Canada is seeing weak home sales, slowing population growth, and economic uncertainty. It’s the perfect recipe for… higher rental prices? A new report shows that rental prices made a sharp jump in March, amplifying already accelerated growth in small cities and traditionally cheaper purpose-built rentals. It’s a little weird to see Toronto and Halifax rental prices now within spitting distance of each other, but it resembles a concept called bubble contagion that impacted home prices a few years ago. Poor policy decisions didn’t just prevent the contagion from fully correcting, but extended the market inefficiencies to rental prices.
Canadian Rental Prices Resume Climbing, Affordable Options Narrow
Canadian rental prices weren’t stagnating, they were just on a winter vacation. A new report from rentals.ca shows the average asking price for an apartment rental climbed 1.5% in March to $2,119 per month. It was the first increase in six months, but enough to reverse the prior 4-months of affordability improvements.
One of the most critical issues in the data is the narrowing between private and purpose-built rents. Since 2020, the average monthly rents climbed 17.8% (+$322) to $2,119 in March. Purpose-built rentals, traditionally much more affordable, climbed 35.5% (+$547) to $2,086 over the same period.
The gap between the two is now almost insignificant. Back in 2020, it cost roughly 16.8% (+$258) more to rent a condo apartment than a purpose-built rental unit. The latter rose so aggressively since then, that a condo apartment is only 1.6% ($33) more expensive than a purpose-built rental. Despite economies of scale producing lower operating costs for purpose-built apartments, those savings are no longer being passed to end-users.
This makes sense to any business, finance, or real estate professional. After market prices disconnect from input costs, lowering input costs increases profits. The market price is still the market price, and input costs are still disconnected.
To be blunt, policymakers’ recent efforts to incentivize institutional investment in purpose-built rentals doesn’t make sense if the goal is improved affordability. It contributes to rental affordability as much as your morning Starbucks run does. However, they nailed it if the goal was more profits for institutional investors.
But wait, there’s more!
Canada’s Big Cities See Rent Stagnate, Small Cities Surge & Close Gap
The Great Rental Price Flattening has also occurred when it comes to location. Smaller cities have seen a sharp increase in the cost of rents, while the country’s largest cities continued to move lower. The Big Three are all going through an unusually long losing streak.
Toronto’s average asking rent fell to $2,590 in March, down 6.9% compared to last year. That marks a 32-month low for prices, after 14 consecutive months of declines.
Vancouver did slightly worse than Toronto, despite home sales being generally more resilient. Rents came in at $2,822 in March, down 5.7% from last year. It was the 16th month of price declines, and marked a 35-month low.
Similar trends were also observed in Montreal, and Calgary. Montreal fell to $1,968 in March, down 4% from last year following 8 consecutive months of declines. Calgary fell 7.8% to $1,915 over the same period, hitting a two-year low and earning the biggest drop across Canada.
While major cities have seen a pullback, small city rents have seen astronomical gains. Contrasting that with Halifax emphasizes the distortion in the rest of the country. Back in 2020, a 1-bedroom in Toronto cost 74% more than one in Halifax. As of last month, prices in Halifax climbed so aggressively that Toronto’s average 1-bedroom is just 15% more expensive.
Not from Canada and wondering where Halifax is? If you were in Toronto, you would walk 500 miles and then walk 500 more, just to be the man who walked 1,000 miles to fall down at a door still roughly 200 miles away from Halifax. It’s a lovely place, but at less than 10% of Toronto’s GDP it’s a little more than just 5 years behind.
The Canadian Real Estate Bubble Contagion Spread To Rents
Starting to think there’s no refuge when it comes to a more affordable life in Canada? You’re onto something. Despite significantly lower operating costs, purpose-built rental prices are now similar to private apartments. Rents are rising in small cities and stagnating in big ones, narrowing the gap between major and minor economic regions. It’s starting to feel like the cost of living only has minor degrees of variation from Victoria to Halifax, despite very different lifestyles, no?
