Canadian Rental Market Hits 33-Month Low, But Supply Cliff Looms Ahead
Canada's rental landscape is currently experiencing its most favorable conditions in years, with national asking rents declining for nearly a year and a half, reaching a 33-month low. However, this period of relative affordability may be short-lived as experts warn of an impending supply cliff that could reverse recent gains.
Record Construction Meets Falling Rents
Apartment construction has been on a historic run across Canada, with housing starts increasing six percent year-over-year in February to an annualized level of 259,000 units. This surge is primarily driven by unprecedented rental apartment construction, including low-rise apartments, multiplexes, row homes, stacked townhouses, and accessory suites. Currently, there are 193,000 units under development nationwide, with another 140,000 units under construction, approximately half of which could enter the rental market.
This construction boom has contributed to falling rental prices, with asking rents in February dropping to an average of $2,030 nationally. For the first time in over six years, this represents just 29 percent of renter household income, falling below the traditional affordability benchmark of 30 percent.
The Looming Supply Cliff
Despite current construction activity, industry experts express concern about future supply. Ben Myers, president of Bullpen Research & Consulting Inc., warns that "we've been talking in the industry about the supply cliff starting in 2028. We will be significantly undersupplying the market. It is inevitable that rents and prices will turn around at that time and go back up."
The problem, according to Tania Bourassa-Ochoa, deputy chief economist at CMHC, is that current construction numbers reflect decisions made one to two years ago when interest rates were declining and demand was strong. "Fast forward a few years and the situation has changed," she notes, describing a potential "effect of taking your foot off the pedal" that could slow development.
Developer Challenges in a Changing Market
Developers face significant challenges in the current environment. Benjamin Tal, deputy chief economist of CIBC World Markets, describes most current apartment projects as "low-hanging fruit" made possible because they had already started or were built on land already owned by developers.
Myers explains that while "every developer is looking at rental, only so many can do it because it has a significant up-front cost." Unlike condo developers who can borrow against deposits and contracts from purchasers, rental developers face more uncertainty. "You can forecast rent, but you are not sure what they are going to be in the future, and you don't know what the rate will be for refinancing your construction loan. There are a lot more unknowns."
Financial wherewithal has become increasingly important, with more developers switching from condominium projects to rental developments. In markets like Toronto, condos often function as quasi-rentals as investors typically rent out units.
The Affordability Paradox
Despite falling rents, affordability remains a concern. Using the traditional formula that rent should not exceed 30 percent of income, many Canadians still find housing expensive. This affordability pressure could make developers skittish even as Canada Mortgage and Housing Corporation continues to emphasize the need for more supply.
The current construction activity represents the most significant period for apartment development in decades, with new units expected to be occupied this year and next, continuing to put downward pressure on rents. However, the long-term outlook suggests this period of improved affordability may be temporary unless construction momentum is maintained.
