February 2, 2009 – Moishe Alexander’s review on how the current world economy and Canadian economic turndown is affecting the Greater Toronto Area Rental Market
Moishe Alexander’s Review
Toronto at Night - Credit Bensonkua, Flickr
The average apartment vacancy rate in the GTA declined to 2.1 per cent in 2008. Average fixed sample two-bedroom apartment rents increased by 1.7 per cent. Market conditions tightened in the rental market as ownership home prices continued to increase and employment growth moderated. Home ownership demand will continue to slow in 2009. The average apartment vacancy rate will be 2.0 per cent next year.
Factors Influencing Rental Demand
Rental market conditions in the Greater Toronto area (GTA) tightened in 2008. The average vacancy rate for purpose-built rental apartments declined to 2.1 per cent – the lowest level in seven years (see Figure 3). A number of factors contributed to the lower rental vacancy rate, including more moderate home ownership demand, steady in-migration, changing demographic trends and a dip in full-time jobs for young people.
Ownership Demand Moderated
A moderation in first-time buying activity in the GTA was one of the key factors underlying the decline in vacancy rates over the past year. CMHC’s Renovation and Home Purchase Survey found that the percentage of intended home purchases accounted for by first-time buyers declined to 40 per cent for 2008 compared to 47 percent in 2007. Local economic conditions became less certain in 2008, impacting the decisions of would-be first-time buyers. Potential first-time buyers are arguably more sensitive to changing ownership market conditions due to lower down payments and incomes, on average, and a lack of accumulated home equity. As a result, the outflow of rental households into home ownership slowed. In addition, some potential first-time buyers have also put their decision on hold due to the elevated cost of home ownership. Between 1997 and 2007, the GTA housing market experienced annual existing home price growth above that of consumer prices and average incomes. Over the last two years, the cost of home ownership became less manageable for first-time buyers who generally have incomes below the average. Even the relatively less expensive condominium apartment market segment, which has served as an entry point into home ownership for many first-time buyers, has become less accessible in some parts of the region. At the same time as the cost of home ownership was increasing, the cost of renting increased below the rate of growth for inflation and incomes. The gap between the average monthly mortgage payment and the average rent for the apartments in the GTA has widened, further prompting some renter households to put their home buying decision on hold. Rental demand for two and three bedroom unit types strengthened the most. The rental universe of two or more bedroom apartments actually increased this year, nevertheless the increase in demand outpaced the increase in supply. The gap between the average principal and interest payment for a condominium apartment and the average rent for an apartment likely widened more for larger unit sizes.
Weaker Full-Time Employment
One of the essential factors influencing renter-households’ decision to move into home ownership is a secure and well-paying job. While GTA labour market conditions remained tight, with job growth at two per cent in 2008, employment prospects for younger people weakened. Youth employment growth declined over the past year, with year-over-year gains only experienced in part-time jobs. Typically, individuals moving into ownership would require full-time employment to save for a down payment or to be approved for a mortgage. More renter households employed in part time positions had to hold off on home purchases. Demand for rental housing strengthened as a result.
Condominium Apartment Development
Pre-construction sales of condominium apartments have been very strong since the early new millennium, when vacancy rates began increasing. In 2007, a record number of pre-construction highrise sales took place. However, while a pre-construction purchase was the first step towards home ownership for many renter households, many of these condominium apartment units have not actually completed. Condominium apartment completions increased in 2008 (see Figure 6). However, over the same period, the average number of condominium apartments under construction increased from the mid-20,000 range to the mid-30,000 range. There are still many households continuing to rent that will be moving once their new ownership housing completes. As will be discussed further in the forecast section of this report, movement from rental into completed condominium apartments will put a floor on the degree to which vacancy rates will move lower over the next year.
Immigrants Fuel Rental Demand
In 2008, the number of immigrants settling in the Toronto area trended higher, contributing to increased demand for rental housing. In 2007, the Citizenship and Immigration Canada raised the target for new permanent residents to Canada by more than five per cent, the highest increase in the past 15 years. Immigration continues to be the driving force behind sustained positive net-migration into the GTA. Immigrants have been attracted to the GTA by the healthy economy, variety of employment opportunities and strong ethnic and cultural networks. Many immigrants tend to rent when first arriving in the GTA, rather than entering home ownership directly. Once they gain quality employment, establish a credit history and accumulate a sufficient down payment, many recent immigrants will move into home ownership. However, the steady inflow of immigrant households into the GTA serves to fill the gap left by the movement of some newcomers into home ownership.
