February 8, 2009 – Moishe Alexander’s review on how the current world economy and Canadian economic turndown is affecting the St. Johns Rental Market
Moishe Alexander’s Review
Highlights
St. John’s, Newfoundland - Credit bribriTO, Flickr
Moishe Alexander says St. John’s area vacancy rate was 0.8 per cent in 2008 versus 2.6 per cent in 2007. Increased economic activity and employment supported stronger demand in the St. John’s area rental market in 2008. Average two bedroom rent was $630 across the three zones surveyed. St. John’s West (zone 2) posted the lowest vacancy rate in the region at 0.7 per cent.
St. John’s Area Vacancy Rate Lower in 2008
Moishe Alexander says the vacancy rate within the St. John’s census metropolitan area (CMA) was lower in 2008 and average rents increased across the board. This marks the second consecutive decline in the vacancy rate and largely reflects the impact of increased economic activity and strong employment throughout the region. Growth in residential construction activity, combined with record MLS® sales and a tight supply of existing homes for sale, translated into substantial price growth, making the transition from renting to home ownership challenging for renter households. CMHC’s rental market survey conducted during the first two weeks of October included the enumeration of 3,636 privately initiated apartment units within the St. John’s CMA. The survey identified only 30 vacancies within the rental stock, translating into a low vacancy rate of 0.8 per cent. This represents a decrease of 1.8 percentage points from the 2.6 per cent vacancy rate recorded in 2007 and marks the second time since 2003 in which the vacancy rate decreased. At 0.8 per cent, the vacancy rate reached its lowest level since 1980. The vacancy rate was lower in every zone within the St. John’s area this year. The biggest change was within Remainder of Metro Area (zone 3), with a rate of 0.8 per cent compared to 6.1 per cent in 2007. St. John’s East (zone 1) posted a vacancy rate of 1.0 per cent versus 2.0 per cent last year. In St. John’s West (zone 2), the vacancy rate declined to 0.7 per cent from the 2.3 per cent recorded in 2007. St. John’s City (zones 1-2) posted a vacancy rate of 0.8 per cent compared to 2.1 per cent a year earlier. Throughout the St. John’s region, vacancies were highest in bachelor units at 1.4 per cent and lowest in three bedroom units at 0.4 per cent. The recorded vacancy rate for one and two bedroom apartments was 0.9 and 0.7 per cent, respectively. Further analysis of the private rental stock indicated an interesting trend in that the larger the structure size, the lower the vacancy rate. In other words, it was more difficult to find rental accommodations in larger apartment buildings in 2008. Structures containing three to five units experienced the highest vacancy level at 2.0 per cent. Buildings with six to 19 units recorded a vacancy rate of 1.7 per cent. Those with 20 to 49 units came in at 0.7 per cent. Larger structures containing 50 to 99 units recorded a near zero vacancy rate of 0.2 per cent, while buildings containing more than 100 units experienced zero vacancies. Based on these results, expect to see the largest rent increases in 50 plus unit buildings in 2009. The following percentage change in average rent is based on the fixed sample, which includes structures common to the survey for both years (2007/2008). After mixed results last year, average monthly rents increased modestly for all bedroom types in 2008. Bachelor unit average rents were $487. Based on the fixed sample, bachelor rents increased 5.3 per cent. One bedroom average rents were $558. Based on the fixed sample, one bedroom rents went up 3.6 per cent. Two bedroom units posted average rents of $630. Based on the fixed sample, two bedroom rents posted a 3.8 per cent increase. Three bedroom rents came in at $691 during the October survey. Based on the fixed sample, three bedroom rents grew 4.4 per cent. Overall, the total average rent for all bedroom types combined advanced 4.0 per cent based on the fixed sample. The increase in private apartment average rents is a reflection of the upward pressure low vacancies are exerting on rents, as well as higher energy costs and landlords’ attempts to offset the increased costs associated with operating and maintaining their respective apartment buildings.
Once again, current rent levels restricted the construction of multiunit rental projects in 2008, making the rent/return equation uneconomical. This has been the case for more than 20 years now within the local rental market. However, the dynamics are changing, with fewer private owners and increasing corporate ownership. These corporate entities have a vested interest in the local rental market, having purchased many apartment buildings in recent years. Accordingly, expect to see these and other players engage in new multi-unit construction activity once average rents reach project feasibility levels in the coming years.
