New indicators raise more concerns on housing affordability and supply

Kevin Hughes
Deputy Chief Economist

As Deputy Chief Economist, Kevin Hughes is part of a team of housing economists and researchers striving to improve Canada’s understanding of drivers and barriers in housing markets and how they impact affordability. Kevin is also part of a diverse national team of researchers and analysts who are investigating impediments to housing supply and potential solutions.

The results of CMHC’s Rental Housing Survey are always highly anticipated, as they provide a comprehensive view of current conditions of this critical segment of the housing market.

In addition to providing this view, the 2022 edition opens our eyes to new perspectives.

Methodological improvements provide a more accurate view of the issues facing the future of housing in Canada: access to affordable housing and supply in the years to come.

Markets are tightening in many centres

As far as current market conditions are concerned, the 2022 results reflect a tightening in many markets across Canada and reflect increases in rents. These results are driven by well-known dynamics:

• Higher demand stemming from a rebound in immigration and robust employment markets
• Supply unable to adjust to demand, despite an increase in construction,
• Rising interest rates, which have reduced homeownership for many tenants. 

In the short term, market forces could be expected to restore some balance between supply and demand. But we must ask ourselves whether these forces alone are sufficient at present. If the lack of interest of investors for the rental sector (currently observed) continues, the shortage of rental housing is likely to increase further.

Two new indicators raise additional concern

Driven by the need for a more realistic and comprehensive view of rental market phenomena in Canada, CMHC added two indicators to its survey in 2022.

The first indicator measures the share of units that are affordable (whose rent represents less than 30% of pre-tax income) for the lowest income group of renters, those in the lowest income quintile (20%).

What this first measure tells us is worrisome, to say the least. As shown in the figure below, the lowest income households have access to a very small share of the rental stock. Apart from Quebec City and Montreal, the market share that is affordable for low-income households is less than 5 per cent in major centres, one per cent in Vancouver and almost none in Ontario cities.

Whether we think of older households or future households (currently living in Canada or arriving from abroad), the results are worrisome in terms of current and future needs. In addition to the most vulnerable segments, access to housing for future economic contributors (youth, ready to form a new household) is delayed.

The second indicator allows us to measure the average rent for newly rented units, that is, apartments whose occupants arrived in the last 12 months. This new statistic is very relevant because it allows us to compare it with the average rent for units occupied for more than a year.

Comparing these two rent categories reveals significant differences between the average rent for occupied units and the average rent for newly vacant units. This gap is most pronounced in:

• Major population centres
• Centres with relatively low vacancy rates
• Centres where the rent increase is subject to guidelines

The fact that there are large differences in Canada’s cities is a concern given the number of households involved. In particular, Toronto and Vancouver, where the gap is close to $500. Given the population projections (according to which Canada’s major cities will see sustained population growth), the gap is all the more compelling.

It is also not surprising to find that the spreads are relatively proportional to the tight state of a market, as scarcity usually pushes new rents higher.

The results also reveal that the gap is more pronounced in centres where rent increases are subject to guidelines. In addition to gaps previously mentioned for Toronto and Vancouver, the gap is approximately $250 in Montreal. This result is not surprising as owners will adjust the rent in order to reflect current prices and to account for certain capital expenditures (repair and renovation) that could not be accounted for prior to the turnover.

We could also expect that insofar as the turnover stock is composed of units for which the duration of occupancy was long, the spread would be greater. In Calgary and Edmonton, which are not subject to guidelines, the spread is an average of $50.

Average rent, Two-bedroom, by City, 2022

Two new measures that reflect of lack of housing supply

The two new measures introduced by CMHC in its rental market survey improve our analysis of the rental market and increase our awareness of the lack of housing supply in Canada. They also tell us that to fill this gap, the short- and long-term prospects of all market participants will have to be considered. Ensuring that Canadian households have access to affordable housing while encouraging private sector investment is a challenge, but there are few alternatives.