Toronto sees the lowest percentage of vacant rental housing
Rental situation
What is happening in Toronto on the rental housing market that one can speak of a crisis? As noted by the columnist of the publication "Russian Toronto", the answer to this question is that there is a chronic and acute shortage of apartments for rent. Such an important indicator as the vacancy rate currently stands at only 1.1% in Toronto.
The vacancy rate, or percentage of vacant housing, shows the ratio of the number of housing units put on the market for rent to the total number of apartments for rent. If this indicator is within 8-10%, the situation on the rental housing market is considered balanced. If it goes above 10%, it indicates an oversupply; if it falls below 8%, it signals a housing shortage.
Moreover, even 10 years ago, when the vacancy rate in Toronto dropped to 4%, alarm bells were rung and the government was called upon to take measures to stimulate the rental housing market, including simplifying the process of obtaining construction permits, reducing the tax burden on construction companies, simplifying bureaucratic procedures, etc.
However, nothing useful was done over these years. On the contrary, in 2017, the Liberal government introduced populist measures to control rent increases, limiting them to 1.9% per year. These administrative measures, aimed against rental housing owners in favor of tenants, led to the rental housing market shrinking even further.
In addition to the shortage of rental housing in Toronto, high prices are also a major problem, unaffordable for many and consuming the bulk of many tenants' income.
Currently, the average rent for a 2-bedroom apartment in a condominium in Toronto is $2,393 per month, and in a purpose-built rental building it is $1,467 per month. Moreover, in the downtown area, where demand for apartments is highest, rents are significantly higher, sometimes two to three times or more.
High prices are, of course, largely the result of a shortage of apartments for rent – and this is a clear example of how market mechanisms work. However, there are a number of other factors that inevitably lead to rising rents.
Situation with rental housing
Why is there a shortage of rental housing in Toronto? Again, the answer is obvious – because it is not being built. Currently, the rental housing market consists of three separate sectors:
a) apartments in purpose-built rental buildings, owned by one company and entirely designated for rent;
b) apartments in condominiums, owned by private individuals, purchased for personal use but rented out;
c) the sector of single-family homes and townhouses, mainly in the suburbs.
So, the main reason for the shortage of rental housing lies in the shortage of purpose-built rental buildings. This type of housing was actively built from 1960 to 1980, and during this period more than 175,000 apartments were brought into service. Another approximately 70,000 apartments were built before 1960.
These apartments constitute the main stock of rental housing in purpose-built rental buildings. In practice, this is already outdated housing that poorly meets modern standards and is mainly occupied by less affluent tenants.
After 1980, the construction of purpose-built rental buildings slowed down, and since 1980, only 18,000 apartments have been brought into service. Moreover, everything built in the last 15-20 years as rental housing is, by its type, more of a variety of condominiums, with all the signs of expensive housing. And the rent for apartments in them is correspondingly close to the rent for condominium apartments.
Thus, cheap rental housing remains only in purpose-built rental buildings built 50 years ago or more.
The rental market was largely saved by the boom in condominium construction that has been going on in Toronto for the last 20 years. First, people bought apartments there and moved out of purpose-built rental buildings, freeing up space for other tenants. Second, investors bought condominium apartments to rent out, thus forming the rental housing market. At least, for a time, this scheme worked properly.
However, condominium apartment prices have risen very noticeably in recent years, utility costs have increased, and this has all been reflected in rising rents. Moreover, due to rising prices, the number of buyers has begun to decline. This was also facilitated by the adoption in 2017 of measures to limit the purchase of real estate in Toronto by foreigners.
And then there is the factor of AirBnB – those condominium owners who previously rented out apartments on a long-term basis switched to short-term rentals. All together, this led to a shortage of rental housing.
Reasons for the shortage of rental housing and high prices
The two main problems of the rental housing market in Toronto – the shortage of apartments and high prices – are caused by many reasons, including high population growth, especially in the downtown area; rising incomes, including among young professionals; a large influx of foreign students whose parents have money, etc.
However, there are also specific reasons. For example, why purpose-built rental buildings are not being constructed. Obviously, it is more profitable for construction companies to build condominiums, as they receive up to 20-25% of the cost of apartments from buyers even before construction begins, and they get full profit almost immediately after the project is completed, that is, 4-5 years from its start.
