Navigating Canada’s Housing Crunch: Supply, Demand, and Investment Outlook

Canada is currently experiencing a period of unprecedented population expansion, fueled by robust immigration targets and a significant influx of international students. This remarkable growth trajectory is poised to continue, setting new records for newcomers to the country. While a testament to Canada’s appeal as a global destination, this demographic shift places immense pressure on an already strained national housing market. Major urban centers, including Toronto, Vancouver, and Montreal, which serve as primary hubs for new arrivals, are at the forefront of this challenge, facing escalating demand that exacerbates existing housing supply shortages.

The Surging Demand in Canada’s Housing Market

The consistent increase in Canada’s population, driven by a strategic national immigration policy and a strong international student program, creates a foundational, persistent demand for housing across the country. Each new resident, whether a permanent immigrant or a temporary student, requires a place to live, contributing to a robust and ongoing stream of housing demand that experts anticipate will persist for many years to come.

This rapid expansion has highlighted a critical long-term issue: Canada’s housing supply has historically lagged behind that of its G7 counterparts. For an extended period, the nation has been significantly under-built on a per-capita basis, creating a substantial imbalance between the available housing stock and the needs of its growing populace. The addition of an ambitious immigration strategy, while economically beneficial, inevitably intensifies this pre-existing supply-demand gap, particularly within the rental sector where immediate housing solutions are often sought by newcomers.

Developers Grapple with Supply Challenges Amidst High Demand

In this high-demand environment, the need for rental housing has reached an all-time high. Developers across the country are actively responding to this urgent call, striving to deliver purpose-built rental units to alleviate the pressure. However, their efforts are frequently met with a complex array of challenges that complicate and often delay the construction process.

Ambitious Development Pipelines Offer Hope

Leading real estate firms are committing substantial resources to address the housing crisis. Michael Tsourounis, Managing Partner and Head of Real Estate at Hazelview Investments, a prominent Toronto-based owner, developer, and manager of global real estate investments, exemplifies this commitment. Hazelview boasts an impressive development pipeline of over 21,000 new rental homes slated for the coming years, in addition to its current portfolio of approximately 24,000 apartments across Canada.

Tsourounis highlights the strategic geographical reach of their projects: “We have a clear development pipeline across the country in most major markets, including Halifax, the Greater Toronto Area, Calgary, and Montreal… we identify sites that we believe are excellent long-term rental investments.” He emphasizes Hazelview’s role in the solution, stating, “We feel we’re part of the solution to help solve the supply/demand imbalance that we have currently in the housing market.”

Currently, Hazelview has four major projects actively under construction. These include a two-tower site in Halifax, which will add over 500 units to the city’s housing stock, alongside two master-planned communities in Toronto totaling nearly 1,000 units. A standalone tower in midtown Toronto, comprising approximately 330 units, further contributes to their robust construction schedule. Tsourounis notes, “We have a good pipeline of stuff in construction and some completed construction over the past 12 months that is currently going through lease-up and stabilization stage right now.” This ongoing activity reflects a sustained effort to bring new rental supply to market, even as the complexities of development persist.

Navigating Economic Headwinds and Investment Requirements

While development pipelines are robust, the actual timeline for breaking ground and completing projects is heavily influenced by a confluence of economic factors and municipal processes. Tsourounis explains that the 21,000-unit pipeline represents a full range of potential projects, but the speed at which they transition from plans to physical structures hinges on prevailing economic conditions. A critical prerequisite for building multi-family housing is substantial investment in the sector.

Developers require economic conditions that promise a suitable return for investors, encouraging them to commit capital to rental housing strategies. Several market factors interact to determine the pace of production, including interest rates, inflation, and the overall stability of the financial markets. The need for sustained, attractive returns is paramount for mobilizing the significant capital required for large-scale housing projects, making investor confidence a key determinant of construction timelines.

Deep Dive into Development Obstacles: A Multifaceted Challenge

Beyond the fundamental demand, developers face numerous formidable challenges that impede the timely and cost-effective construction of new housing units. These obstacles range from bureaucratic hurdles and financing bottlenecks to rising construction expenses and critical labor shortages, collectively creating a complex environment for housing providers.

