Canadian Real Estate Flashes Another Bubble Warning — A Flattening Rental Curve

It’s not just Canadian home prices showing bubbly signs, but rental prices are following too. The cost of renting an apartment in the suburbs is rising much faster than in the city. Economists call this the flattening of the bid-rent curve, or rental gradient. Basically, the discount for being located further from amenities is disappearing. People are so panicked about paying more, they’re willing to pay a premium today, to avoid pain later. When prices move entirely in anticipation of future rises, you’re looking at a bubble.

The Bid-Rent Gradient (or Curve)

In a normal market, the cost of real estate is higher closer to a city’s central business district (CBD). Higher real estate prices tend to be reflected with higher rents as well. This makes sense since the CBD has the highest concentration of amenities. Further from the center generally sees prices reduce, as commute times rise. This is called the bid-rent curve, or rental gradient. A sharp concentration of high prices diffuses and gets lighter as you get further out.

Longer commute times aren’t a monetary cost, but they are an opportunity cost. People without money tend to pay it with their time, in exchange for more space. In healthy markets, households balance their time with the amount of land consumed.

Huge properties are great, but a two-hour commute totally blows chunks. Likewise, small properties are less than ideal, but beats spending hours on TransLink. Interest should be self-balancing in a healthy environment. People trade-off time for cost, and this theory goes back hundreds of years. Farmers were one of the earliest markets studied for commute times and land prices. All of this breaks when people become exuberant though.

When people are exuberant, the primary concern is avoiding being “locked out” of the market. No time for lifestyle balance, because there’s no time. We’re running out of land, remember? Even though these people may not be consciously speculating, they are making speculative assumptions.

No one will be able to buy property outside of a few elite landowners. This is the last chance a generation will be able to buy property without inheritance. Prices won’t fall, so it doesn’t matter how much I pay, because I’ll never be underwater. These are all common assumptions that need to exist in a bubble. Oh, and I almost forgot, the one we’re talking about today — it doesn’t matter where you’re located. Proximity to amenities doesn’t matter, because it’s this or nothing.

One professor of land economics concisely explained, “[in a] bubble, the principal concern is not having any property, pushing up the relative price of low-amenity properties.”

Toronto Rental Prices Are Rising Faster Outside of The City

There’s evidence of prices rising faster in the suburbs for almost every major city. We’ve talked about this trend in home prices, so let’s look at rental prices today. More specifically, one-bedroom leases in the City of Toronto, and the surrounding region.

Over the past year, the further away a rental apartment was located, the more prices increased. Within 5 km of downtown Toronto, the average price fell 12.05% in May, when compared to a year before. As you get further away, we can see the decline in annual price change get smaller. Eventually, it starts to increase consistently after 40 km from the city center. The rapid climb further from the city has rents flattening. Amenities became less important than securing tenure, in a city with rising vacancies.

Toronto Average Rental Price By Distance

The annual percent change for the average absorbed one-bedroom rental lease for May 2021, by distance from city center.

Source: TRREB; Daniel Foch, Broker; Better Dwelling.

The Premium For Being Located Near Amenities Is Shrinking Fast

The discount for being located further away from the city center was decent just a year ago. As you got further away from downtown Toronto, the average price of a one-bedroom fell. Sharply. In May 2020, it was 7.3% cheaper to rent 5 km outside of the city center. It generally got even cheaper as you got further out, dropping 22.8% for people leasing 30 km away. The market reached a peak discount of 31.6% for properties located 60 km away. The discount then shrinks, as you get into a place with specialized inventories.

Toronto Rental Price Discount From City Center

The discount in price for the average one-bedroom rental, compared to renting in the city’s central business district (CBD).

Source: TRREB; Daniel Foch, Broker; Better Dwelling.

Those discounts have significantly flattened over the past year. Last month, the average discount for renting 5 km from the city center was only 3.0% in May 2021, about half that of last year. Locating 30 km from the center only saw an average discount of 9.8% from the center. That’s less than half the size a year before. The peak discount is seen 65 km from the city, and it’s only 15.7% — almost half the 31.6% seen last year, 60 km away. There is a definite flattening of the rental curve.

