August 19, 2022

Here We Go Again!

All that pressure and energy that was pushing real estate sales and prices higher has dissipated over the last 4 months. Or so we thought!

It’s found another outlet. The rental market.

It seems that the rental market is now experiencing conditions similar to what buyers were going through over the past 2 years, and the parallels are interesting to say the least. People lined up to view rentals and making offers for hundreds of dollars more than the posted rents. It’s a windfall for landlords much like it was a windfall for sellers.

What’s driving this? Not surprisingly, similar conditions exist that drove the sales side. An abundance of demand for rentals and a chronic lack of inventory.

There are a lot of frustrated buyers that have been priced out of the market because current prices are too high and have lost purchasing power because of escalating mortgage rates. Some of these buyers are now looking for rental accommodations. A number of the tenants chasing the few available rentals are new tenants moving into the area or out of their parents properties. Locally, a good portion of the demand is also being driven by students returning to in-person classes at local universities and colleges.

The rental frenzy is all over the media and twitter in particular with a lot of focus on the “greedy” landlord being portrayed as the classic villain.

For tenants already in a rental and their lease renewing, there is no real impact on them unless they want to change locations. The allowable rent increase in 2022 after a 2 year freeze for covid is 1.2%. Yes that’s right, if the 2021 rents were $1000/m, the legal rent increase this year is $12/month. The capped legal increase for 2023, a generous 2.5%. Landlords legally cannot crank the rents up on existing tenants, nor can they legally give existing tenants the boot because they want to increase rents.

However, if a landlord has a vacant unit today, they are going to maximize the rents they can get locked in today knowing that next year and the following years the rent increases allowed will not keep up with inflation.

In Ontario, the Residential Tenancies Act has been used to manipulate and regulate the rental market very much in favour of tenants. It’s political. There are a lot of votes to be gained by favouring people that rent and it doesn’t cost the political parties or government in power anything in terms of money.

The true cost, however, is a diminished rental market that is starved for capital and has reduced capacity. There is truly no long term thinking or strategic planning in the rental market, just like in the residential real estate market.

The solutions required will take a lot of money, time and effort from government, tenant associations, landlords and developers. There are no quick answers to a solution that’s fair to all parties. Until the politicians make affordable and equitable housing a true priority, the turmoil in the rental market will continue to make headlines.

What’s it going to take? For starters, federally the government should have Canada Housing and Mortgage Corporation (CMHC) get back to its core purpose which was to support the construction of affordable housing, including rentals. If the government makes it easier for new rentals to be built, the increased supply alone will be instrumental in reducing rental rates and at the same time improving the quality of rentals available.

Locally, the city has started by allowing accessory units and now tiny stand alone units in existing homes and neighbourhoods. Still, there is resistance and NIMBYism preventing densification in existing housing stock.

Consumers own a part of this as well. We need to be prepared to re-vision what a home looks like. Will it become more multigenerational? Are we able to change the ideal detached home, grass and white picket fence for something more sustainable and dense which will create a better urban environment and experience?

There’s a lot to unpack around housing, both rental and ownership. Until our leaders decide to tackle the issue, we will continue down the path of least resistance and what is the easiest most profitable product to sell or rent out.

Just my 2 cents.

Enjoy the weekend.

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