Regulatory Delays and the CMHC Backlog

One significant impediment is the approval cycle itself, often characterized by lengthy and unpredictable timelines. Kendal Harazny, Principal of Wexford Developments in Calgary, illustrates this challenge. Wexford has projects underway in Victoria, is preparing to break ground in Kelowna, and recently completed a fully leased 61-unit rental building in Calgary. Their 164-unit project in McKinley Beach, Kelowna, has all necessary permits in place and is ready for construction.

However, a critical bottleneck for Wexford, and indeed for many multi-family rental developers across Canada, lies with the Canada Mortgage and Housing Corporation (CMHC) insured debt program. Harazny reports a substantial backlog within the CMHC department responsible for this financing. What once took approximately three months to process now often extends to six, nine, or even twelve months, depending on the complexity of the file. “We’re just waiting to break ground as soon as we get that MLI Select (multi-unit mortgage loan insurance) debt,” he explains, highlighting the direct impact of these delays on construction starts.

The CMHC MLI Select program is a cornerstone for financing the majority of apartment buildings in Canada. Harazny emphasizes its indispensability: “The only way to make projects pencil in today is using that debt, largely. So, that program is very backed up which is causing delays in getting more apartments built.” This dependency on a backlogged system means that even well-prepared projects with permits in hand are stalled, directly contributing to the ongoing housing supply crisis. Another Wexford project, a 105-unit building in Esquimalt, British Columbia, is currently under construction and slated for completion in February 2024, demonstrating that some projects do eventually navigate these challenges.

Escalating Costs and Labor Shortages

In addition to regulatory and financing delays, developers grapple with significant cost pressures. Interest rates have tripled over the past year, dramatically increasing the cost of financing during the construction phase and for permanent mortgages on completed buildings. This surge in borrowing costs directly impacts project feasibility and profitability.

Furthermore, construction costs continue their upward trajectory, driven by inflationary pressures on materials, which were exacerbated during the COVID-19 pandemic. The scarcity of skilled trades and labor required for construction further intensifies these cost pressures. This extends beyond on-site trades to include professionals in planning, urban design, and engineering, all of whom are critical to bringing housing projects to fruition. Harazny summarizes the situation, stating, “So, there’s a lot of challenges getting rental housing built right now. The saving grace is that rents continue to trend up and that makes some projects pencil in today.”

However, this saving grace may be temporary. Harazny expresses deep concern that the feasibility of most new rental housing projects is dwindling, leading to a halt in new construction across the country. He warns of a potential “significant spike in rents” in two years if the delivery of new rental buildings dramatically declines. This impending crisis, he argues, demands a concerted effort from both industry and government. “Everyone – the industry and the government – needs to put their heads together to get more rental housing built. And it’s multi-faceted – you can’t just do one thing.” He advocates for faster permits, lower municipal development charges, and a hopeful reduction in future interest rates as crucial steps to boost supply.

The Role of Investors in Canada’s Rental Landscape

Amidst these challenges, individual investors continue to play a crucial role in providing rental housing, particularly in a market where purpose-built rental projects face significant hurdles. Their motivations and strategies are evolving in response to the dynamic economic environment.

Individual Investors vs. Purpose-Built Rentals

A survey released by Royal LePage Canada earlier this year revealed that approximately 4.4 million Canadians own an investment property, with a substantial portion considering further investments. Fifty-one percent of current investors and 23 percent of non-investors are contemplating buying an investment property before 2028. Additionally, 26 percent of all Canadians indicate a likelihood of purchasing an investment property within the next five years. The critical question, however, remains: where will this supply originate?

Phil Soper, President and CEO of Royal LePage, asserts that individual investors continue to be the primary suppliers of rental units in Canada. He observes that the condominium market, in particular, benefits from the acute need for rentals, as investors acquire units specifically for rental purposes. Soper notes, “The smaller entrepreneurial investor has been the primary supplier of rental units in Canada for some time now.”

While there is a growing interest in large-scale, corporate-led purpose-built rental projects, Soper suggests that this remains largely conceptual. “There’s certainly an uptick in interest in purpose-built rental projects that are large in scale with corporations rather than smaller entrepreneurs as landlords, but at this stage, it’s been predominantly talk with only modest growth in substantial purpose-built rental projects.” This underscores the ongoing reliance on individual property owners to fill the gap in rental supply.