The issue resembles what experts refer to as bubble contagion. This is when a bubble becomes so large that it spreads like wildfire. Affordable regions see prices surge while expensive regions stagnate as they run out of deep-pocketed households.
We discussed this back in 2022 when home prices in distant suburbs rose much faster than the cities they surrounded. Buyers dismissed any value derived from the proximity to amenities, and scrambled to buy whatever they could. They maxed out the excessively cheap credit and leverage that persisted just a little too long. The Bank of Canada (BoC) warned these regions are vulnerable to the sharpest corrections. The BIS, a central bank for central banks which was led by the BoC governor at the time, warned that central banks inflated home prices with excessively cheap credit. Whoops.
The trend usually only extends to real estate prices but we’re in a unique situation. Real estate bubbles are a function of inefficient and excessive credit use, and when that corrects, the market does too. It is expected that policymakers will try to extend credit further to save home prices, even though the BoC recently warned they should stop doing exactly that.
What’s not expected is extending the credit bubble to institutions to build rentals. Policymakers aren’t just pumping tens of billions into home buying stimulus, they’re deploying hundreds of billions to backstop purpose-built rental projects. In addition to increasing building costs by inducing non-market demand, this reinforces inefficient rents. Kind of like preventing a home price correction, they’re trying to halt a rental price correction to prevent a reduction of institutional income flows.
Imagine watching very profitable institutions push rents aggressively for years. They hit a wall and suddenly have trouble squeezing higher rents out of consumers, so they have to reduce profits slightly. Any cash flow is usually better than no cash flow, especially when bond payments are due. Finally renters are about to catch a break on their payments!
But hold on. A guy in a suit shows up and says he’s from the Government and he is here to help. He reaches into your wallet, gives half your cash to the institution, and tells them there’s plenty more where that came from—no need to negotiate. After eliminating your negotiating power with the money you pay in taxes, he goes outside and tells everyone he just improved your housing affordability.
In reality, further market inefficiencies were introduced to protect investor revenues. Not mom and pop landlords, but massive institutions run by people who say supervillain-like things and not realize it.
The good news is this can’t be extended forever. The risk eventually builds up and blows, with the fallout largely dependent on how much voters are willing to gamble. The bad news is, we underestimate just how predatory policymakers can be, and while it doesn’t last forever the distortions can hurt a generation for its whole lifetime.
People think that politicians are ideologically-driven crazy people. I wish they made polticians with ideals, even if they weren’t mine.
These guys are much worse once you realize that infrastructure just means potential taxpayer revenue for private companies.
– immigration was to drive credit ratings, increase debt service capacity of the country, and drive infrastructure demand
– massive debt taken out and GIVEN to institutional investors to build infrastructure
– green bonds weren’t about the environment, it was provide taxpayer subsidized funding for infrastructure projects
– most scandals? Institutional investors involved in infrastructure
– SNC? FFS
– Ford’s tunnel to nowhere? Infrastructure
– Ontario Place’s bajillion dollar parking lot? Infrastructure
I’m far from a socialist, but back when the government actually did these things we got a lot more value because the minor amount of waste created with pensions and unions was a drop in the bucket compared to the private profits they’re looting.
IIRC Canada tried to pull this PPP scam on Africa and Academics called them out, so now they’re just doing it here.
Liberals complain that Harris privatization caused Walkerton but they have no comment on the PPP projects that are doing exactly the same thing. “it’s a good thing actually because…” clown show.
At the root here is the fact that when everyone is just surviving, they’ll only think of themselves. There’s no consideration for the greater society because that narrative is abused so frequently.
Rents are bond payments is an interesting way to put it. Mortgage payments used to be bond payments, so how do you grow the lending businesses if your customer can no longer afford to buy? You collect their rent.
In theory I like the concept of the CMHC. In reality it’s been captured solely to drum up institutional investment. Shut it down and go to market. It’s not like the gov won’t backstop it anyway. The difference is the person in charge of regulating it won’t also be the person directing it.
