The average rental apartment vacancy rate in Canada’s 35 major centres increased to 2.8 per cent in October 2009 from 2.2 per cent in October 2008. The centres with the highest vacancy rates in 2009 were Windsor (13.0 per cent), Abbotsford (6.1 per cent), Peterborough (6.0 per cent), Calgary (5.3 per cent), and London (5.0 per cent). On the other hand, the major urban centres with the lowest vacancy rates were Regina (0.6 per cent), Québec (0.6 per cent), St. John’s (0.9 per cent), Winnipeg (1.1 per cent), Kingston (1.3 per cent), and Victoria (1.4 per cent).

Demand for rental housing in Canada decreased due to slower growth in youth employment and improved affordability of homeownership options. Rental construction and competition from the condominium market also added upward pressure on vacancy rates.

The highest average monthly rents for two-bedroom apartments in new and existing structures were in Vancouver ($1,169), Calgary ($1,099), Toronto ($1,096), and Ottawa ($1,028). The lowest average monthly rents for two-bedroom apartments in new and existing structures were in Saguenay ($518), Trois-Rivières ($520), and Sherbrooke ($553).

Year-over-year comparison of rents in new and existing structures can be slightly misleading because rents in newly-built structures tend to be higher than in existing buildings. However, by excluding new structures, we can get a better indication of actual rent increases paid by most tenants. The average rent for two-bedroom apartments in existing structures increased in all major centres. The largest rent increases in existing structures were recorded in Regina (10.2 per cent), Saskatoon (8.3 per cent),Victoria (5.0 per cent), and St. John’s (4.9 per cent). Overall, the average rent for two-bedroom apartments in existing structures across Canada’s 35 major centres increased by 2.3 per cent between October 2008 and October 2009.

CMHC’s October 2009 Rental Market Survey also covers condominium apartments offered for rent in Calgary, Edmonton, Montréal, Ottawa, Québec, Regina, Saskatoon, Toronto,Vancouver, and Victoria. In 2009, vacancy rates for rental condominium apartments were below two per cent in seven of the 10 centres surveyed. Rental condominium vacancy rates were the lowest in Toronto, Saskatoon, and Ottawa. However, Regina and Edmonton registered the highest vacancy rates for condominium apartments at 3.0 per cent and 3.1 per cent in 2009, respectively.

The survey showed that vacancy rates for rental condominium apartments in 2009 were lower than vacancy rates in the conventional rental market in Ottawa, Saskatoon,Vancouver, Toronto, Edmonton, and Calgary. The highest average monthly rents for two- bedroom condominium apartments were in Toronto ($1,487),Vancouver ($1,448), Calgary ($1,310), and Victoria ($1,223). All surveyed centres posted average monthly rents for two- bedroom condominium apartments that were higher than average monthly rents for two-bedroom private apartments in the conventional rental market in 2009.

The vacancy rate throughout the St. John’s CMA (census metropolitan area) remained low in 2009. In fact, there was little change in the vacancy rate, which largely reflects the impact of solid economic activity and positive employment growth within the region. Robust residential construction activity, combined with healthy MLS®1 sales and a strong supply of existing homes for sale, translated into continued house price growth, once again 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 3,601 privately initiated apartment units within the St. John’s CMA. The survey identified 31 vacancies within the rental stock, translating into a vacancy rate of 0.9 per cent. This compares to a similar 0.8 per cent vacancy rate recorded in 2008, with the rate below one per cent now for two consecutive years and holding steady at its lowest level since 1980. The vacancy rate was one per cent or 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 0.3 per cent compared to 0.8 per cent in 2008. St. John’s East (zone 1) posted a vacancy rate of 0.9 per cent versus 1.0 per cent last year. In St. John’s West (zone 2), the vacancy rate was 1.0 per cent compared to 0.7 per cent in 2008. St. John’s City (zones 1-2) posted a vacancy rate of 0.9 per cent versus 0.8 per cent a year earlier. Throughout the St. John’s region, vacancies remained highest in bachelor units at 1.5 per cent and lowest in three bedroom units at 0.4 per cent. The recorded vacancy rate for one and two bedroom apartments was 0.8 per cent for both. Average rents increased across the region for all bedroom types in 2009. The following percentage changes in average rent are based on the fixed sample, which includes structures common to the survey for both years (2008/2009). Bachelor unit average rents increased the most of all bedroom types at 6.2 per cent; one bedroom average rents increased 5.7 per cent; two bedroom unit average rents were up 4.9 per cent; and three bedroom rents increased 5.4 per cent. Overall, the total average rent for all bedroom types combined, advanced 5.5 per cent.

