Top 4 Things to Know About Ontario’s Rental Supply Gap

Ontario’s Rental Supply Gap

A new Urbanation report released in the second quarter of the year reveals just how behind we are when it comes to the GTA's purpose-built and condo rentals.

The Ontario Rental Market Study Update by Urbanation, in partnership with the Federation of Rental-housing of Ontario (FRPO), is a study that has revisited the rental demand and supply outlook in 2022 and beyond.

What is clear is that Canada needs unprecedented construction levels to address the supply issue, which has been slowed by supply chain disruptions exacerbated by the COVID-19 pandemic, lumber costs and inflation. Never before has housing affordability and the need for more housing supply been a more significant issue for the nation, especially for its city centres.

With this said, we've curated the TOP 4 takeaways from the research.

Rental Supply Gap

1. The projected gap between rental housing demand and new supply delivered from purpose-built units and secondary condo rentals will grow to approximately 236,000 units over the next 10 years.

Despite purpose-built rental completions having increased by 65% over the past five years to a more than 30-year high in 2021, vacancy rates in Ontario for purpose-built rentals completed within the last 40 years fell back below a neutral level of 3% last year. Meanwhile, condo rentals, which continued to represent the majority of new rental supply, reported a vacancy rate below 2% for the eighth straight year.

One can't help but wonder what is being done to combat these numbers? Well, months before the 2022 Ontario general election, the Ford Government promised to take immediate action to help combat the housing crisis, a pressing issue for many Canadians. The government called on the housing task force to develop a report; while consulting with municipalities, municipal affairs and the general public to find a solution.

The Housing Affordability Task Force provided an extensive report detailing 55 recommendations that could greatly improve the housing crisis. Of the 55 recommendations, several themes emerged:

  • Build more housing density across the province.
  • End exclusionary municipal rules that slow down new housing.
  • Depoliticize the housing approvals process.
  • Prevent abuse of the housing appeals system.
  • Provide financial support to municipalities that build more housing.

Whether or not this is achievable is another question.

Accepting over 1.2 million immigrants over the next three years

2. Ontario's rental market experienced relatively strong population growth during the pandemic and was not equipped with enough supply, causing further vacancy rate compression and intense upward pressure on rents.

This occurred as employment expanded beyond pre-pandemic levels, population growth moved back above its 10-year average, and homeownership affordability eroded significantly following a more than 40% increase in housing prices over the past two years.

In 2020, Canada announced its commitment to accepting over 1.2 million immigrants over the next three years, and the projection is on pace even with the unexpected COVID-19 pandemic. Under its new Immigration Levels Plan 2022 - 2024, Canada is targeting approximately 432,000 new immigrants this year which would be the highest in history.

Current data shows 1 in 5 newcomers to Canada purchase a home, and the rest rent upon arrival. 50% of the renters reside in Ontario. Depending on what you're in the real estate market for, rent vs. own, this is something to consider since it is estimated that Ontario has accumulated a supply deficit totalling over 66,000 purpose-built and condominium rentals over the past 10 years.

If you are an investor, the growing population, which is noticeably absent of development and construction workers needed to fulfil the housing demand, makes for a profitable opportunity to own income properties that will continue to be greatly needed.

Ontario Zoning Laws

3. While the pace of new rental construction starts in the province has doubled over the past five years to reach over 13,500 units in 2021, purpose-built rentals continue to represent a small share (15%) of total housing starts in the province. Ontario has among the lowest number of per capita purpose-built rental units under construction in the country. Even accounting for its large number of condo rentals, Ontario's total per capita rental construction ranks below BC, Quebec, and Nova Scotia.

Just in case you were wondering, land scarcity is not an issue in Ontario. There is enough land in the province; however, many exclusionary zoning laws restrict building. Reforming some of these zoning laws will significantly increase housing availability. For instance, about 70% of land zoned for housing in Toronto is limited to single-detached or semi-detached homes. Removing these restrictions will allow high-density communities with condos, retail, office, and mixed-uses to be constructed in otherwise unpermitted areas.

A 2020 survey on development approval periods show that projects take between 20 - 24 months to be approved. This timeline does not include building permits, which take about two years for a condominium in Toronto. Plus, the study reveals that it can take five to ten years for undeveloped land to be designated for housing. Resulting in increasing housing costs directly affecting homebuyers and renters.

In fact, a BILD Municipal Benchmarking Study by Altus Group released last year found that government fees and delays added between $58,000 and $87,000 to the cost of a 2,000-square-foot single-family home in the GTA. For high-rise condo units, this additional cost was between $44,000 and $66,000.

Also, development charges and planning fees add an additional $93,700 to an average low-rise home and $57,800 to high-rise condos.

BILD found that when you combine taxes from different levels of government, including HST and Land Transfer Tax (LTT), the total burden of government fees, taxes and charges totals almost 25% of the cost of a new home in the GTA.

While the Ontario government has taken positive steps to address some of these issues through the Housing Supply Action Plan, the truth is that there's still more work to be done to ease the rental supply gap to bring us back to a more balanced market.

Ontario House Prices

4. The latest outlook is for rental demand in Ontario to grow by approximately 26% or 478,000 units over the 2021-2031 period. This growth is mainly the result of upwardly revised population growth projections calling for an expansion of well over two million persons in the next decade, combined with declining homeownership rates.

The expansion of Ontario's rental supply pipeline has continued to make substantial progress. At over 25,000 units, the number of purpose-built rentals under construction in Ontario as of year-end 2021 was up 112% compared to five years earlier. In the three years since rent control was removed for new units, the inventory of proposed rentals in the GTHA grew by over 56,000 units (122%). But even under a scenario where construction starts double in 10 years, rental apartment supply from purpose-built units and secondary condominiums is projected to fall short of demand by over 200,000 units. Accounting for potential supply contributions from other secondary rental sources, an estimated 100,000 additional purpose-built rentals above and beyond what is already in the pipeline will be needed to satisfy demand over the next decade. This is in addition to the 66,500 units currently in deficit.

And on the topic of declining homeownership rates, ten years ago, the average cost of a home in Ontario was approximately $329,000. In 2021, the average house price across Ontario was $923,000. Over that period, average house prices have climbed 180%, while average incomes have only grown about 38%. It's no secret why there is unprecedented pressure on the rental market. Young professionals, families, and many Ontarians find it extremely difficult to buy a home in the province.

Ontario needs unprecedented construction levels to address the supply dilemma, which has been impaired by supply chain disruptions, lumber costs, inflation, record-breaking immigration levels, and lack of skilled workers.

Now that we know what the issues are and the suggested solutions. Are they realistic? Will Budget 2022's $10 billion plan to double housing construction come to pass? Time will only tell.

In the meantime, what we know for sure is that the housing demand, especially in the rental market, is far from being met. For this simple reason, rental prices will continue to rise, and homeownership will grow farther out of reach for most of the population.

If you are interested in making the most of the tight rental market by owning an income property but do not know where to start, our Online Investment Seminar is the first step. Register today!