It’s similar to real estate bubble contagion theory, where bubbles spread to the burbs. Some justify the surge in suburban prices as a temporary work-from-home trend. Though, as previously mentioned, bubble experts still consider a shock-driven bubble to be a bubble. Besides, every market peak sees the bid-rent gradient flatten. Historically, people tend to just really want fresh air during expensive markets. It’s totally not about price either, because they would be fine with a 10 to 20 point drop in value. Oh, you don’t think that can happen? Prices will only go up? Exactly, market assumptions accompany this change in “preference.”

Rent prices are following the path of home prices, demonstrating frothy activity. Flattening of the bid-rent curve was just one of the many oddities seen recently. Rental prices have also increased with rising vacancies. Landlords are capitalizing on the fact people think they’ll be locked out of buying. Keeping properties empty while property values appreciate is another one. Large landlords are hoping rents adjust towards the lofty property prices.

In a bubble, fundamentals don’t matter. Amenities don’t matter. Vacancies don’t matter. The only thing that does is how much the next person is willing to pay.  

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  • GTA Landlord 3 years ago

    This is spillover from the investor bubble IMO. Speculators that have convinced themselves they are landlords are buying at negative cap all over the city.

    They’re subsidizing the rent people pay, because they think the price of appreciation will be much higher than the actual value of the rent they can collect. It’s the definition of a bubble if everyone thinks land values will rise faster than what people can pay, and the people will continue to pay premiums based on just the opinion other people will pay bigger ones to own.

  • Manta 3 years ago

    Well if you compare the increase in home prices vs increase in rent you will find its always been relatively flat. Meaning rent increase compare to prices increase of real estate is at best nominal. Hence, this is not a good metric for home prices. I know people are going to say but investors will need to make income from rent. No, as long as inflation expectations remain high then home prices will always track inflation. Hence in an environment with high inflation expectations rental income is secondary for an investor. Think about it, where are you going to park your millions? Crypto? Crashed. Stocks? Too risky. Bonds? Negative real return.

    There you go, as long as inflation expectations are here there will be increase in real estate prices. This is not just Canada, the whole world is like that.

    • Jessie Cass 3 years ago

      This is literally the dumbest way to compare rent increases. I don’t even know how to unpack it, it’s like you had a stroke halfway through writing it. It’s that non-sensical.

    • Oakville Rob 3 years ago

      I would add real estate to your too-risky list. It goes up and down like everything on your other lists. You have to watch the individual markets.

      • Taco Batista 3 years ago

        Also discounting leverage real estate is just garbage returns to even just holding the S&P500 long… it’s really only the leverage that means anything or it would be worthless. It’s why I think it’s funny when people blame X or Y for housing prices when in reality the concept of a mortgage is what decimated things.

    • JT 3 years ago

      The basis of home prices moving in line with inflation was based on incomes increasing upwards with inflation. What has happened in the last 10 or 15 years is that home prices are moving inversely with the cost of borrowing and not moving in line with increases in income.

      I don’t think we can assume that a rise inflation that will spur an increase in borrowing costs is going to mean increases in home prices.

  • Brad 3 years ago

    Stephen, I really enjoy your blog and articles, oh and can’t forget the Twitter feed. Thanks for producing all this great content.

  • WS 3 years ago

    ” long as inflation expectations are here there will be increase in real estate prices.”

    Inflation will force bond yields higher and higher; at this nose bleed level RE prices, the slightest rate hike will puncture the bubble.

    • Taco Batista 3 years ago

      Slightest hike meaning 225-250+ basis points right? As that’s where the test is set atm.

    • Dar Robbins 3 years ago

      About your comment: Inflation will force bond yields higher and higher

      History is not onside with this.
      During the 70’s, Canada’s highest post war inflationary decade, the bank of Canada initially raised rates in 1974 from 7.5% by 200bp only to reduce them in early in 1975 by the same amount. They raised again twice starting mid 1975 only to ease three time in 1976~77 and returning to the same starting interest rate level.
      All and all, What did the BOC do during Canada’s highest inflationary decade?
      Nothing ! Absolutely Nothing.
      Bank of Canada will inflate its Balance Sheet to the moon to keep rates from rising and creating a depression and unsustainable deficit spending.

  • iver 3 years ago


    people like manta dont know about economics…typical canadians.

  • Herry 3 years ago

    It’s obvious the chinese won’t leave.