Sub-Market Highlights – Rental Demand Varied by Neighbourhood
Because the Greater Toronto is a very large metropolitan area – the largest in Canada and in the top ten in North America – rental market conditions vary considerably by submarket (see Figure 7). For example, the former City of Toronto has always been popular choice with renter households since it offers a diversity of amenities, services, cultural attractions, educational institutions and employment opportunities. Furthermore, the area includes a variety of transportation alternatives. Renters pay aboveaverage rents for these benefits, but are willing to due so as evidenced by the below-average vacancy rates in the Former City. While the amenities available in the Former City are a key factor explaining below-average vacancy rates, home prices are another factor influencing rental demand. Average home prices in the former City of Toronto are the highest in the GTA. Average rents are also above the GTA average, but not by the same proportion. This means that the gap in household income required to own versus rent is wider in the Former City than for the GTA as a whole. Many households opting to live in the former City of Toronto have arguably chosen to rent as a result. Strong rental demand in the Former City pushed the vacancy rate down to 1.5 per cent from 1.8 per cent in 2007. Other regions of the GTA, such as Durham, actually experienced a softening in rental market conditions with rising vacancy rates. Home ownership is in greater competition with rental in many parts of Durham. Below average home prices relative to the GTA as a whole and low mortgage rates have kept home ownership affordable in the area and supported an outflow of households from rental.
Vacancy Rate Lowest for Most Expensive Units
Following the trend observed over the past three rental market surveys, the lowest vacancy rates in the GTA are observed for the most expensive apartments – those commanding rents over $1,000 (see Figure 8). Average rents have been growing modestly since vacancy rates increased strongly early in the new millennium. Those renter households whose incomes grew in excess of average rents have been able to trade up in the rental market, from mid-range apartments to more expensive units with a higher level of finishings and amenities. As will be discussed later in this report, this same trend has also resulted in some renter households switching from purpose-built rental accommodations to comparatively higher end investor-held condominium apartments available for rent.
Vacancy Rate Increases for Newer Rental Buildings
Between July 2007 and June 2008, over 1,400 new rental units completed with over 40 per cent of these completions taking place in the City of Brampton. The result was an increase in the vacancy rate for newer rental apartments. Given that over 70 per cent of the completions took place in the first and second quarters of 2008, many, if not all of these properties are still “renting up”. It makes sense that these new additions to the rental stock have not yet achieved occupancy levels in line with the GTA rental market as a whole. The higher vacancies experienced by new properties resulted in the increase in the average vacancy rate for those units completed after 1990.
Little Change in Rental Supply
While over 1,400 rental apartments were completed last year, Toronto’s private rental apartment universe remained almost unchanged. Over the same July 2007 to June 2008 period, approximately the same number of units were taken out of the rental universe for reasons such as condominium conversions, demolitions, renovations and sales. With little change in rental supply and stronger demand for rental housing, the number of vacant units shrunk to the lowest level in the past seven years.
Rent Growth In Line With Inflation
CMHC measures annual changes in average rents based on a method that compares rental structures that were common to both the 2007 and 2008 survey years. This eliminates the compositional impact of new structures coming into or being removed from the rental market universe. This approach allows for an analysis of average rent fluctuations resulting from changing market conditions. In 2008, the average two-bedroom fixed sample rent increased by 1.7 per cent, which was almost in line with the general rate of inflation. Over the same period, the cost of ownership increased at the higher rate. The comparatively lower cost of renting helped tighten demand for the rental accommodations.
Rental Affordability Index
According to CMHC’s new rental affordability indicator, affordability in Toronto’s rental market remained in line with the last four years, during which time the indicator ranged between 89 and 91. The indicator dipped slightly from 91 to 90. Median rents grew at a moderately higher rate than median renter household income (see Figure 9). The rental affordability indicator is a gauge of how affordable a rental market is for those households which rent within that market. A generally accepted rule of thumb for affordability is that a household should spend less than 30 per cent of its gross income on housing. The new rental affordability indicator examines a three-year moving average of median income of renter households and compares it to the median rent for a two-bedroom apartment in the centre in which they live. More specifically, the level of income required for a household to rent a median priced twobedroom apartment, using 30 per cent of its income, is calculated. The threeyear moving average of median income of households in a centre is then divided by this required income. The resulting number is then multiplied by 100 to form the indicator. An indicator value of 100 indicates that 30 per cent of the median income of renter households is necessary to rent a twobedroom apartment going at the median rental rate. A value above 100 indicates that less than 30 per cent of the median income is required to rent a two-bedroom apartment, conversely, a value below 100 indicates that more than 30 per cent of the median income is required to rent the same unit. In general, as the indicator in- creases, the market becomes more affordable; as the indicator declines, the market becomes less affordable. Please refer to the Methodology section at the end of this report for detailed information on the indicator.
