Canada’s Rental Market Forecast: Navigating Rising Rents and Shifting Dynamics in 2019

The Canadian rental market is bracing for a significant shift in 2019, with average rents projected to climb by six percent nationwide. This increase is set to be even more pronounced in major urban centers, with Toronto leading the charge at an anticipated 11 percent surge, followed closely by Ottawa at nine percent, and Vancouver at seven percent. These projections, outlined in a comprehensive report by Rentals.ca, underscore a tightening market and escalating demand across the country.

Understanding Current Market Conditions and Seasonal Fluctuations

As of November 2018, the average Canadian rental property listed on Rentals.ca commanded a monthly price of $1,754. This figure, however, represented a 4.4 percent month-over-month decrease. Ben Myers, president of Bullpen Research & Consulting, attributes this dip to typical seasonal patterns. “The dip is not uncommon because fewer people move during the winter months,” Myers explains, highlighting the predictable ebb and flow of the rental market influenced by colder weather and holiday seasons.

Despite these seasonal variations, the underlying trend points toward sustained upward pressure on rental rates, particularly in high-demand areas. The report details a complex interplay of factors contributing to this trend, ranging from new housing developments to broader economic forces and regulatory changes. These elements collectively paint a picture of a rental landscape undergoing rapid transformation, making it crucial for both landlords and tenants to understand the evolving dynamics.

The Driving Forces Behind Toronto’s Soaring Rents

Toronto, Canada’s largest city, remains at the forefront of the rental market surge. Matt Danison, CEO of Rentals.ca, points to the influx of new, high-quality housing as a key factor. “Toronto rents have been pulled up by recently completed high-design condo apartments for lease,” Danison states. These modern units, often featuring premium amenities and desirable locations, allow landlords to command significantly higher prices compared to older, more traditional rental apartments. The premium attached to these contemporary offerings is a major contributor to the city’s elevated average rent.

Beyond the quality of new inventory, a robust increase in demand is also fueling the price escalation. Ben Myers corroborates this, noting that “A surge in demand has also added to increasing rents.” This demand surge is multifaceted, stemming from both local economic conditions and national policies that are subtly reshaping the housing landscape for prospective homeowners.

The Impact of Macroeconomic Factors on Rental Demand

Several significant macroeconomic factors have redirected a substantial portion of the population towards the rental market. The introduction of the mortgage stress test (often referred to as B-20), coupled with a period of higher interest rates and steadily rising home prices, has created formidable barriers to homeownership. Danison observes that these conditions have “dramatically increased the number of people looking for rental accommodation this year.”

The mortgage stress test, designed to ensure borrowers can afford mortgage payments even if interest rates rise, has effectively reduced the purchasing power of many prospective homebuyers. This, combined with the general appreciation of home values, means that a considerable segment of the population, particularly young couples and families, are finding homeownership increasingly out of reach. As a result, they are opting to postpone purchasing a home, which has a direct and significant impact on rental demand.

This shift is clearly reflected in the price of two-bedroom rental units, a popular choice for families. In Toronto, these units are now nearing $2,600 a month, while in Ottawa, they have surpassed $2,000 a month. These figures highlight the immense pressure on the rental supply in these bustling urban centers, where the dream of homeownership is being deferred for many.

Homebuyer Trepidation and Reduced Rental Listings

The sentiment among potential homebuyers, especially in the Greater Toronto Area (GTA), has also played a crucial role. Following a period of “bubble-like conditions” and a subsequent price correction in the GTA housing market last year, there is a palpable sense of “trepidation among potential homebuyers,” Myers notes. This uncertainty has prompted many Torontonians to prioritize leasing over buying, seeking stability in a volatile market.

An interesting consequence of this trepidation is the behavior of existing tenants. To avoid paying the significantly higher market rate for an available unit, many long-term renters are choosing to “stay put.” This phenomenon, while understandable for individual renters, has a broader market impact: it further reduces the number of available rental listings in an already high-demand environment, exacerbating the supply shortage and contributing to the upward spiral of rental costs.