    • Pete 3 years ago

      rich won’t leave, not Chinese ( Canadian government fail to tax rich people like in the US; making re speculation not as profitable as in Canada). Canadian re market is going to crash at much higher levels ( history repeats, 1990-91 is going to be repeated again). Rich are going to buy at cheap and sell high ( as always), poor ( stretching out buyers) are going to cry.

      • Don Kwasny 3 years ago

        Taxes in the US are a lot cheaper than in Canada for both rich and poor.

        • Pete 3 years ago

          Over all taxes on your income are lower, 15-20%.
          Property tax? NO!
          Check Zillow, any Toronto size city has much higher property tax. Its very transparent.

    • Manta 3 years ago

      Its not “Chinese” moron, did Chinese print tons of money? Blame the us if you cant afford a place, they are the ones causing this inflation.

  • Kath 3 years ago

    “Longer commute times aren’t a monetary cost, but they are an opportunity cost. ”

    So gas and car repairs are free?

    • Ola Anyanwu 3 years ago

      You can take a bus or train. Or you can walk. You make the decision to spend money to save time, which is how capitalism works.

  • Kim 3 years ago

    Let’s say a couple with pets are renting a semi, have excellent long-term rental history, suddenly get a verbal ‘head’s up’ re: eviction cuz landlord/realtor says he needs to move in due to marriage breakdown, but likely it’s about selling his property at peak or hiking the rent above its huge discount; either way couple is left in a bind as it is the worst time to be left ‘homeless’ facing crazy high rent & house prices in Oakville where Husband (& Georgetown where wife’s, Brother, works who may move in with them + his wife who will be working in Waterloo region) . All carrying large debt but could roll into 1st time mortgage and all four buy a “fixer upper” house together further out even if left with no options; as opposed to paying astronomical rent to someone else. I still am concerned to go ahead because house prices are bound to correct; thus interest rates will go up, prices down. Any advice + how long do you believe this bubble can go on for?

    • Canaduh 3 years ago

      First off, get everything in writing and read the law inside and out. Know your rights and be ready to defend them. This sounds like a scare tactic to make you the first mover. Secondly, supposing you were forced to move after proper notice in writing, etc, you have a coin toss here for outcomes. If you purchase you face a lot of unknowns, where as if you are OK continuing to rent for a while with the thought that we could be at or near the top, it could pay off if you’re on a position to purchase and the market heads that way. Alfernatively, you pay a little more in rent per month (or a lot) but you have flexibility. Think of your rental history as an asset, and your flexibility as an asset. Good tenants are not the norm, and large mortgages are a debt obligation that you currently do not have. You have two assets right now that you’re not properly pricing. Many people are stuck in a 25+ year obligation with a hope of price appreciation and no flexibility. The worst thing you can do is be forced into a lifestyle situation that doesn’t work for you (EG: purchasing now and entering a complex legal setup for ownership.) This market is unsustainable but it could go on for a while. The longer it goes on the worse our country is long-term, regardless of what reasons for sustainability start to sound plausible now (there’s always a reason for everything in a bubble, especially one that has gone on as long as this one has.) Make a decision you can live with for at least half a decade without looking back and feeling like someone forced your hand. You can’t tell the future but you can protect your downside risk in a logical way. Good luck.

  • Juan in a Million 3 years ago

    Just started reading this site more regularly, and it just seems very bearish on the housing market.

    With the impending rate hikes both here and in the US, yes it will impact housing but to an extent where the bubble pops? I don’t think so. We’ll see a price correction, 5-15%, for a year and then everyone is going to pile back into the market.

    • RW 3 years ago

      Most people have no idea what bears mean. “we’ll see a price correction of 15%.” That would crater the economy. People tend to view themselves as more rational, and other peopel are on the extreme side.

      In reality, if you read the articles carefully, you realize these are banks and economists that are more bearish. Mass media is trained to humanize bad news, by making people feel like everything is going to be okay.

      Better Dwelling: Prices are forecat to fall 10%.
      MSM: Prices are forecast to fall only 10%, but everyone will be fine according to a Realtor we’re going to speak to now.

      Better Dwelling isn’t negative in their tone, they just don’t humanize because it’s data first. Bloomberg also reads like that.

      • iver 3 years ago

        ever heard of inflation? endless money printing? mortgages funded in the bond market?

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