At the same time, the payback period for a rental apartment building can be 15 years or longer, especially due to restrictions on rent increases, so builders themselves ignore such projects. There are also not many investors in rental buildings, and for the same reason – this sector is too overregulated, all decisions are made in favor of tenants, and it is easy not only to lose profit but also to incur losses. It is for this reason that many modern rental buildings are built according to condominium templates – if profits are low, such a building can be converted into a condominium and sold.
So the main reason for the catastrophic situation in the rental housing sector, in my opinion, lies in the overregulation of Canadian society and the incompetence of the government, which interferes in market regulation processes. High taxes, constantly rising fees, increases in material and labor costs, as well as the long and expensive process of obtaining construction permits, lead to the cost of building condominiums rising year after year. Accordingly, apartments become more expensive, and to ensure the profitability of renting them out, prices have to be raised, which further fuels the spiral.
If we follow common sense, to solve the problem with rental housing and reduce prices, the government should remove bureaucratic barriers, lower taxes, and provide builders with a preferential regime. However, in practice, everything is done exactly the opposite, which is clearly seen in the example of measures taken by the Liberal government in 2017.
And if private owners of condominium apartments who bought them for rental find ways to evict old tenants and find new ones at higher prices, companies that own rental buildings cannot do this and begin to incur losses. Naturally, there are not many people willing to invest in such a business.
Condominium Market
Currently, only 10.9% of high-rise buildings are built as rental buildings. However, even this statistic is greatly exaggerated. Almost all of these buildings are constructed as condominiums, only the apartments remain in the ownership of the construction company or investor. And nothing prevents selling these apartments as condominiums after construction is completed or 2-3 years after the project is finished – which many do.
For example, the average price per square meter in condominiums rose by 9% in 2018. In 2019, prices are growing more slowly, but still 5-6% growth can be expected. Naturally, against this background, the restriction on rent increases in rental buildings to only 1.9% per year pushes builders to focus only on condominiums.
As I can judge from conversations with employees of development companies, the construction of rental buildings is declared by these companies largely for political reasons, to secure approval for other projects from the Toronto municipality, or to set high rental prices, skim the cream, and after 2-3 years sell the apartments as condominiums. Therefore, as I think, the condominium market will remain the main source of growth in rental housing in Toronto. However, as experience shows, their construction does not keep pace with population growth, and construction volumes are unlikely to increase, rather the opposite.
Real Estate Market Prospects
Despite the fact that everyone has long recognized the housing situation in Toronto as catastrophic, very few practical steps are being taken. More precisely, they are not being taken at all, except for large cash injections into the construction of subsidized housing and forcing builders to transfer part of the apartments under construction to a fund for the poor. There is no talk of any noticeable reduction in the tax burden or any noticeable easing of obtaining construction permits.
What does this mean? I think, at best, in the next 2-3 years, the government may be able to at least keep the vacancy rate at the current level, and even then I am not sure. Rather, we should expect an even greater deterioration of the situation, primarily in the downtown area.
Naturally, this cannot continue for long, and a solution will be found in any case. As I see it, people will move to the suburbs, where the situation with rental housing is incomparably better than in the downtown area – both in terms of housing choice and prices.
This will be facilitated not only by the fact that people will be forced to do this and that it is financially the best option for them. Many companies are now moving their offices from central Toronto to the suburbs, and employees are moving with them. Also, a significant number of companies are increasingly transferring their employees to work from home, which makes life in the suburbs much more attractive. Finally, the active development of suburban commuter connections with the city center, which has been ongoing in recent years, also stimulates the move to the suburbs.
Buying vs. Renting
As a realtor who actively works with newly arriving immigrants and people coming to Toronto to study, I am constantly approached with requests to help rent an apartment. And every time I have to explain what difficulties await them, and that if they are coming for a long term, even for 2-3 years, it is more profitable and easier to buy property in Toronto than to rent an apartment.
Of course, the rise in prices for condominium apartments, which has been observed over the past couple of years, makes investments in this type of housing less profitable. However, apartment prices in Toronto will still rise, albeit at a conservative level of about 5-6% per year. Given this growth, as well as the amount that currently has to be paid for renting an apartment, buying your own apartment makes a lot of sense.
If buying an apartment is not in the plans, then it makes sense to look either for a sublease or for an apartment in an old rental building. In any case, you need to be prepared for the fact that finding housing will be difficult.