Rising Rents: Can Canada Overcome the Rental Crisis?

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Source: Could $5,600 rent be around the corner? New report says it's likely

The Growing Burden on Canadian Renters

Canada is in the midst of a rental housing crisis that shows no signs of slowing. Recent research from the John Molson School of Business at Concordia University sheds light on this worsening situation. The report, AI-Driven Insights into Key Factors Influencing Canada's Rental Market, by Erkan Y?nder, associate professor of Real Estate and Finance, paints a stark picture of rising rents and shrinking vacancy rates, especially in major urban areas like Toronto, Vancouver, Montreal, and Calgary.

With demand for rental properties far outpacing supply, renters are being priced out of the market, and homeownership is becoming increasingly elusive. The following will break down the research findings and present solutions that favour investors in the rental market over traditional homeowners, especially in the current climate where the financial risks of owning a home are growing.

Population Growth and the Surge in Rents

Canada’s population is booming, largely driven by immigration, which in turn is fueling unprecedented demand for rental properties. The research reveals that a 1 percent increase in the share of immigrants in a rental market leads to a 0.6 percent increase in local rents, while non-permanent residents cause rents to jump by 2 percent for every 1 percent increase in their population.

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This surge in demand is pushing vacancy rates to historic lows, with markets in cities like Toronto seeing vacancy rates hovering around just 1 percent. With the supply of rental housing failing to keep up, rents continue to skyrocket, making it increasingly difficult for middle- and lower-income Canadians to find affordable housing.

The False Promise of Increasing Supply

Conventional wisdom suggests that building more housing would alleviate rent pressure. However, Y?nder’s research debunks this assumption. In reality, the pace of new housing development is far below what is needed to meet the demands of a rapidly growing population. The report indicates that rental growth will continue to rise sharply until annual housing completions reach 6 percent of total dwellings. To put this into perspective, Toronto’s current completion rate is nowhere near this figure, and the city would need to multiply its housing development by nearly ten times to meet demand.

For renters, this means they will continue to face an environment of increasing rental prices for the foreseeable future. For homeowners, it means something far worse: the rising cost of homeownership may not be sustainable, particularly as mortgage rates begin to reset at much higher levels, creating financial pressure on many households.

Homeownership: A Growing Risk

For decades, owning a home has been a cornerstone of financial stability for Canadians. However, in the current climate, owner-occupied housing is becoming increasingly risky. The combination of skyrocketing home prices and impending mortgage rate resets is setting the stage for a potential financial disaster for many homeowners.

Mortgage rates that once hovered around 1.95% are expected to reset to over 5% in the next two years, significantly increasing the monthly payments for those with variable-rate mortgages or those renewing their fixed rates. As housing prices remain inflated, overstretched homeowners will face rising mortgage costs, making it harder to keep up with payments. In many cases, this financial strain could force some to sell their homes at a loss, especially if housing prices begin to stagnate or fall as interest rates climb begin to rise again.

Regional Disparities: The Challenge for Homeowners

While some might argue that regional differences in the housing market offer relief in certain areas, the overall trend is clear: housing is becoming increasingly unaffordable across Canada. In urban centers, the combination of low supply and high demand is driving rents higher, while in smaller regions, the pace of development is often too slow to keep up with even moderate population growth.

For current homeowners, this regional disparity offers little solace. The financial pressure created by mortgage resets is a nationwide issue, and those who stretched their finances to buy homes during periods of low interest rates will be hit hardest. Homeownership, once a symbol of financial security, is now becoming a burden for many Canadians.

The Solution: Investing in Purpose-Built Multifamily Rental Apartments

In contrast to the growing risks associated with homeownership, the rental market, particularly purpose-built multifamily rental apartments, offers a far more stable and lucrative investment opportunity. Private real estate investment trusts (REITs) specializing in these properties are poised to benefit from the continuing rental property shortage and Canada’s growing population.

First-Time Homebuyers: A New Path to Real Estate Wealth

For first-time homebuyers, the dream of owning a home is becoming more difficult to achieve. However, rather than rushing into homeownership and risking financial overextension, potential buyers should focus on saving for a down payment while simultaneously investing in purpose-built multifamily rental apartments through private REITs.

This strategy allows first-time buyers to gain exposure to the booming rental market without the immediate pressures of homeownership. Even as rental prices rise, the increasing rental income generated from these REIT investments will, in many cases, cover the higher rental costs faced by those saving for a home. Additionally, by staying out of the volatile homeownership market, first-time buyers can avoid the risks of potential declines in home values, especially as mortgage rates rise and overstretched homeowners begin to feel the financial strain.

Current Homeowners: Time to Sell, Rent, and Invest

For current homeowners, the risks associated with rising mortgage rates and inflated home prices make now an opportune time to sell. By transitioning to renting and investing the proceeds from a home sale into purpose-built multifamily rental apartments through private REITs, homeowners can reduce their financial exposure while benefiting from the strong rental demand driven by immigration and limited rental supply.

While some may worry about higher rental costs after selling their homes, the increase in rental income generated through private REIT investments can, in most cases, offset these expenses. This approach not only reduces the financial risks tied to homeownership but also provides a stable and potentially growing income stream from the rental market.

The Benefits for Investors in Purpose-Built Rentals

Investing in purpose-built multifamily rental apartments through private REITs is a strategy that aligns with the current economic landscape. Homeownership is becoming increasingly risky due to rising interest rates and inflated housing prices. In contrast, the rental market, particularly multifamily rental properties, is positioned for strong growth. These assets benefit from high demand, low vacancy rates, and steady rental income, making them an attractive option for investors seeking to protect and grow their wealth.

By shifting focus from owning homes to investing in rental properties, individuals can capitalize on the long-term trends shaping Canada’s housing market. The growing population, driven by immigration, is creating sustained demand for rental properties, ensuring that multifamily rental apartments will remain a lucrative investment for years to come.

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Disclaimer

The information provided is for educational purposes only and does not constitute financial, investment, legal, real estate, estate planning, wealth planning, financial planning, tax planning, insurance, or any other financial-related advice. It should not be viewed as a recommendation to buy, sell, or hold any financial products or assets. All investments, including stocks, bonds, private equity, private real estate, alternative assets, and precious metals, carry inherent risks, including loss of principal. Markets are unpredictable, and past performance does not guarantee future results. Diversification may reduce risk but does not ensure protection against loss. Real estate and precious metals are subject to market volatility, economic conditions, and illiquidity. Alternative investments, such as private equity, private real estate, and private debt, often involve complex legal structures, longer time horizons, and higher risk, requiring careful consideration and professional advice. Insurance, estate planning, wealth planning, real estate, and tax planning decisions, as well as any financial strategies, must be tailored to the unique circumstances, goals, and risk tolerance of each individual. Tax and legal implications vary by person and jurisdiction, and changes in laws can affect outcomes. It is crucial to consult with licensed financial, legal, tax, insurance, real estate, and mortgage professionals before making decisions. Forward-looking predictions are the opinion of the author and do not constitute financial advice. By using this information, you acknowledge it is general in nature and not a substitute for personalized advice, and you agree that the authors and affiliated entities are not liable for any financial losses or consequences from reliance on the content provided.

Sources:

1. CREA Cuts Housing Market Forecast, Sammy Hudes, The Canadian Press.
2. “Your private asset allocation may have proved its worth last week,” David Kitai, Wealth Professional.

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