Rental construction needs to double to satisfy demand

The Canada Mortgage and Housing Corporation (CMHC) recently released the results of its Rental Market Survey, and Urbanation, the Greater Toronto Area’s (GTA) source for condo market intelligence, quickly published a response.

Basically, Urbanation was not shocked by the drop in vacancy rate and they also went to great lengths to explain that condo investors can not fill in the gap between the strong rental demand and low supply of purpose-built rental units (primary market).

The demand for rental is so strong that there needs to be an 82% increase in primary units to get back to the 20-year average of a 2.1% vacancy rate. There was an 8,485 increase in primary units, which is 44% lower than the 15,288 increase in 2016.

There was also a slowdown in condo completions, partially due to a lack of condo investor growth. There was a 5,908 unit increase in the condo market, down 59%, which is significant considering the rental market relied on an annual increase of 14,000 units since 2013.

According to the 2016 Census, rental demand is its highest in 25 years. Though condo development is reaching record levels and condo investors have represented a 94% increase in rental units in the last decade, it’s still not enough.

So, what’s the greatest risk to rental supply? Resale prices surged this year, reaching a 30% year-over-year increase in the middle of 2017. This discourages some condo investors from buying resale because they won’t be able to rent it out for enough to make a profit.

We’re seeing price increases in the pre-construction market too. The average price of a new condo unit in the GTA as of the end of October was more than $677,000. Many investors believe it is too expensive to generate rental income. With rent control thrown into the mix, even more investors are scared off.

That said, Urbanation believes long-term investors should be encouraged by average monthly rent growth. The average has gone up 10% to $2,078, and if the market remains tight, rent might continue to rise. That’s not great news for tenants, but if investors aren’t buying, than the market will be even tighter.

Urbanation says rental construction needs to at least double to satisfy demand!