Renting in the Greater Toronto Area is becoming increasingly dangerous for many renters.
The average cost of rentals in Toronto. hit $2,898 in Augustwhile across the region prices have generally shot up more than 30 percent in the last two years alone.
It’s not a mystery why. Demand is far outstripping supply, especially when it comes to purpose-built rentals. That is, homes built specifically for stable long-term rental accommodation that are usually professionally managed.
The shortage has been developing for decades. And now a “perfect storm” of factors has made the impact on the rental market and rental prices especially acute, says Shaun Hildebrand, president of real estate data and consulting firm Urbanation.
“There is an intense level of competition among tenants. Demand is growing on several fronts and supply is extremely limited,” he said.
In 2018, Ontario’s Progressive Conservative government took a controversial step to try to address the shortage of purpose-built rentals. Fresh off his election victory, Premier Doug Ford rolled back rent controls on all units built or occupied after November 15 of that year, saying the move would provide “market-based incentives for housing growth.” the offer”.
The government bet that removing rent controls on newer units would encourage developers to build more purpose-built rentals, since the absence of rent controls, at least in theory, makes such projects more financially attractive.
Given the current circumstances for renters in the GTA, it may seem obvious that the government’s reviews of rent control did little to create more supply. But the reality is more complicated.
TO February report from industrial groups and Urbanization found that the changes initially generated more interest from developers in purpose-built rental projects. Between the end of 2018 and the end of 2022, the number of proposed rental units across the GTA nearly tripled from about 40,000 to more than 112,000, although less than a third were approved.
In the city of Toronto specifically, applications for purpose-built rentals more than doubled in 2019 from the previous year. according to a staff report.
Meanwhile, GTA rental starts (the number of units included in projects with shovels in the ground) hit a three-decade high of 5,958 in 2020, according to the industry report. That’s about triple the average pace of rental construction starts over the previous two decades, he said.
But then momentum stalled, and progress has remained largely stagnant ever since.
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The COVID pandemic hit and with it, supply chain constraints. That coincided with an ongoing shortage of skilled labor. Then came progressively higher interest rates. Since 2020, average construction costs have risen four times faster than rents, according to Urbanation.
Many proposed rental projects became commercially unviable very quickly, Hildebrand said.
Unfortunately for tenants, all of this corresponded with an intensification of demand-side pressures.
High interest rates and astronomical home prices have kept potential buyers in the rental market. Those who live in rent-controlled units are reluctant to leave, fearing huge rent increases if they move to a new place. Landlords in Ontario can charge new tenants whatever the market will bear for a previously vacant unit. a practice known as vacancy decontrol.
The GTA remains a top destination for new Canadians and has also seen a post-pandemic influx of international students, two demographic groups that typically rent.
High demand over the next decade
A significant majority of purpose-built rents in the GTA increased more than 40 years ago, according to the Canadian Mortgage and Housing Corporation (CMHC). Construction slowed significantly in the intervening years, and investor-owned condominiums became by far the dominant source of rental supply in the region.
“We are now paying the price of not building,” Steve Pomeroy, a professor at the Canadian Housing Evidence Collaborative at McMaster University, said of the pressures on renters.
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Developments requiring purpose-built rentals in the GTA will grow by about 300,000 units over the next decade. Even in a “fairly optimistic scenario,” the company expects a shortfall of more than 170,000 units over the same period.
It’s worth noting, however, that those projections were made before the federal government announced it would exempt long-term rental construction from the GST, a policy to spur development that has long been favored by housing experts and the industry insiders.
Some GTA developers I have already indicated it The move could move more proposed and stalled rental projects forward. But the region’s existing supply deficit is so substantial that some experts say a Tax cuts alone are unlikely to be a panacea.
One problem is the time scale. Short- and long-term demand is expected to remain high, while rental projects, particularly those with a large and complex footprint, take years to materialize.
“It takes four or five years, at least, to create a unit,” Pomeroy says. “An international student can get on a plane today and arrive tonight or tomorrow. We can’t produce a rental unit that quickly.”
A polarizing policy
Rent control has proven to be a politically divisive issue. Opposition Ontario New Democrats and Liberals criticized Ford’s changes to the province’s rent control policy in 2018, and both parties have said they would reintroduce protections for all rental units if they were in government.
Critics of rent control argue that it deters landlords from both new construction and improvements to existing rental units. Supporters say the benefits to renters, particularly a sense of financial stability, outweigh any potential negative effects.
According to Pomeroy, evidence from past decades presents a contradictory picture. Rollbacks to rent controls in both Ontario and British Columbia in the 1980s and 1990s, for example, did little to boost construction of rental projects, she says.
That said, the lack of purpose-built rental housing in the GTA has quickly reached a critical point, and demand is expected to increase in the coming years. Pomeroy says an ideal approach would limit the volatility of rent increases for uncontrolled units, while ensuring that new projects continue to make financial sense for developers.
“We are undersupplied with purpose-built rentals. And now we have to catch up,” he said.
