Rental housing construction in Canada has accelerated significantly and is expected to continue growing this year, according to a new report from the Royal Bank of Canada (RBC). However, the report says more supply is needed to fill the backlog of demand.
RBC economist Rachel Battaglia said rental housing starts hit their highest levels in decades in 2022 and 2023, with more than 80,000 new homes being started each year.
That figure is expected to rise further this year thanks to rising demand, as well as new policy measures that are helping property developers tip the scales despite their inflation and labor challenges, Mr.me Battaglia in a report released Wednesday.
Rapid population growth due to immigration and interprovincial migration is increasing demand, she said in an interview.
“We are also seeing a shift toward rental housing in general in Canada. This has been happening since 2011, with more baby boomers entering the rental market and cost pressures putting homeownership out of reach for a growing number of Canadians,” explained Mr.me Battle.
Housing starts are already up 11 per cent from last year, the report says, and planned interest rate cuts by the Bank of Canada should keep that trend on track.
The bulk of housing construction activity comes from new rental housing projects, which have nearly doubled compared to six years ago, writes Mme Battaglia in the report, while single-family home construction has “declined to just three-quarters of the housing starts activity seen in 2017.”
Imbalance
A severe imbalance between the supply and demand for rental housing has caused rental prices to soar, the report said, with annual rent growth in 2023 outpacing both inflation and wage growth. Homeownership rates have declined since their peak in 2011 as home values have soared.
The rental market was “exceptionally tight,” Mr.me Battaglia said the rental vacancy rate fell to a record low of 1.5% last year. That’s well below the 3% rate that would indicate a more balanced rental market, she added.
“By increasing this supply, we hope to see a slight rebalancing of the rental market there,” said Mr.me Battle.
But there is this backlog that we have to take into account. Because over the last few years, the demand for new rental housing has far outpaced additions to the purpose-built rental stock, which means that gap has widened.
Rachel Battaglia, economist at RBC
Demand for rental housing grew more than three times faster than the purpose-built rental stock grew between 2017 and 2023, it said in the report, while second homes and condominiums filled only part of the gap.
“If we look at vacancy rates in the secondary rental market, these rates are even lower than in the primary market, which suggests that Canada’s secondary rental market is very limited in its ability to absorb new rental demand,” Mr.me Battle.
“Crucial” measures
Governments at all levels have responded to this imbalance by changing rules and providing incentives to promote the construction of high-density housing and rental housing, particularly in the last five to seven years.
The federal government’s 2017 National Housing Strategy was “pretty crucial,” Mr.me Battaglia, and the most recent housing plan helps continue that work.
Provinces like Ontario and British Columbia have taken steps of their own, while municipalities like Vancouver and Toronto – the country’s most expensive big cities – have also acted to expand their social housing stock and encourage rental housing development, the report says.
Strong demand for rental housing combined with government support has contributed to a significant increase in rental construction, even as most other types of development projects have stalled, writes Mme Battaglia in the report, adding that the policies of Canada’s latest housing plan should continue this momentum.