Based on the 2009 survey, bachelor unit average rents were $541; one bedroom average rents were $592; two bedroom units posted average rents of $677; and three bedroom rents came in at $713. Overall, the total average rent for all bedroom types combined was $643. The increase in average rents is a reflection of the upward pressure very low vacancies have exerted on rents since 2008, as well as increasing energy costs and the increased costs associated with operating and maintaining apartment buildings. Once again, current rent levels prevented the construction of multi-unit rental projects in 2009, making the rent/return equation uneconomical for developers and real estate investment trusts (REITs). This has been the situation for more than 20 years within the local rental market. However, local rental market dynamics have been changing, with fewer private owners and increasing corporate ownership. The buoyant St. John’s economy and housing market has seen these corporate entities become increasingly interested in the local rental market. In fact, they have purchased many apartment buildings in recent years. The expectation is that these and other players will engage in new multi-unit apartment building construction activity in the coming years, once average rents reach a point where project development becomes feasible.

The local rental market is driven by a number of factors. These factors have remained fairly constant over time and involve both demand and supply influences. Key factors affecting the demand dynamics for rental accommodations over the short term include economic activity, employment, migration trends and the home ownership rate. The supply side of the local rental market is affected by additions to the rental stock via new construction or conversion of existing space into apartments. Apartment supply can also be reduced by conversion activity when existing rental units get converted to condos or hotels. On rare occasions, demolition of apartments for alternate site use or loss due to fire may also diminish the supply of rental units. While CMHC’s rental market survey historically covered structures containing three or more apartment units only, both demand and supply has always been affected by competition from the secondary rental market (newly surveyed since 2007). This market consists of single-detached units; semi-detached, row and duplex units; and other- primarily accessory suites. Statistics for secondary rented units exclude apartments in purpose built rental structures with three rental units or more, condo 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 quite substantial at 12,896, with an average rent of $653 compared to $618 in 2008. Refer to tables 5.1 and 5.2 for additional details regarding secondary rental market survey results.

Results from Canada Mortgage and Housing Corporation’s recently completed Rental Market Survey* revealed a higher vacancy rate for the Moncton CMA in the fall of 2009. In October of this year, the number of vacant units in Greater Moncton stood at 375. In comparison, there were 234 vacant units recorded at the time of last year’s Rental Market Survey. Consequently, the vacancy rate in Greater Moncton was up from last year’s level of 2.4 per cent to 3.8 per cent in the fall of 2009. The vacancy rate for the popular two bedroom units was consistent with the change in the overall vacancy rate, climbing from last year’s rate of 2.6 per cent to 3.6 per cent. This was not unexpected as two bedroom units account for approximately two thirds of the rental universe in the Moncton CMA. The vacancy rate for one bedroom units reached four per cent in the fall of 2009. This marked a significant increase from the low 1.5 per cent vacancy rate recorded last October. A general desire on behalf of local renters for the increased living space provided by two bedroom units has effectively reduced demand for one bedroom units. Within the tri-community area, Dieppe City had the lowest vacancy rate at 2.2 per cent, followed by the Town of Riverview and Moncton City at 3.4 and 4.0 per cent, respectively. In the outlying areas of the Moncton CMA, the vacancy rate rebounded from last year’s low of 0.9 per cent, climbing to 3.1 per cent. * The survey, completed during the first two weeks of October, is limited to privately initiated structures comprised of at least three rental units that were available for rent or completed before June 30, 2009.

In 2009, economic development in Greater Moncton continued to follow the same positive trend that has defined the region over the past decade. Overall employment, as of the end of October, was on pace to exceed last year’s record setting level. As a result of the stronger job market, Greater Moncton has enjoyed the strongest in-migration of all regions in the province during the past ten years. Housing market conditions in the Moncton CMA, starting last year, have become increasingly favorable to potential home owners. In particular, mortgage rates have remained at historically low levels and new listings have retreated moderately from record levels set in 2008. As a result, home ownership has moved within reach for a larger number of people in Greater Moncton, including those who currently are renters, thus limiting demand for rental units. In the tri-community area, the rental market in the Town of Riverview remained the most stable during the past 12 months, with the local vacancy rate remaining unchanged at 3.4 per cent. Rental unit demand had been on the rise in Riverview in recent years. Despite higher than average apartment starts in both 2007 and 2008, the vacancy rate declined in both years. In 2009, a decline in rental unit demand was offset by reduced rental unit construction, leading to the local vacancy rate remaining unchanged.