The demand for rental housing resonates deeply with the average professional with disposable income, prompting them to consider real estate alongside traditional investment vehicles like TFSAs or RSPs. Soper explains, “They see this long-term trend towards the need for more units and they know we have a shortage of them. Even if people don’t have a degree in economics, they understand when there’s a shortage of things and there’s lots of demand, it’s going to put upward pressure on prices.” This intuitive understanding fuels investment in rental properties across the country, not just in major centers. Advances in technology and property management services also enable investors to purchase and manage properties remotely, expanding their geographic reach to more affordable markets.

Regional Dynamics: A Tale of Two Markets

The Canadian housing market is not monolithic; significant regional disparities in demand, supply, and investment opportunities define its current landscape. While some major centers show signs of softening, others are experiencing unprecedented growth.

Toronto and Vancouver: Buyer’s Market Emerges Amidst Softening Demand

Despite the critical lack of supply in the rental market, Don Kottick, President & CEO of Sotheby’s International Realty Canada, points to a softening of demand for both conventional and luxury condominiums in Canada’s largest metropolitan real estate markets, including Toronto and Vancouver. This paradoxical situation can be attributed to several factors.

Elevated property prices, coupled with significantly higher mortgage rates, have made homeownership increasingly unaffordable. Additionally, an overall increase in carrying costs, such as maintenance fees, utilities, and insurance, has prompted potential buyers and investors to reassess their strategies. Even with high rents and a tight rental market, the financial calculus for condominium investment has shifted. Buyers are now carefully weighing condominium investments against single-family and attached home properties, and even exploring entirely different financial assets.

As a result, Sotheby’s is observing “a gradual build-up of resale and pre-sale condominium inventory in certain neighborhoods.” This shift indicates a nascent buyer’s market, where “savvy buyers and investors” are beginning to find real opportunities. They are already “negotiating on price and conditions with increasing assertiveness, and with increasing success,” signaling a power shift from sellers to buyers in these previously red-hot markets.

Alberta’s Rental Boom: Migration Drives Unprecedented Returns

In stark contrast to Toronto and Vancouver, Alberta’s housing market, particularly its rental sector, is experiencing a remarkable boom. Joel Semmens, a realtor with Re/Max Real Estate (Central) in Calgary, describes the migration into Alberta over the past year as “phenomenal,” directly fueling an intense demand for housing.

Semmens notes a significant influx of investment, primarily from Ontario, over the last two years. “We’ve done quite a bit of small apartment buildings that investors have bought,” he explains, adding that “they’re just buying little condos downtown or (in the) inner city to rent out.” This interprovincial capital flow is a direct response to differing market dynamics.

He highlights the historical context: “Many people bought condominiums in downtown Toronto about 10 years ago, which have doubled and tripled in value. They made a lot of money there.” However, Calgary’s condo market experienced a decade of stagnation, with values actually decreasing. This makes Alberta an attractive proposition for investors seeking growth and better returns. The massive migration into the province has forced newcomers to either buy or rent, causing the rental market to “go bananas.” Consequently, the amount landlords can charge for rent has increased by approximately 35 percent this year alone, offering investors substantial earning potential and making Alberta a hotspot for real estate investment.

Conclusion: Charting the Future of Canada’s Housing Supply

Canada’s housing market stands at a critical juncture, defined by a powerful confluence of record population growth and persistent supply challenges. While the nation’s welcoming immigration policies fuel economic vitality, they simultaneously intensify the demand for housing, particularly in key urban centers. Developers are demonstrating ambitious pipelines for purpose-built rental units, yet their efforts are continually hampered by a complex web of obstacles, including burdensome regulatory approval processes, significant CMHC backlogs, escalating construction costs, rising interest rates, and a scarcity of skilled labor.

Individual investors continue to play a vital role in supplementing the rental supply, often filling gaps where large-scale projects face delays. However, regional markets are diverging, with Toronto and Vancouver showing signs of softening demand due to affordability constraints, while Alberta experiences an unprecedented rental boom fueled by interprovincial migration. Addressing this multifaceted challenge requires a collaborative and comprehensive strategy involving all stakeholders—government at all levels, industry leaders, and financial institutions—to streamline processes, stimulate investment, and ultimately ensure that Canada can provide adequate, affordable housing for all its residents.