The Rise of the Rental Market
This post is written by Trusted Partner, Equiton. To become a contributing editor, please contact our Real Estate Investor Solutions Specialist, David Maxwell at email@example.com.
The number of Canadians choosing to rent rather than buy is increasing. According to a recent report by RBC, Proof Point: Is Canada becoming a nation of renters?, in the last decade, renters have increased three times faster than homeowners, despite two-thirds of Canadian households owning their home. While younger Canadians and urbanites still make up the largest group of renters, the trend has been widespread across age groups and areas.
As affordability pressures, demographic forces, and behavioural preferences drive this change, it will continue to accelerate. Statistics Canada found that the number of households who rent their homes grew by more than 21% between 2011 and 2021. During that same period, the number of households that own their homes grew by just 8%. The decline in homeownership is reflected in the emerging trends in new construction. The fastest growing building type from 2016 to 2021 were apartments in high-rise buildings (five or more storeys), growing over twice as fast as private dwellings, and accounted for 34.4% of dwellings in Canada.
WHAT CAUSED THIS TREND?
Renting and buying both have their advantages. Buying a home isn’t the right choice for everyone.
Lower Upfront Costs
As a renter, you generally need to provide first and last month’s rent when you sign a lease but there’s no down payment needed. Even when renters need to make a security deposit, it’s considerably less than a down payment and the closing costs associated with buying a house. You also don’t have to pay property tax.
A major benefit to renting is that you have greater flexibility where you live. In major urban centres, you generally won’t find single-family homes in the downtown core, but apartment buildings are often well-situated. Renters can live closer to work, avoiding a lengthy commute and affording them a better work-life balance.
Renting gives you the flexibility to relocate without much notice. In Canada, you generally need to give at least 60 days’ notice before the end of the lease, depending on your lease term. Once this notice is given and accepted, all you have to do is plan your move. Homeowners on the other hand have to put their house up for sale and deal with all the associated paperwork and potentially significant expenses that come with selling a home and purchasing a new one. Renters aren’t tied down for the long term.
Maintenance and Repairs
When you rent, maintenance and repairs are the responsibility of the landlord. You can avoid some major and often unexpected repairs like plumbing, heating and cooling, electrical, and appliance breakdowns. You’re also not responsible for lawn maintenance, snow removal or landscaping costs.
Houses don’t generally come with additional amenities. Amenities such as pools, fitness centers, storage areas, gardens, BBQ station, and common rooms can come with apartments at no additional charge to tenants. If a homeowner wanted to have access to amenities such as these, they would likely have to pay out of pocket for installation, maintenance or membership fees. Even condo owners aren’t exempt as these expenses are rolled into their monthly condo fees.
OTHER CONTRIBUTING FACTORS TO THE SHIFT TO RENTING
High Interest Rates
One factor leading many to choose renting is the rising interest rates. As interest rates climb, those looking to purchase homes are waiting longer than usual or choosing not buy at all, which is causing greater demand for rental units. Amidst some of the highest interest rates seen in two decades, mortgage stress test criteria for uninsured mortgages are proving prohibitive for many. With the current prime rate sitting at 6.95% (June 2023), prospective homebuyers could potentially have to qualify at a daunting 8.95% to obtain a mortgage; a staggering increase as compared to those who qualified at 5.25% in 2020 and 2021.
Soaring House Prices
Another factor is the cost of single-family homes. With the average sold prices soaring to $816,720 in February 2022 ($1.3M in the Greater Toronto and Vancouver Areas), single-family homes and their associated mortgages were out of reach for many. At these prices, it takes the typical young adult over 20 years to save up for the down payment (and nothing else) on a modest Toronto-area home as compared to roughly 6 years in the 1970s. Taking average salaries into account, in order for millennials to afford a home in Ontario, “average home prices need to drop by $530,000, more than 60% of the market value last year, for them to afford a mortgage that covers 80% of the value.”
Housing Supply Crisis
Contributing to the perfect storm of unaffordability is the housing supply in Canada. To restore affordability, 5.8M housing units are needed by 2030. At Canada’s current rate of new construction, it’s projected that only 2.3M units will be accomplished within that timeframe. With the demand for housing far exceeding the available and projected supply, multi-residential properties, like apartments, are imperative to support Canada’s growth. In the January edition of the Canadian Mortgage and Housing Corporation’s (CMHC) The Housing Observer, they revealed that, though rental housing supply surged in 2022, demand outpaced growth leaving the national vacancy rate at a near-historic low. They identified several factors that led to this rental demand including higher immigration and net migration, more expensive homeownership and students returning to on-campus learning.
High immigration targets are also supporting rental demand. Most newcomers who come to Canada typically rent for five to ten years after they arrive. According to RBC, “Of the one million recent immigrants (a landed immigrant or permanent resident for five years or less) living in private dwellings, 56% (640,700) were living in rented accommodation in 2018. That’s nearly two-times the national average, leaving immigrants to represent a disproportionately high share of rental households in Canada.” If those statistics hold true, with nearly 1.5 million immigrants expected between 2023-2025, that translates to roughly 840,000 immigrants needing rental housing.
Evolution of Renting
Over the last few years and amid the recent cost- and availability-related factors, the attitude toward renting has shifted. Panelists at a Vancouver Real Estate Forum in April concluded that, “any stigma associated with renting an apartment versus buying a condo in high-cost housing cities has disappeared.” No longer is renting seen as a transitory decision but as the end game. There is an expansive gap between the cost of renting versus owning. Renting is becoming much more sustainable for the long-term. In a 2016 article, Paul Smetanin, CEO of the Canadian Centre for Economic Analysis, says cities with large populations of renters, such as Sydney and Vienna, prove “you don’t have to own your own home in order to have a great home.” It is quickly becoming more acceptable, and even more financially sound, to chose renting rather than buying in any life stage.
APARTMENTS: A SOUND INVESTMENT
With a national vacancy rate for purpose-built apartments of 1.9% in 2022 – the lowest level seen since 2001 – multi-residential apartments have once again demonstrated their status as a profitable investment. The shortage of for-sale inventory is neither an easy nor quick problem to solve. Everyone needs a place to live. With Canada’s population growth and nearly 1.5 million immigrants expected, renting will play a major role in ensuring that Canadians have a roof over their heads. The rise of the rental market is upon us and with attitudes toward renting in all life stages evolving, that’s not expected to change.
Equiton’s ever-growing Apartment Fund specializes in acquiring underperforming and undervalued multi-residential properties and select new developments in Canada and increasing value through active management. Investors get access to the benefits of rental revenue and the growth of the sector without the hassles of building ownership or maintenance. Capitalize on the rise of the rental market for your investment portfolio with Equiton.
IMPORTANT INFORMATION: This communication is for information purposes only and is not, and under no circumstances is to be construed as an invitation to make an investment in a Fund. Investing in a Fund involves risks. Please refer to the Fund’s offering memorandum for a discussion of the risks of investing in a Fund. PAST PERFORMANCE MAY NOT BE REPEATED. Investing in a Fund can involve significant risks and the value of an investment may go down as well as up. There is no guarantee of performance.