In Moncton City, the vacancy rate was comparable to the overall rate for the CMA at 4.0 per cent. Population growth has remained positive in Moncton City proper as the region’s economy continues to support economic development and attract people to the area. However, in-migration in 2009 has slowed compared to last year’s above average pace. In addition, apartment starts in Moncton City in 2008 were higher than the average for the last five years. This resulted in a relatively large infusion of new units in 2009 as projects started last year were completed. As such, local supply was ahead of demand with Moncton City’s vacancy rate rising to 4.0 per cent from last year’s level of 2.4 per cent. The vacancy rates in each of Moncton City’s four separate zones also increased in 2009. The largest fluctuation occurred in East Moncton. Last year, this zone posted Moncton City’s lowest vacancy rate at 1.9 per cent. In the fall of 2009, the vacancy rate in East Moncton was the highest at 4.6 per cent. In contrast, North Moncton had the lowest vacancy rate at 2.7 per cent. Not only was it the lowest, it was also the least changed among Moncton City’s four different zones, climbing 0.6 percentage points from last year’s rate of 2.1 per cent. In Central and West Moncton, the vacancy rate in the fall of 2009 was up to 4.5 and 3.6 per cent, respectively.

In the City of Dieppe, the vacancy rate inched up to 2.2 per cent in the fall of 2009, a moderate increase from 1.8 per cent last year. In general terms, population growth in Dieppe has outpaced both Moncton and Riverview in recent years. As a result, residential development has flourished in Dieppe. During this time, the popularity of semi-detached homes has increased resulting in tremendous growth in the Moncton CMA, with a significant number of new units added in the City of Dieppe as well. With semi-detached homes, consumers can obtain a newly-built product with a mortgage payment comparable to the typical monthly rent for a newer two bedroom apartment, while allowing the owner to build equity in their new home. As such, semi-detached units in Dieppe, which have nearly matched last year’s record setting pace in 2009, continue to lure renters to homeownership. This year, apartment starts are expected to post the third annual decline in Dieppe. However, with fewer consumers seeking rental units, supply and demand have maintained a relative balance, resulting in a moderate 0.4 percentage point change in Dieppe’s vacancy rate.

In 2001, the vacancy rate in Charlottetown reached a record low of 1.8 per cent, as the construction of rental units was somewhat limited throughout the 1990′s. In response to the low vacancy rate, local developers built higher levels of rental buildings from 2002 to 2006. This strong level of rental construction resulted in a rising vacancy rate from 2003 to 2007. Last fall this trend was reversed, as the vacancy rate declined for the first time in five years due to reduced rental construction in 2007 and 2008. However, the vacancy rate inched back up this year as rental starts are once again on the rise. The increased level of construction pushed the vacancy rate for apartment structures containing three or more units in the Charlottetown CA to 3.4 per cent up from 2.3 per cent last year. The October 2009 survey aggregated the rental information for 3,888 rental units in the Charlottetown area, which was up from the 2008 figure of 3,790 units. Of the surveyed units, 131 were vacant in 2009, compared to 86 vacant units during the same period last year. The 2009 survey revealed that vacancies among two-bedroom units, which make up the majority of the local rental universe, were higher with 78 vacant units, compared to 54 units last year. As a result, the vacancy rate for two-bedroom units rose to 3.1 per cent from 2.2 per cent last year. Among the other unit types the change was more pronounced. One- bedroom units recorded the largest change, as the vacancy rate for these units increased from 2.0 per cent last year to 4.4 per cent in 2009.

Overall, the average rent in Charlottetown was $658 per month in 2009. For the fourth year in a row, CMHC is measuring the change in rents for existing structures (i.e., those common to the current and previous years’ surveys). Focusing on existing structures excludes the impact of new structures added to the rental universe between surveys and provides a better indication of the rent increase for existing structures. For the Charlottetown CA, the average rent for all bedroom types in existing structures increased by 4.8 per cent in October 2009 compared to a year ago. This year’s increase of 4.8 per cent is very close to the 5.0 per cent increase allowed for heated premises by the Island Regulatory and Appeals Commission (IRAC), which manages residential rental increases on the Island. As most of the units in the Charlottetown area include heat in the rent, it is not unexpected that the actual increase mirrored the increase allowed by IRAC. In 2009, there was very little reason to discount rents now that all of the projects built over the past six years have been integrated into the market. Also, owners were looking to increase rents in an effort to make up for the high heating costs experienced in the 2007/2008 winter due to the rapid rise in the price of heating oil. There was a significant difference in the increase in two-bedroom rents recorded in Zone 1 (Downtown) and Zone 2 (Peripheral). In Zone 1, the average two-bedroom rent advanced by 3.9 per cent, while in Zone 2 the increase was more impressive at 5.8 per cent, as measured by the fixed sample.