The Supply-Demand Imbalance: A National Challenge

The broader economic landscape of Canada further amplifies the demand for housing. Danison points out that “With near record-high immigration in Canada and record-low unemployment, demand for housing is high.” A growing population, fueled by immigration, combined with a strong job market, naturally leads to an increased need for housing across all segments.

However, this robust demand is not being met by an adequate increase in housing supply, particularly in the ownership market. “Flat or declining resale house prices due to current and expected future credit tightening has deterred many would-be first-time buyers from entering the ownership market,” Danison explains. This creates a significant “demand overflow” that directly impacts the rental market. The critical issue is that “very few Canadian markets are offsetting demand with new rental supply,” leading to a chronic imbalance that underpins the rent increases.

Regional Hotspots: GTA Municipalities Leading the Pack

Within Canada’s most competitive rental markets, several Greater Toronto Area (GTA) municipalities stand out. Suburban markets such as Oakville and Vaughan are registering some of the highest rental rates, reflecting their desirability, access to amenities, and quality of life. Closer to the city core, the former municipalities of Etobicoke, North York, and East York within the 416 area code are experiencing rental rates that rival, and in some cases even surpass, those found in Vancouver – traditionally one of Canada’s most expensive cities. This geographical spread of high rental costs underscores the widespread nature of the housing challenge within the GTA and beyond.

Discrepancies in Rental Market Data: CMHC vs. Rentals.ca

Understanding the true state of the rental market requires a careful look at the data, and here, a notable divergence exists between different reporting agencies. Recently released data from the Canada Mortgage and Housing Corp. (CMHC) indicates that rental apartment vacancy rates are at their lowest level in a decade. This suggests a very tight market from a broad perspective.

However, Rentals.ca offers a different lens through which to view the market. They contend that CMHC rental rates cover the “entire stock of rental apartment units,” which includes units that have been occupied for many years and are subject to varying rent control regulations. In contrast, Rentals.ca data primarily examines “vacated units” – those that have recently become available for rent (the “flow rate”). Rentals.ca argues that this flow rate is a “better indicator of market rents” because it reflects the prices new tenants are actually paying today.

The company further asserts that average market rental rates, as identified by their data, are typically 40 to 60 percent higher than the figures reported by CMHC. This significant disparity can be partially attributed to the impact of rent control policies, which prevent landlords from charging the true current market rate for units that have been continuously occupied by the same tenants.

The Rent Control Conundrum: Intended Effects and Unintended Consequences

Rent control, while designed to protect tenants from excessive rent hikes and promote housing affordability, has complex and sometimes contradictory effects on the rental market. The expansion of rent control in April 2017 in Ontario is cited as partially responsible for the low turnover rate observed in the Toronto area. By limiting the extent to which landlords can raise rents for existing tenants, rent control incentivizes tenants to stay in their current units, even if they might otherwise consider moving.

While this benefits individual tenants by providing stable housing costs, it inadvertently reduces the overall supply of available rental units on the market. With fewer units becoming available for new renters, the competition for the remaining units intensifies, naturally pushing up market rents for those properties that do become vacant. The report indicates that this phenomenon has contributed to annual rent increases of 10 to 15 percent in some buildings in 2018, illustrating a significant unintended consequence of rent control policies – the reduction of rental supply and the subsequent inflation of market rates for newly available units.

Outlook and Implications for the Canadian Rental Market

The forecast for Canada’s rental market in 2019 and beyond signals continued challenges for renters and significant opportunities for landlords, particularly in new, high-quality developments. The convergence of robust demand driven by immigration and employment, coupled with barriers to homeownership and a persistent shortage of new rental supply, creates a fertile ground for rising rents. The nuanced impact of policies like the mortgage stress test and rent control further complicates the market, leading to divergent data and intense competition.

For policymakers, the challenge lies in addressing the fundamental supply-demand imbalance without inadvertently exacerbating other issues. Stimulating the construction of purpose-built rental housing and exploring innovative solutions to enhance housing affordability will be critical in shaping a more sustainable and equitable rental landscape for all Canadians.