I understand all the words but have no clue what it ‘all’ means! Can someone say in direct sentences please: Is the BOC corrupt? Are all banks corrupt? Is the government (Feds, Prov and local) complicit? Are the people in power just shafting the average man?
Small landlords, with no immediate administrative overhead, have long pushed rent prices down. With extreme risk renting only a few units out, small landlords are abandoning the market in droves, leaving only institutional investors who only do “cost + profit” models.
It didn’t sound like a bubble as I understand it. Bubbles are irrational gains and they generally last a limited amount of time. Vancouver and Toronto have been in bubble territory waiting to burst according to commentators for close to 20 years. That’s not a bubble. It seems to me, and I’m not an expert, that it is all related to supply and demand. And I asked myself how does Toronto still have a shortage when the crane index, the number of cranes in a city, for Toronto is still very high and has been, to the best of my knowledge, for a very long time. Perhaps the crane index is invalid. Perhaps it’s that all of the immigrants come to the greater Toronto area first, greater Vancouver area out west. But now that things are so bad and unaffordable with no end in sight, and I’ll speak to Toronto because it’s where I live, so people are moving away from the city, but those places don’t have capacity either. I haven’t heard any plans or proposals that would correct any of these problems. All I hear are proposals and then expert saying that won’t work. Well what will work? I reserve the right to judge what an expert says will work, because they sometimes make proposals that takes things in a direction people don’t want it to go… A downgrading of expectations. “Here you’ll be stuck in your 500 ft² unit and that’s just the way it has to be”. Developers are constantly complaining, yet I think they’re all in the 1%. I don’t have the answers but we have to be able to do better than we’re doing. There have to be more good and creative solutions.
Some say build new homes like did post war , small affordable homes. I suggest they build slightly larger homes with built in apartment/inlaw suit. With seperate entrance. I would also designate these new builds to be sold to first time buyers only. This would not only give them a n affordable option to own a home (with rental income) but also provide some relief in the rental market .
What is being described here is a simple fact that a modern monetary system must be regulated to protect consumers, and not banks and investors.
Even adam smith noted that inelastic demand for housing, food, heat and credit would completely wipe out any bekefits of supply and demand to regulate an economy, because the demand for certaon things doesnt change witj price efficiently.
In plain english, if you allow banks, landlords and builders to set prices, particilarly using credit, the prices will eventually consume all other spending.
This means that when we start out with a healthy consuker budget of 1/3 of income for housing and heat, 1/3 for food, transit, clothes 1/3 for taxes which is a sustainable budget, if housing prices rise and credit is used to make up the difference we can quickly see housing at 50% or more.
This is important because this is an inefficient use of resources. We arent investing in making stuffnto sell, but just interest, profits and basically the same housing as before.
To see economic growth we need exports, primary industries, and caputal investment. Housing, banling are not in any way ‘productive’ because they are mainly a function kf rising prices for the same asset, not net new production. Even when built, if all we produce is houses for people to live in, where will we get the money to buy cars, oil, phones, and so on.
Finally we have the rapidly increasing issue of interest as a part of our gdp. Interest is also non productive, and is actually a parasite on economic growth. If we borrow to build a pipeline or a factory, the roi may be justifiable, but to build houses? So whe we are paying 20-30% of our incokes in interest, this is just a scam to transfer wealth from the.middle and poor to the wealthy. Even worse the banks and their investors gwnerally dont add anh of their own capital to create these loans, using a fiat from government to create it on the basis we will pay it back?
So effectively tge trudeau government has created a system of financial fuedaliam, disguised as home ownership. The serfs pay much of their income to.pay interest for the govt, corpirations and themselves, which effecticely trnasfers the wealth to the nobility.
Even worse they aee now extending that to the poor via rent.
The big concern is ws have had a govt fhat instead of regulating banks, has spent the last 4 years removing risk and putting it on the taxpayer. This ridiculous supply argument has seen even more govt money dumped on the.people who should be facing the bubble bursting, and theeefore exacerbating rhs problem. So we need a new goct that will stop subsidizing banks and work for us.