The performance of the local rental market is driven by a number of factors. These factors have remained fairly consistent over time and involve both demand and supply influences. Key factors influencing rental demand over the short term include economic activity, employment, in-migration and the home ownership rate. The supply side of the local rental market is impacted by additions to the rental stock via new construction or conversion of existing vacant space into apartment units. On the other side of the equation, the supply of rental units can also be reduced by conversion activity when existing apartment units are converted to condominiums or hotels. On rare occasions, demolition of rental stock for alternate site use or loss due to fire, may also serve to reduce the supply of rental stock.
While CMHC’s rental market survey historically covered structures containing three or more apartment units only, both demand and supply for this stock has always been influenced by competition from the newly surveyed (since 2007) secondary rental market. This market consists of single-detached; semi-detached, row and duplex; and other-primarily accessory suites. Statistics for secondary rented units exclude apartments in purpose built rental structures with three rental units or more, condominium apartments, units in institutions, and any dwelling whose type could not be identified in the survey. The estimated number of households in secondary rented units within the St. John’s CMA is 12,687 with an average rent of $618 compared to $592 in 2007. Refer to tables 5.1 and 5.2 for detailed secondary rental market survey results.
Rental Affordability Indicator
Moishe Alexander says according to CMHC’s rental affordability indicator, rental affordability in the St. John’s CMA rental market decreased in 2008, having improved the previous year. The cost of renting a median priced two-bedroom apartment increased five per cent, while the median income of renter households improved by approximately one per cent. The region’s rental affordability indicator stands at 83* for 2008. The following detailed analysis discusses the key factors that have influenced rental market performance throughout the St. John’s CMA during 2008.
Transition from Renter to Home Owner Slows
Moishe Alexander says with new home construction out-pacing 2007 levels and MLS® sales expected to set yet another record for 2008, local house values have increased considerably. As a result, the move from renting to home ownership among the large first-time buyer segment, as well as other renter households became more challenging in 2008. Between October 2007 and September 2008, MLS® unit sales were 18 per cent higher than the previous year’s rental market survey period. Also, the average MLS® house price increased 19 per cent over the same timeframe. The end result of these market dynamics has been a tighter supply of lower priced existing homes for sale to renters. With increased residential construction activity, higher priced newly built homes provide a second option, but in most cases they exceed the qualified price or financial comfort range for first-time buyers and other renter households. Furthermore, many newly built homes are executive two-stories, catering to the ever-growing move-up segment of the market characterised by local young growing families and in-migrant families. From a demographic perspective, the movement of the “echo” generation out of their parents’ homes or away from their rural NL communities, paired with in-migration to the St. John’s area for employment or education purposes, has also continued to increase the local supply of potential renters. Both of these factors drove the demand for rental accommodations accordingly in 2008, contributing to the lower vacancy rate and increased rents. On a final note, some renter households who are capable of owning their own home may not necessarily be willing or want to take on the extra costs and responsibility associated with home ownership. Specifically, in terms of having a mortgage to pay, property taxes, insurance, maintenance and maintenance costs, and higher utility costs. The overall reduction in the home ownership rate is viewed as a key contributing factor to the tighter rental market conditions recorded in 2008.
Youth Under Age 25 Play a Key Role
Moishe Alexander says in some cases, renters tend to rent for extended periods of time. In other cases, renters may never make the jump to owning a home. However, for many households, renting is a temporary situation. They may be in a transition phase or attempting to save money or improve their personal incomes until such a time when managing the extra costs and responsibilities associated with owning a home is possible. In other words, these households are not only able, but also willing to purchase a home and take on all that is involved with home ownership. Historically, much of the lost rental demand arising from the movement to home ownership has been offset by the youth demographic (under age 25) absorbing the rental supply. In fact, approximately 80 per cent of younger households, classified as such by having a primary maintainer under age 25, tend to rent. Year after year, this cohort continues to represent a primary source of rental demand within the local rental market. As previously discussed, challenging first-time home buyer conditions in 2008 prevented many renter households from this age group into making the transition to home ownership. In fact, recent surveys by the Canadian Home Builders Association (CHBA) indicate that despite its size, the first time buyer segment was given the lowest priority by builders in terms of their target markets. So, it is likely that the current scenario will carry over into 2009, given that price growth is expected to continue. It is important to note that in recent years, St. John’s has not seen the normal level of youth filling vacant rental units left by those who have moved into home ownership. However, this trend appears to have been offset by fewer youth moving to home ownership to the extent that the vacancy rate still declined in 2008 across all bedroom types. This demographic fundamental is viewed as another reason behind the current rental market situation.