Rental Market Outlook for 2009
The overall apartment vacancy rate will level off at 2.0 per cent in 2009. The average two-bedroom rent will increase by 2.0 per cent. Softening home ownership demand will keep the apartment vacancy rate low compared to what has been experienced for the majority of the new millennium. Rising home prices coupled with more moderate employment growth will continue to keep some would-be home buyers, especially first-time buyers, on the sidelines, deferring entry into home ownership beyond 2009. The impact of more moderate demand for home ownership, however, will be mitigated by the continuation of strong condominium apartment completions. Many condominium apartments currently under construction were purchased by renter households at the pre-construction stage of development. Over time, condominium apartment starts and completions should follow a similar path. However, since mid-2007, a gap between starts and completions has developed (see Figure 10). As more of these units complete next year, this gap will narrow. Some renter households will vacate their current dwellings to move into home ownership for the first time. Completed condominium apartment developments will also contain investor- held units for rent. Some households living in purpose-built rental apartments will be attracted to the higher level of finishings and amenities offered by brand new condominium developments.
Secondary Rental Market
CMHC also surveys the secondary rental market The secondary rental market survey for the GTA includes information on condominium apartments offered for rent as well as the following additional rental housing types: rented single-detached houses, rented double (semi-detached) houses; rented freehold row/town houses; rented duplex apartments; rented accessory apartments; and rented apartments which are part of a commercial or other type of structure containing one or two dwelling units. The methodology section at the end of this report provides more detailed information on the Secondary Rental
Market Survey.
Condominium Apartment Rental Market
The condominium apartment market remains an important component of the secondary rental market. The total number of apartments, registered under condominium corporations in the GTA, rose by nearly four per cent to 234,303 in 2008. During this period, the number of condominium apartments designated as rental (i.e. units held by investors that are either occupied or vacant), rose by almost six per cent to 44,051 (see Figure 11). Thus, the share of condominium apartments held by investors edged upward slightly to 18.8 per cent – still well-below the levels experienced in the mid-1990s, when approximately one-third of the registered stock was investor-held. While the number of condominium apartments available for rent increased over the past year, their popularity increased as well. The GTA vacancy rate fell to 0.4 per cent in 2008 compared to 0.7 per cent in 2007 (see Figure 12). This vacancy rate is significantly lower than that for purpose-built rental apartments. The reason for the relatively tight conditions in the condominium apartment rental market is twofold. First, the rising cost of home ownership has prompted some households to choose renting versus owning, at least in the short term. Second, condominium apartments offer, in many cases, a higher level of finishings and amenities than the average purposebuilt rental unit. Many renters have been willing to pay a premium to take advantage of better quality and more modern rental apartments.
High-Rise Condominiums Most Popular Rental Type
Larger condominium apartment buildings experienced the lowest vacancy rates. The lowest average vacancy rate of 0.1 per cent was recorded for rental buildings with 300+ units, even while the total number of rental units in these buildings increased by 9 per cent. Many larger projects have completed over the past two years. Typically larger developments benefit from a larger array of amenities that could prove attractive to renters, including larger workout/gym facilities, cinemas and well-outfitted party rooms.
Higher Rents Have Not Deterred Renters
The higher rents charged for rental condominium apartments have not kept renters away from this housing type. The average condominium apartment vacancy rate is 0.4 percent compared to 2.1 per cent for purpose-built rental units. The average two-bedroom rent for a condominium apartment in the GTA is $1,615 compared to $1,078 for the same unit type in a purpose-built rental. Superior quality and valuefor- money often associated with modern condominium apartments trumps lower rents offered in the primary rental market.
Other Secondary Rental Housing Types
The secondary rental market consisting of rental single-detached and semi-detached homes, town houses, duplexes and accessory suites represent a large component of the general rental market in the GTA. The total number of rental units in the secondary rental market was estimated at 153,053 (or approximately a third of the total stock available for rent) in 2008. The average rents for other secondary rental housing types falls more in line with average rents charged for purpose-built rental apartments and thus lower than average rents realized for condominium apartments. The average purpose-built twobedroom apartment is $1,082 compared to $1,083 for all secondary rental market types other than condominium apartments. Similar to the purpose-built rental market, unit size, quality of finishing and location are the likely reasons for the difference in average rents between condominium apartments and other secondary rental types.
You can find the entire report in PDF format through the following link:
http://www.cmhc-schl.gc.ca/odpub/esub/64459/64459_2008_A01.pdf
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