing supply, coupled with unaffordable rents) creates a rickety platform, that has an impact on stability on each rung of the ladder.

Renters are not stepping onto the property ladder as they would have done historically, which was a semi-reliable way of freeing up supply. (Do you now see the ripples of this issue moving outward in concentric circles through the housing markets? It’s very concerning.)

The article points to Sweden as a success story. The country was in dire need of a substantial amount of housing in a hurry during a population boom in the 1960s. They committed to building 1 million new homes over the decade that followed. Not a lot by today’s standards, but at that time, the entire population of Sweden was 8 million people.

And they did it. By 1974, they’d created a spread of different housing types – single family, PBR, student housing, and more – to house different parts of the population, which is the social housing ideal.

Sweden did this, not just by making creative use of every nook and cranny land-wise, but by exploring alternative, more cost-effective construction methods to mass produce while retaining quality.

This is feasible in Canada as well.

 

 

Tight Rental Market Is Affecting Housing On A Larger Scale

It’s not just affordability and shelter at stake. This pressure on the rental market has ramifications on the housing market as a whole.

There are those for whom renting is a choice, but for many, renting is a gateway to homeownership, amassing a downpayment

A CTV news article entitled, “Is It Cheaper To Rent Or Buy A House With A Monthly Mortgage In Canada? Prices Analyzed In 26 Markets” talks about how in most Canadian cities, it is still cheaper to rent a home than to purchase one, but also points out that supply alone will not fix the affordability issue.

It highlights the traditional role that rental housing plays in the property ladder, as it is where homebuyers lived before, they became homeowners, amassing downpayment.

But with the extremely high cost of living, much of that being directed towards high market rents, amassing that downpayment is a decades-long endeavour, while housing prices continue to climb.

Furthermore, on the other end of the traditional property ladder, people traditionally downsized and transitioned into less expensive, or in many cases, rental housing, realizing the return on their investment, while also keeping the natural flow of properties going through the property ladder cycle.

This isn’t happening anymore, as this article points out, as the whole model was based on the idea that a person could sell at the top of the property ladder and live more cheaply – and that is not the case at all now, with sky-high rents. So, as this article puts very succinctly, the current rental model, where supply is lacking and rent prices are so high relative to income, hinders both the young and old alike.

Here are some more articles that shine a light on the crisis around the lack of purpose-built rentals: “Rent Prices Rose In 2023 As Canada Saw Lowest Vacancy Rate Since 1988: CMHC” – and – “As For Canada’s Fragile Housing Market, More Turbulence Ahead“.

 

* Image courtesy of Rehousing.ca, with thanks!

 

So… Solutions?

There have been some incremental changes that will contribute to the creation of more rental housing, like last year’s zoning change to permit multiplexes in residential areas once predominantly single-family dwellings which I discuss here: As-Of-Right Multiplexes Create Missing Middle Options For Toronto Real Estate.

More impactful is addressing the financing and taxation side of the issue. Recently, in September 2023 it was announced that the “Federal Government To Remove GST From Construction Of New Rental Apartments“. This was followed in November 2023 by “Ontario Plans To Remove 8% Tax On New Purpose-Built Rental Housing“.

Also of issue is the severe shortage of labour in Canada which is impacting the ability to keep projects on timelines that will make them more cost-effective and therefore more feasible for developers per “Immigration Policy Changes Needed To Meet Construction Demand“. Apparently, in August 2023, the federal government was launching a separate stream of entry for newcomers with work experience in skilled trades per “As Worker, Housing Shortages Collide, Canada Hones In On Newcomers In Skilled Trades“.

Clearly, the Federal Government recognizes this is a political hot potato, only recently amping up its commitment to resolve our housing crisis including “Ottawa Launches $1.5-Billion Fund To Protect Existing Rental Apartments” – and – “continuing his pre-budget spending pledge tour, Prime Minister Justin Trudeau promised a $15-billion top-up as well as reforms to “turbocharge” an existing federal apartment construction loan program” per “Promising $15B To Build More Apartments, Trudeau Says It’s ‘Not Fair’ Many Young People Can’t Afford A Place To Live“.

There is also the proposal for a National Standard Lease Agreement per “Ottawa Has Proposed A Renters’ Bill Of Rights. Will It Help?“.

There has been a call too for more innovation when it comes to construction to make it more cost-effective, such as practices like off-site construction, using alternative materials, or 3D printing and automation like nidus3D out of Kingston, Ontario. And, also as a pre-budget announcement, 600 million dollars has been earmarked for this per “Millions In Funding Coming For Homebuilding Innovation Initiatives, Trudeau Says“.

Also, in the nick of time, the “Federal Government Plans To Lease Public Lands For Construction Through New Housing Strategy

 

The Federal Government just released this document which is not limited to creating rental housing but addresses many shelter issues. Check it out  –> Solving the Housing Crisis: Canada’s Housing Plan

Now, let’s see how much of this is effective, ok?

 

I also want to acknowledge RBC who recently published “The Great Rebuild: Seven Ways To Fix Canada’s Housing Shortage” because it comes at an important time. The housing crisis is a complex matter and few pieces are published that endeavour to cover as many of the facets as this does. It’s a worthy read.

 

As a realtor who takes into account every type of shelter typology, part of knowing how to navigate a challenging real estate market is understanding the economic forces at play – and how they may shape all markets. With decades of experience, through all market conditions, I have a unique perspective to offer. I’m here to help!

 


 

Here are some of our past blogs on our housing crisis:

How CMHC & The Federal Government Are Trying To Manage Canada’s Housing Crisis

How Canada’s 3 Levels Of Government Shape Housing Policy & Programs

Dear Urbaneer: What’s Being Done To Create Affordable Housing In Toronto?

Dear Urbaneer: How Can Minimalism Help With Affordability & Sustainability In Housing?

 

 

 

 


 

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Since 1989, I’ve steered my career through a real estate market crash and burn; survived a slow painful cross-country recession; completed an M.E.S. graduate degree from York University called ‘Planning Housing Environments’; executed the concept, sales & marketing of multiple new condo and vintage loft conversions; and guided hundreds of clients through the purchase and sale of hundreds of freehold and condominium dwellings across the original City of Toronto. From a gritty port industrial city into a glittering post-industrial global centre, I’ve navigated the ebbs and flows of a property market as a consistent Top Producer. And I remain as passionate about it today as when I started.

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Thanks for reading!

 

-The Urbaneer Team

Steven Fudge, Sales Representative
& The Innovative Urbaneer Team
Bosley Real Estate Ltd., Brokerage – (416) 322-800

 

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