(Graphic supplied by Rentals.ca and Bullpen Research)

Average rents across Canada will increase by six per cent in 2019, but the increase could be almost twice that high in Toronto, according to Rentals.ca’s National Rent Report.

“People tend to want to separate the sales market from the rental market, but they’re connected,” said Bullpen Research & Consulting Inc. president Ben Myers, who provided analysis for Rental.ca’s data.

“The government wanted to cool down the pricing market that we had in 2017 in Ontario and put in measures to bring down pricing, which it has, but now it’s caused a spike in rental rates.”

The report says Toronto’s rates could jump as much as 11 per cent, while Ottawa (nine per cent) and Vancouver (seven per cent) are also projected to be above the average.

Rents across Canada

Rentals.ca lists thousands of apartments, condominiums and houses for rent across Canada. Its data shows the average rent for a unit was $1,754 per month in November. It was $1,223 in Edmonton, $1,412 in Montreal, $1,457 in Calgary, $2,033 in Ottawa, $2,352 in Vancouver and $2,369 in Toronto.

Average asking rents in Ontario were 70 per cent higher than in Quebec and 93 per cent higher than in Manitoba, its two neighbouring provinces.

Properties listed for above $5,000 per month, as well as single-room rentals below $500 per month, were excluded from the sampling. Average rents per square foot in November ranged from $1.49 in Saskatchewan to $2.60 in Ontario.

Per-square-foot rents for various housing types across Canada, according to Myers, are: $3.33 for condo units; $1.83 for purpose-built rental units; $1.75 for basement apartments; $1.56 for single-family homes; and $1.34 for townhomes.

“The majority of those condo apartments listed are in Toronto and Vancouver, and a large percentage is in Ottawa, with a little bit in Calgary, Edmonton and Montreal,” said Myers. The housing industry veteran launched his Toronto-based boutique real estate advisory firm at the beginning of 2018.

Stock rents vs. flow rents

While the rental rates reported by the Canada Mortgage and Housing Corporation (CMHC) are “stock” rents, or an average of all of the units in a specific market, the data in the report uses “flow” rents for vacated units which are available that month. This smaller sample of transactions not subject to rent control increase restrictions is more representative of the true market value.

Flow rents are 39 per cent higher than stock rents for studios, 36 per cent higher for one-bedroom units, 46 per cent higher for two-bedroom units and 65 per cent higher for three-bedroom units.

Part of the reason the gap is so high is that CMHC likely collects much more data in small communities with low rental rates. However, rent control has likely kept stock rents below the market rate in several cities.

While substantial rent increases are forecast for Toronto, Ottawa and Vancouver in 2019, increases are expected to be just 0.3 per cent in Edmonton and 1.3 per cent in Montreal.

Economic woes in Alberta brought about by low oil prices are expected to keep immigration and demand low. Having to learn to speak French might put off some people from moving to Quebec, which has a higher percentage of rental units available.

“In Quebec, renting seems to be more of an accepted lifestyle,” said Myers. “There are less people who feel they have to jump into ownership, so there have been a lot more rentals built.”

Impact of rent controls

While rent controls benefit people already in units, they make building purpose-built rentals less attractive to developers. A combination of low supply and low turnover rate has the unintended consequence of making rents go up.

While Ontario’s Liberal government introduced new rent control legislation in April 2017, the Progressive Conservative government which succeeded it recently removed controls on new rental units built after Nov. 15.

Myers said that decision could result in the construction of 500 to 1,000 more purpose-built rental units annually. He thought it would have a larger impact on increasing the number of pre-construction condo investors purchasing units to rent.

“They want to be able to increase their rents by four, five or six per cent after the first or second year to try to get it up to a rate where they can be cash flow-positive. If they have a tenant in there that plans to stay for five years, and their increases are only 1.5 per cent, they may decide that they’re not going to buy a pre-construction condo unit and may put their money somewhere else.”

Rent control legislation is also having an impact in Vancouver, as the British Columbia government has lowered the former allowable rent increase from the rate of inflation plus two per cent to just the rate of inflation.

“There are probably more developers out there wanting to do purpose-built rentals than there are in the Toronto market,” said Myers. “But now they’re looking at it and saying ‘No’ because there’s too much risk.”

Demand is outpacing supply

The national vacancy rate dropped from three per cent in 2017 to 2.4 per cent this year, and is now at its lowest level in 10 years, according to the CMHC. Studio apartments have a vacancy rate of 2.9 per cent, one- and two-bedroom units are at 2.4 per cent, and three-bedroom units are at 1.8 per cent.

National mortgage rule changes which went into effect in 2018, along with rising interest rates, have reduced the credit available for many would-be first-time homebuyers and kept people in the rental market. Surging immigration and a record-low unemployment rate have increased demand for rental units and contributed to major upward pressure on rents.

Myers said 25,000 to 30,000 more purpose-built rental or condo rental units are needed in Toronto to meet demand, but he doesn’t expect to see that happen.

“There aren’t enough sites to do it, there might not be enough workers to deliver the units, and there may not be enough funds in terms of equity and construction to fund all of these deals.”

Things are even more acute when it comes to supplying affordable rentals for low-income earners.

“You just can’t deliver a new project cheaply,” said Myers. “Everyone needs to make a profit along the line.

“Materials aren’t getting any cheaper and fees and interest rates are going up. So, there are a lot of things that are pushing up prices and the rents that are required to make a reasonable profit.”