Low vacancies, skyrocketing rents and bidding wars among tenants. Toronto’s rental market is so tight, it squeaks. Can anything be done to fix it?
By Graham Haines, The Ryerson City Building Institute
As the cost of homeownership continues to spiral upwards across the Greater Toronto Area, young professionals and families are increasingly turning to the rental market to meet their housing needs. Unfortunately, after decades of focusing on homeownership rather than rentals, the Toronto region is ill-prepared to accommodate this surge. Apartment hunters are already seeing the impacts: low vacancy rates, skyrocketing rents, and even rental bidding wars.
In the current environment, the GTA’s apartment shortage has encouraged condo-owners to rent out their units, making condominiums a better investment than in the past. This has fueled further speculation, leading to higher condo prices. The result? We have an expensive housing market that’s affecting renters, condo-owners, and homeowners alike.
How did we get here?
Toronto’s failure to build new rental supply dates to the early 1990s, but has been particularly pronounced over the last decade. Since 2007, the only significant additions to our rental market have been through condos owned by individuals and small investors. There
has been essentially no new supply of traditional apartments (purpose-built rental buildings).
With condo prices increasing — up 24 per cent over the past year alone — building condominiums is a lucrative business, while escalating prices are an incentive for developers to build condos instead of purpose-built rental apartments. But this is not the only reason we’ve seen condos outpace rental development. Part of the problem lies with the way purpose-built rentals are financed.
Condo projects and rental buildings both rely on large bank loans to fund construction. These loans, much like typical mortgages, require cash to secure. While condo builders can use pre-sale deposits to help secure the loan, builders of rental property must front the down payment on their own. Ultimately, this makes securing financing easier — and less risky — for condo builders than for rental apartment builders.
HST also poses a challenge for the development of rental buildings.
The owner of a new rental building must pay the HST on the market value of the new building. Meanwhile, a condo builder can pass HST along during unit sales. Though tax rebates do exist for builders of rental buildings, this tax treatment still adds a significant cost to rental builders that condo builders are able to avoid.
Should we worry?
On the surface, focusing on homeownership options such as condos, at the expense of rentals, might not seem like a terrible idea. Many Canadians, old and new, dream of purchasing their own home. Certainly, this remains one of the primary ways for Canadians to build wealth. However, our reliance on the condo market, at the expense of rentals, has distorted the housing sector.
Because we have started relying almost exclusively on condos to boost the rental pool, our rental supply has become reliant on individuals buying condos and putting them on the market. This makes our rental market more precarious. Further, our reliance on condos for rental has made condos look like a better investment option. Not only do they appreciate in value in the current real estate market, but given Toronto’s low rental vacancy, they also come with a monthly income if owners rent out their units.
With condos looking like a strong investment, the number of GTA property owners with more than one property is climbing. An analysis by the Ministry of Finance using 2016 property tax data found that 121,000 property owners owned more than one property — more than four times as many as in 2000 (just 24,000 owners had more than one property back then). With more investors getting into the market, this number will continue to climb.
All of this condo investment and speculation affects more than just renters and condo-owners. Someone looking to enter the housing market is no longer competing against other new homeowners, but also with investors. Investors who own property may have access to more equity and can leverage property they own already to help purchase new property, giving them a leg up over most first-time buyers. The challenge gets even harder if you are a family looking for appropriate housing.
Not only do prices keep climbing, but developers are also building fewer family-friendly units than ever before. With strong demand for investment units, one-bedroom condos have taken over as the primary form of development in Toronto. Over the past five years, only 40 per cent of condo units built in the GTA have two or more bedrooms, a steep decline from the 1990s when 67 per cent of condo units had two or more bedrooms. With land in the GTA at a premium, we are no longer building a significant amount of ground-oriented housing such as townhouses, single detached houses, and semi-detached houses. This makes the dearth of new two-bedroom condos even more alarming.
Digging ourselves out of this hole
If we want to shift away from condos for our rental market — and instead rededicate them as the entryway to homeownership — we need to significantly ramp up construction of rental apartments.
Increasing the development of rental apartments cannot happen overnight, but there are several immediate changes we can make. Restrictions on secondary suites could be eliminated, making it easier for homeowners to rent out “granny suites” and basement apartments. This would help address our rental crisis while also helping homeowners earn supplemental income.
Zoning by-laws could also be changed to allow homeowners in residential neighbourhoods to construct laneway and backyard suites. These homes would be more suitable for a range of family sizes and incomes.
The most significant changes, however, are financial incentives to make rental buildings more attractive to developers. A report recently co-authored by the Ryerson City Building Institute and Evergreen recommended that the Toronto area needs 8,000 more purpose-built rental units per year to address its housing challenge. Incentives such as development charge rebates, interest-free loans, and changes to HST rules could all help.
Addressing rentals might seem like a counter-intuitive way to solve our housing challenges, but a healthy system that considers owners and renters can provide more housing for all incomes and ages; the very same qualities that first made the GTA such a desirable place to live.
Graham Haines is the Research and Policy manager of the Ryerson City Building Institute, based in Toronto, Canada.
(Photo credit: Istock.com)
