Canada’s Rental Housing Shortage: Unlocking Capital to Build More Rental Housing
The lack of rental housing in Canada is a complex, multi-faceted issue. It cannot be solved with one solution.
The Rental Housing Shortage
Nearly 4.4 million homes, or nearly 30% of all households in Canada, are occupied by renters, and the pressure is mounting on them1. New housing is not being built fast enough to meet the increasing demand in Canada's major urban centers and towns, both small and medium-sized, across the country. Decreasing vacancy rates and rising rental prices indicate that demand continues to increase.
- The average rent for all property types across Canada rose 11.1% from August 2021 - August 2022
- In Toronto, Vancouver, and Calgary, rental prices for condos and apartments increased more than 20% year-over-year2
- Toronto - Vacancy rates for purpose-built rentals fell below 2% in Q1 2022, down from 6.4% a year earlier3
- Calgary - The purpose-built apartment vacancy rate dropped to 5.1% in 2021 vs 2020
- Vancouver - The purpose-built rental apartment vacancy rate decreased from 2.6% in 2020 to 1.2% in 20214
Once a lucrative opportunity to get into the housing market, developers are more reluctant to participate in new rental housing projects. Construction is hampered by pandemic-specific challenges such as labour shortages and rising costs of construction materials as suppliers grapple with supply chain issues. High upfront land prices and increasing interest rates are impacting carrying costs, and this is exacerbated by lengthy rezoning/approval timelines and costly supply chain issues. About one-third of Toronto's planned multi-residential complexes have been postponed or cancelled as a result of the slowdown, according to CIBC Capital Markets.
Canada experienced double-digit population growth from 2006 to 2021 - twice the pace of any other G7 country5. This is a trend that is expected to continue as Ottawa commits to welcoming 1.2 million newcomers to the country between 2021 and 2023.
27.3 million people, or nearly three in four Canadians, lived in one of Canada's 41 large urban centres6. Canada’s immigration strategy is poised to promote economic growth and reduce labour shortages. However, amid a housing shortage, the growing number of new Canadians is expected to exacerbate the issue.
The Canada Mortgage Housing Corporation predicts high price levels are projected to continue, putting pressure on the affordability of homeownership7. More strain would subsequently be placed on the rental market as a result. More potential homeowners will continue renting longer, which will result in even lower vacancy rates.
More than two-thirds (69.1%) of condos in Ontario and more than three-quarters (77.1%) of condos in British Columbia are owned by Canadian investors who use the condo as an investment property8. Condominiums often cost less than houses, giving owners the opportunity to participate in the real estate market with a property that builds wealth and produces rental income.
The significance of increasing the availability of rental homes has been highlighted in recent talks about the housing crunch. Canadians may wonder how long they want to wait to enter the real estate market—or even whether they really want to—after trying to determine the best time to buy. Housing options will continue to change over time for many Canadians, including those inside and outside the housing market.
How Interest Rates Impact Canada’s Rental Housing Market
The Canadian government intervened in the free market economy with an "all hands on deck" approach due to the global pandemic with expansionary monetary and fiscal policy intervention. Interest rates were lowered to historically low levels in the early weeks of the epidemic (e.g., 0.25%), followed by multiple hikes in 2022 to 3.25 per cent in September 20229.
For those in the rental market, rising interest rates are causing rental housing prices to shoot up. The rate of economic growth will slow as rates rise. This results in more unemployment and slower pay growth, which when combined with rising mortgage rates will make it harder for people to buy homes.
Recent interest rate hikes are also contributing to a slowdown in the resale housing market, resulting in fewer home sales. Many first-time homebuyers are now opting to stay in the rental market instead of purchasing a new home. Would-be buyers don't seem to benefit from lower pricing because they can no longer obtain loans due to significantly higher interest and qualification rates.
The Bank of Canada started hiking interest rates in March 2022 in response to the highest level of inflation in Canada in almost 40 years. From the standpoint of current homeowners who have variable rate mortgages or will be renewing their mortgages, as well as prospective home-buyers, interest rate policy has a direct impact on the cost of homeownership. For instance, a 2-percentage-point rise in the interest rate would result in a 25% increase in the new mortgage's monthly payment. As a result, demand for rentals is increasing.
How Parvis is Helping Tackle Canada’s Rental Housing Shortage
Investor interest in real estate grew as a result of the pandemic and market volatility. Solid real estate investment prospects that combine liquidity and diversification are becoming more popular among investors seeking protection from the economy's inflationary pressures. With interest rates pushing cap rates higher and values lower as a result of higher financing costs, we anticipate that this market will incentivize investors to further move towards real estate investments as the purpose-built residential rental market heats up.
As a bridge between property developers and real estate investors, Parvis invests capital into communities to build housing, including new developments for rental purposes, which is a challenging segment in Canada. Parvis has paved a path to reimagine the way people access real estate, allowing investors to directly invest in properties on its platform, as well as providing developers with access to financing capital from a much broader pool of investors.
Parvis is able to provide significant value by selecting high-quality projects that are targeting attractive risk-adjusted returns, and allowing investors to choose their investment. The platform matches clients to respective investment recommendations that fit their own personal criteria and goals as they define them. It’s simple, clear, and transparent, making investing in real estate less daunting, and financial futures more secure.
Investing in private residential property on the Parvis platform enables investors to receive passive income through rental revenue in addition to the capital appreciation of real estate investments, while also playing an important role in bolstering the financing and development of rental housing in Canada.
Parvis is building the next generation of real estate investing. Our digital platform democratizes access by bringing quality real estate opportunities to more individuals. Through exclusive access to diverse, high-quality investment projects on the North American market and a user-focused, state-of-the-art platform, Parvis is becoming the go-to marketplace for real estate investing. We are bridging the gap between traditional and digital finance by offering a marketplace that automates compliance tasks, providing in-depth analytics.
1 Government of Canada. (2017). Housing in Canada: Key Results from the 2016 Census (no. 11-001-X). Statistics Canada. www150.statcan.gc.ca/n1/en/daily-quotidien/171025/dq171025c-eng.pdf?st=LeCIEK3y
5 Government of Canada. (2022). Canada Tops G7 Growth Despite Covid. Statistics Canada. www150.statcan.gc.ca/n1/daily-quotidien/220209/dq220209a-eng.htm
6 Government of Canada. (2022). Canada Tops G7 Growth Despite Covid. Statistics Canada. www150.statcan.gc.ca/n1/daily-quotidien/220209/dq220209a-eng.htm
7 Canada Mortgage Housing Corporation. (2022, June). Canada’s Housing Supply Shortages: Estimating what is needed to solve Canada’s housing affordability crisis by 2030. Retrieved September 5, 2022, from https://assets.cmhc-schl.gc.ca/sites/cmhc/professional/housing-markets-data-and-research/market-reports/housing-market-assessment/2021/housing-market-assessment-2021-09-en.pdf?rev=cd88efa7-53ec-4e31-b9fe-7a3e17a671e3
8 Government of Canada. 2022. To buy or to rent: The housing market continues to be reshaped by several factors as Canadians search for an affordable place to call home. Statistics Canada. https://www150.statcan.gc.ca/n1/daily-quotidien/220921/dq220921b-eng.htm
9 Bank of Canada. (2022b). Economic progress report: Navigating a high inflation environment. https://www.bankofcanada.ca/2022/06/economic-progress-report-navigating-a-high-inflation-environment/