IMPACT ON RENTS
The table below provides a summary of some of the results of the CMHC 2002 rental market survey:
2001 and 2002, Monthly Rent (in $ Can)
|
CITY |
Bachelor |
1 Bedroom |
2 Bedroom |
3 Bedroom |
Total |
|
01 |
02 |
01 |
02 |
01 |
02 |
01 |
02 |
01 |
02 |
|
Toronto (Central) |
750 |
794 |
971 |
1,013 |
1,319 |
1,349 |
1,729 |
2,057 |
1,018 |
1,075 |
|
Former City of Toronto |
711 |
757 |
920 |
955 |
1,211 |
1,244 |
1,719 |
1,786 |
979 |
1,021 |
|
Toronto City |
698 |
733 |
870 |
894 |
1,039 |
1,055 |
1,248 |
1,279 |
951 |
976 |
|
York Region |
653 |
658 |
787 |
817 |
915 |
953 |
1,079 |
1,128 |
861 |
895 |
|
Mississauga |
668 |
690 |
868 |
903 |
1,004 |
1,045 |
1,136 |
1,153 |
958 |
993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
The above data provides a sample of the CMHC reported data on current market rents. Despite increasing vacancy rates, rents have continued to climb on average but at a much slower rate. Generally rent increases in Toronto at the higher end of the market have dropped to 2.7% compared to 3.9% the year before.
In fact, there are numerous reports from landlords that their rents have been declining at the higher end of the market. The Fair Rental Policy Organization, (FRPO) an organization representing landlords in Ontario earlier this year reported that Toronto area members were reporting rent declines of as much as 14%. Another report by Will Dunning Inc., prepared for the Greater Toronto Home Builder’s Association and FRPO reported that asking rents for Condominiums in the entertainment district of downtown Toronto had dropped by as much as 10%. Landlords are reported in many cases to be offering incentives such as free Internet access and emphasising upgrades to the units being offered for rent, in addition to rent reductions.
Not surprisingly, CMHC statistics show that the vacancy rate for apartments renting for $800 a month or less is only about half the rate for apartments going for $ 1,200 or more. Vacancy rates for apartments over $ 1,200 are at 3.2 % compared to 1.5% for apartments under $ 800.00. For apartments over $ 1,700 the vacancy rate is 3.5%.
WHY ARE VACANCY RATES INCREASING
There are few new apartment buildings being constructed in Toronto (there were only about 1300 conventional apartment under construction in 2002). At the same time, Statistics Canada reports that the population in Toronto grew from about 4,586,700 in 1998 to 5,029,900 in 2002. Of that number the total number of households is more than 900,000 and about 475,000 are renting.
Year 2001 statistics show that 80% of immigrants are renters. In addition 47% of renting households are either single people or people who are sharing space. Couples without children form 21% of the renting households.
Bearing the foregoing in mind, there are three important elements to the current market condition:
1. The drop in interest rates have made home ownership more affordable than it has been in years. A combination of the recent growth in rents and the drop in mortgage costs, the cost of home ownership (mortgage, taxes, utilities) is comparable in many cases with the cost of renting. Home ownership in the GTA increased to 63.8 % in 2002 from 60.5% in 1996 and is projected to increase to 65% by 2004.
2. Young adults have often been an important source of demand for apartment rentals. However, whereas a few years ago university graduates could expect multiple offers, many graduating students are unable to find work. At the same time statistics show that the number of young adults living with their parents is at all time highs (41% for Canadians in the twenties).
Similarly youth unemployment is growing higher. Statistics Canada has reported that youth unemployment is at 13.5%, up from an average of 12.5% in 2000 and 12.8% in 2001. Ironically while employment statistics appear to be robust generally, unemployment is clearly a problem now.
3. Condominiums have become an important source of new rental housing. There are about 34,343 condominiums in the GTA that are rented – 22% of the total supply (about 25,000 in Toronto – 23.1% of the total supply).
In addition there were 12,000 new condominium units expected to be constructed in 2002 and the same expected for 2003. With as much as up to 35% of these new condominiums expected to be purchased for rental purposes new condominiums have been and continue to be an important source of rentals especially at the higher end of the market.
Still it is important to note that the trend towards increased home ownership has been reflected in Condominiums as well. In 1996 the percentage of condominiums being rented was 33% of the total (vs. 23% in 2001) and according to the City of Toronto the total number of condominiums available for rental in the City dropped by over 4000 units between 1996 and 2001.
WHAT CAN WE EXPECT IN THE FUTURE
Low interest rates, the shift to home ownership, unemployment among the young all suggest that the vacancy rate will remain at or above the current levels.
However, in the long term, any shift to higher interest rates and increasing home ownership costs may reduce the shift by renters towards home ownership and stabilize or reduce the increase in vacancy rates.
The increase in vacancy rates in condominium apartments may also lead to less demand from investors and a slowdown in new construction.
An improvement in the opportunities for young adults may lead to increased demand for apartments.
Also note that the Tenant Protection Act now allows for demolition of apartment buildings and conversion to condominiums. The City of Toronto passed laws restricting the conversions (OPA No. 2) and demolitions (OPA No. 2 and PR-22), but these regulations do not apply once there have been two years of vacancy rates of 2.5% or more. In 2001 there were already been applications of at least 1700 rental units to condominiums, a process that would reasonably be expected to accelerate if the vacancy rate remains high.
The virtual absence of a vacancy rate among the apartment buildings resulted in properties being bought and sold almost like a bond. Yields were low and property prices and demand were high, with the supply of properties for sale also being very low. It may well have been unrealistic to think that such a situation could persist and market forces have operated to introduce alternatives to renting. Still, vacancy rates are not unreasonable and as described above there are numerous forces that will work to keep vacancy rates in check.
We already are seeing an increase in the supply of multi-residential properties for sale. As the supply increases and yields drop to reasonable levels that reflect expected vacancy rates there will be opportunities available for the astute buyer.
Remember who your renters are, look for reasonable prices and look for locations that will attract renters.
Prepared December 20, 2002.
Multi-Res Update (prepared January 2004)
As of October 2003 vacancy rates reported by CMHC at 3.8% in Toronto. The previous record for vacancies in Toronto was set in 1971 at 3.5%.
The availability rate (ie units that are still occupied but where tenants have given notice that they will vacate) was 5.7% in Toronto in October 2003.
Average rents in 2003 dropped by 1.1 % according to CMHC. However the asking rent for units that become available have dropped by 7% over the prior year. Higher end units have been the hardest hit, with asking rent for 1 and 2 bedroom units in the higher end of the rental range, dropping by almost 18% since mid 2002.
Vacancy rates have been projected to increase in 2004 and 2005 to 5% and 5% or more respectively for each of those years. Low interest rates which have fueled the move from apartments to new homes and moderate job growth due to economic conditions (including the growth in the Canadian dollar) will be major factors that contribute to the high vacancy rate. At the same time there has been an expansion in new rental supply with about 1950 purpose built rental units and about 4000 investor condominium units.