In addition to the vacancy and rent data that is collected each year as part of the annual Rental Market Survey, landlords and property managers were asked about rental unit availability. A rental unit is considered available if the existing tenant has given, or has received, notice to move, and a new tenant has not signed a lease; or the unit is vacant. Based on the results from the 2009 Rental Market Survey, the availability rate in the Charlottetown CA moved up to 4.9 per cent in 2009 from last year’s level of 4.0 per cent. Within the CA, the availability rate was identical in both Zones 1 and 2 at 4.9 per cent. Among the different bedroom types, one-bedroom units posted the highest availability rate in 2009 at 5.8 per cent. The availability rate for bachelor and two-bedroom units was 4.8 per cent for both.

According to the 2009 Rental Market Survey, the largest apartment buildings in the Charlottetown area command the highest average rents and enjoy the lowest vacancy rates. In the October survey, apartment buildings in the Charlottetown area with between 50 and 99 units posted the lowest vacancy rate at 1.8 per cent, which was well below the overall vacancy rate of 3.4 per cent. The second largest buildings in the area, ranging from 20 to 49 units, also saw lower vacancies with a rate of 3.0 per cent. In addition to having the lowest vacancy rate, the largest buildings also commanded the highest average rents. Buildings with 50 to 99 units had an average rent of $760, while the smallest structures, those with three to five units recorded an average monthly rent of $608. This escalation of rents from smaller to larger buildings is logical, when considering that more amenities tend to be offered to tenants as the building size increases. These features such as elevators, underground parking, security measures and common rooms raise the construction and operating costs for owners, which in turn are passed on to tenants.

Vacancy rate stable in October 2009

According to the results of the Rental Market Survey conducted by CMHC in October 2009, the vacancy rate remained rather stable in the Montréal metropolitan area, reaching 2.5 per cent, compared to 2.4 per cent in October 20081. The stronger than expected homeownership trend, especially starting in the second quarter, and the job losses among young people aged from 15 to 24 years offset the increase in migration, which kept the vacancy rate relatively stable over the past year. After easing from 2002 to 2006, the Montréal rental market has since stabilized. That being said, conditions remain relatively tight compared to the 1990s.

The difficult economic environment also had a direct impact on young renter clients. Nearly 15,000 jobs, most of them full-time, were lost among the group aged from 15 to 24 years between October 2008 and October 20092. Although the people in this age group account for only 7 per cent of renter households, a vast majority (89 per cent) of them rent their dwellings3 . The job losses very likely forced a number of these young people to stay with their parents or share their apartments with more roommates. Therefore, the difficult job market conditions for people aged from 15 to 24 years resulted in a decrease in demand for housing.

That said, the arrival of more immigrants acted as a counterbalance for the renters who left the rental market. According to our forecasts, net migration in the Montréal CMA should reach 30,000 people in 2009, up from 28,600 in 2008. Montréal received more immigrants this year, thanks to the higher immigration targets set by the Government of Quebec. A large majority (84 per cent) of the 55,000 immigrants that the province aims to welcome annually will settle in Montréal, and most will first choose to rent a dwelling. Immigration puts pressure on the Montréal rental market and keeps the vacancy rate low.

On the supply side, there have been fewer traditional rental housing starts in recent years, even though the vacancy rate has been relatively low. Builders still seem to be further attracted to more profitable markets, such as the condominium and retirement home segments. The rather limited growth of the rental housing stock is also helping to maintain the vacancy rate at a low level.

According to the survey results, larger apartments, that is, units with two bedrooms and those with three or more bedrooms, appear to be the most popular. In fact, demand for roomier units, notably from families, has been steady. The vacancy rates in these two unit categories reached 2.0 per cent and 1.7 per cent, respectively, well below the rates recorded for bachelor apartments (3.7 per cent) and one-bedroom units (3.2 per cent).

As well, the vacancy rates by rent range also revealed differences depending on unit size. In fact, apartments renting for less than $500 per month recorded the highest vacancy rate (3.2 per cent). These apartments are less popular, because they are usually smaller. By comparison, units with rents from $500 to $899 and apartments renting for $900 or over had lower rates, at 2.5 per cent and 2.8 per cent, respectively.

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