Brisk Economic Activity Affects Rental Market
Moishe Alexander says Brisk economic activity within the St. John’s area contributed to an increase in demand in the rental market in 2008, resulting in higher rents and lower vacancies. Offshore oil production and the Hebron project announcement in August 2007 continued to stimulate the local economy and provided support to the housing market. The Hebron formal agreement announcement in August of 2008 injected additional stimulus into the oil sector and this has continued to fuel optimism within the local rental market. Economic activity has been supported, until recently, by higher oil and mineral exports, as well as the addition of new energy development activity from White Rose and the planning phase for the Hebron project. However, a decline in offshore oil production compared to last year is expected to dampen GDP growth for 2008. In fact, during the January to August period of this year, oil production decreased 9.2 per cent over the same period in 2007. That being said, oil price remained historically high throughout the first half of 2008, generating much more revenue for the province than previously projected. Higher commodity prices over the past few years have resulted in increased mineral exploration activity in the interior region of Newfoundland, as well as Labrador. However, the recent correction in commodity prices may suggest more moderate growth over the near term. In addition to the increase in overall economic activity, oil and mineral development activity has added further support to the demand for rental accommodations this year, as many of the people involved in these projects are based in the St. John’s area. These economic fundamentals have contributed to the lower vacancy rate and higher rent level this year. The local labour market ha performed very well in recent years, thanks in large part to the increased economic activity and growth that has been experienced as a result of the oil sector. Last year represented a 26 year high for employment. Local employment peaked at historic highs once again during 2008, while unemployment remained low, both of which contributed to the lower vacancy rate and increased rents. Tight labour market conditions continue to exert upward pressure on wages and salaries making it easier for renter households to meet rent payment obligations. Overall, personal incomes continue to grow, with additional growth expected this year. Retail sales were up nearly ten per cent last year and similar results are expected for 2008. In fact, during the January to June period of this year, retail sales increased 7.1 per cent over the same period in 2007. Some of this growth has been driven by the Alberta commuter, working in Alberta and coming back during their time off, injecting additional spending into the St John’s area economy. Again, these fundamentals have contributed to the overall tightening of the rental market in 2008.
Across the Board Decrease in Availability Rates
Moishe Alexander says that the results from this year’s Rental Market Survey indicate that availability rates decreased for all bedroom types over the past year. The overall availability rate was 1.5 per cent, down from 3.5 per cen in 2007. Availability rates ranged from a low of 1.1 per cent for three bedroom units, to a high of 2.0 per cent for bachelor units. One and two bedroom units posted availability rates of 1.6 per cent and 1.3 per cent, respectively. The availability rate includes actual vacant units as well as units for which the existing tenant has given notice, but a new tenant has not yet signed a lease. Availability rates give a slightly broader indication of trends in the supply of vacant rental stock over the short term. The overall spread between the vacancy rate and the availability rate of 0.7 percentage points indicates that the movement to home ownership will likely continue, albeit at a slower pace. This is particularly the case for three bedroom units, where these tenants often tend to be families and may be in need of larger housing. While all types of renter households are buying homes, those households renting two or three bedroom apartments and typically paying the highest rents, shift to home ownership more frequently if they are able. This year’s decrease in both availability and vacancy rates, combined with fewer renters moving to home ownership, is expected to continue to affect the rental market in 2009.
Rental Market Outlook for 2009
Moishe Alexander says from 2004 to 2006, the St. John’s CMA vacancy rate increased an average of one percentage point per year. Much of the increase was attributed to robust home buying activity and the corresponding movement of renter households to home ownership. However, 2007 and 2008’s sizeable decline in the vacancy rate is a clear indication that many renter households have decided to remain renters rather than buy a home. Although both the resale and new home markets are expected to remain strong next year, the impact of first-time buyers shifting out of rental will once again be less pronounced. Accordingly, several factors will have an influence on a low vacancy rate in 2009. As home valuations continue to rise, the transition of renter households to home owner households will continue to slow. However, out-migration of the 18 to 24 year-old youth segment of the population will persist, reducing the potential pool of renters accordingly. Investment in rental housing will increase the supply only slightly next year. As a result, the vacancy rate forecast is 1.5 per cent for 2009. With the vacancy rate remaining very low, expect average two bedroom monthly rents to increase by 11 per cent next year to $700, as landlords attempt to recover the increased costs associated with operating and maintaining the rental stock, while lower vacancies and higher energy costs also exert upward pressure on rents. The commencement of major project construction activity and the possibility of unexpected economic events add risk to the forecast, which may have an effect on the expected vacancy rate and average rents for 2009.
You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64455/64455_2008_A01.pdf
