Think house prices are too high? The rental market is even worse – with no relief

Although the dramatic impact of higher lending rates on the housing market has been documented, what is happening in the rental market has received little attention.

As anyone who has signed a lease — or tried to — lately can attest, rents are rising in Canada at an unprecedented rate.

According to data from the rental website and analyzed by data firm Urbanation, the average rent in October in Canada was $1,976, in all types of properties, from bachelor apartments to three bedrooms. That’s an increase of 11.9 percent, ahead of Canadian inflation of 6.9 percent.

The increase isn’t across the country, either, as Atlantic Canada has seen rents rise at a rate of 32.2 percent over the past year. Ontario, British Columbia and Alberta have seen increases of 17.7 per cent, 15.1 per cent and 13.2 per cent respectively.

Other areas experienced an increase slightly below the national average, but just about every market across the country, renters face a big jump in the cost of keeping a roof over their heads.

WATCH | Why rent is getting more expensive in Canada:

Soaring prices leave some renters priced out

While the real estate market may be cooling down, the rental market is on fire, with the price of an average unit increasing by 10 percent compared to last year. It has left many renters struggling to find suitable housing.

Calgarian Kellie Knight knows this well. He rents a two-bedroom unit in the city for $2,200 a month. That’s a jump of about $500 compared to what he paid for the same unit before the pandemic. And it’s bad enough that her rent is now eating up about half her monthly income — more than most financial experts recommend.

“I was surprised how much the price went up and very quickly had to restructure my budget for rent today,” he told CBC News in an interview. “When you’re spending more than half of your monthly salary on rent, you’re not saving anything for a down payment.”

Yet he was happy to sign up for a two-year lease just to lock in that price, as it gave him a reprieve from the uncertainty he would face if he had to move.

“I moved here from Los Angeles, and if you had told me at the time that I would be paying LA rent prices in Calgary, I would have thought you were delusional,” she says.

Kellie Knight rents two rooms in Calgary for $2,200 a month. He said he’s been surprised by how quickly rents have gone up in the city lately. (Rebecca Kelly/CBC)

Supply and demand balance

Usually, a slowing housing market can be good news for renters, as landlords may be more eager to find good tenants. But that’s not happening now for reasons that Canadians have become all too familiar with during the pandemic: supply and demand.

“Interest rates are actually working to drive up rental inflation because a lot of people aren’t buying, so they’re renting more,” said CIBC economist Benjamin Tal.

People who would normally prefer to own themselves find themselves priced out of the market by higher loan rates, which causes them to enter or stay in the rental market.

“Normally they will leave the rental market [and] become homeowners,” Tal said. “But if they don’t move out of their apartments, they will occupy the available supply… it’s like a new demand.”

When demand increases, it is often met with a corresponding increase in supply, but that is not happening now because builders and owners are afraid of the risks.

“Developers are canceling projects because of construction costs,” Tal said. “Investors, due to high interest rates, do not invest in real estate anymore.”

Tal says before the recent real estate slowdown, about half of the new condominium units in Toronto were owned by investors. Most of them are rented out, but the sudden increase in mortgage rates on those units now makes them unprofitable, so investors are selling them – often to people who plan to live there.

“Higher interest rates reduce the incentive to invest in real estate, especially in the condo space,” he said. “So if you don’t own that unit, that’s a factor in the remaining rental costs.”

Faced with higher mortgage costs and lower prices, investors essentially have two options: sell and take units off the market, or increase rents. And other options are good news for renters.

Charlene Irwin has listed her Thornhill, Ont., rental property for sale. He wants to sell before he has to renew his mortgage in December and pay higher interest rates that he says will leave him without a profit. (KBK)

Landlords are not motivated to maintain rental shares

Charlene Irwin was the landlord in the scenario Tal described.

He owns a condo unit in the suburb of Thornhill, just north of Toronto, which he rents out to pay the bills. But his mortgage is set to expire in December and, based on the new rates, his payments will likely double – and that’s not even factoring in things like condo fees and other ancillary fees.

“Even if I rent the unit for $3,000 a month, which I probably will, there’s no profit,” he told CBC News in an interview.

Even if he manages to break even on paper, Irwin says it’s not worth the risk that the tenant will leave him in the lurch and not pay rent for up to a year while he goes through the eviction process.

Irwin hopes to sell his unit before the new mortgage rates kick in next month, but so far he hasn’t been able to find a buyer at the asking price.

“When you’re talking about a situation like mine, where there’s no profit margin, then what’s the motivation to keep rental stock in Ontario?”

Renter Hannah MacDonald faces a 22 percent increase in rent this year (Hannah MacDonald)

The impact of rent control

A rapid escalation in rents is happening almost everywhere in the country.

Hannah MacDonald, a student at Dalhousie University in Halifax, shares a house with four other roommates. They are currently paying $2,700 a month, but their landlord recently informed them that he plans to raise the rent by 22 percent, to $3,300, when their lease expires in May.

“We’re basically left scrambling right now because it’s just not in our budget as a full-time student,” she told CBC News. He said they had two months to decide whether to give notice and move, but his initial inquiries about alternatives indicated there were very few.

“There are like zero vacancies right now, because everything is being snapped up so fast and people are basically desperate at this point,” he said.

“We are kind of stuck between a rock and a hard place at the moment.”

Halifax has a shape rent control in places where the caps increase in two percent per year in most cases, but MacDonald is not sure about her condition qualifies.

A spokesperson for the provincial government told CBC News that while they don’t know the specific case, in general, anyone who is a long-term renter, which McDonald and his roommate was, would be covered by the cap.

“The rent cap applies to tenants who have a residential lease…

Tenants often clamor for rent control, and while that may help on an individual level, Tal said that rent actually makes the overall rental picture worse because it reduces the incentive to build more units.

Tenant rights advocates argue that rent control is needed more than ever, due to the specter of high inflation. Even where there is, there is a gap. In Ontario, for example, most landlords are allowed to raise rents without special permission from the provincial Landlord and Tenant Board ie. in 2023 it will change to +2.5%..

But that only applies to units that have been occupied, while vacant units can be rented for an amount to be set by the landlord. “Over the past five years, we’ve seen apartments in our building double in rent with minimal increases,” said the Toronto tenant rights lawyer. Shelly Dunphy says. “We see apartments sitting empty for months because families simply can’t afford to pay.”

Tal said rent control laws could make it easier for older buildings or with existing tenants, but he said a blanket cap on rent increases would make the problem worse. “We need more supply, not less supply – and rent control can achieve the opposite.”

By implementing hard caps on the increase in rent, Tal said, “You are protecting current tenants at the expense of future tenants.”

Given the lead time in building new projects and the red tape involved in breaking them, Tal said he doesn’t see the situation resolving itself anytime soon.

Change is needed in the mentality around renting

But beyond the real logistical issues facing the Canadian rental market, the biggest one may be psychological.

“We need to create a situation where, if you’re 35 years old, you’re married, you have two kids and you’re renting, there’s nothing wrong with you,” Tal said. “That’s the mentality we need to develop in this country — like in places like Manhattan, Berlin, London.”

The federal government recently announced aggressive new immigration targets that could soon see up to half a million new skilled workers come to Canada every year – a development Tal said could be a boon for Canada’s economy.

But unless the problem with the real estate market is resolved, Tal said it will all be for naught.

“We take for granted that immigrants will come, but if they can’t afford to live in Toronto, Vancouver and many other cities because rents are going up and house prices are going up, they won’t come,” he said.

“We are facing an affordability crisis, [and rent] must be part of the solution.”

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