The rental market in Canada’s major cities, particularly Toronto and Vancouver, is facing increasing pressure as real estate investors struggle to profit from their properties, according to a report from CIBC and Urbanation. The study reveals that most Greater Toronto Area (GTA) investors were cash flow negative for their properties in 2022, meaning that their rental income did not cover their mortgage, property taxes, and condo fees. The rising interest rates implemented by the Bank of Canada have contributed to this shift, making it harder for investors to generate positive cash flow. As a result, many investors are considering selling their properties, potentially further limiting the supply of rental units in the market.
While rent prices have surged in recent years to offset the financial strain on landlords, it has not been sufficient to sustain the business model for most investors. The average monthly rent in Canada reached over $2,000 in April 2023, up nearly 10% year over year. However, experts warn that if investors become less interested in the pre-construction market due to worsening cash flows, it could reduce new builds or increase property sales. This would negatively impact the rental supply, potentially driving up rents further and creating affordability issues for renters.
Investors play a crucial role in the rental market, accounting for many condo units built in cities like Toronto and Vancouver. If investors become less active in the market, it could limit the development of purpose-built rental apartments, exacerbating the housing shortage. Both cities are already grappling with constrained housing supply, leading to upward rent pressure. While this situation may offer attractive returns for investors who can hold onto their properties, it leaves tenants struggling in an increasingly competitive rental market.
Another factor contributing to the pressure on the rental market is high levels of immigration. Canada experienced a record number of newcomers in 2022, with many settling in urban centers. Immigrants often rely on renting initially, and the lack of affordable housing options and rising rental costs in city cores or long commutes from the outskirts pose significant challenges for them. The pressure on the rental market from immigration further compounds the issues renters face.
Experts believe that governments at all levels need to address the challenges in the rental market. They suggest reducing fees and taxation, expediting approval processes, and allowing for greater city density to incentivize investment in rental housing. More prominent institutional investors and individual condo investors are experiencing difficulties in the current market conditions. If housing supply fails to keep up with demand, a significant supply gap could emerge, exacerbating affordability issues in the rental market.
In summary, the report highlights the increasing financial challenges real estate investors face in Canada’s rental market, particularly in cities like Toronto and Vancouver. The rising interest rates and constrained housing supply make it harder for investors to generate positive cash flow, potentially reducing new builds and limiting the rental pool. This could drive up rents and worsen affordability issues for tenants, especially with high levels of immigration adding to the demand for rental housing. Addressing the pain points in the rental market through policy interventions is crucial to ensure a balanced and sustainable rental market in the future.