Since the Bank of Canada’s interest rate hikes began last year, many prospective homebuyers have opted to rent instead. This demand boost, paired with constrained rental supply and already low vacancy rates, has created average annual rent increases far beyond the inflation rate.

The Greater Toronto Area (GTA) saw over 10,500 condominium apartment rentals reported through the Toronto Regional Real Estate Board (TRREB) ‘s MLS System between January and March of this year, a four per cent increase compared to the same time in 2022.

Despite more supply, this market saw a 15+ per cent year-over-year increase in the average rent for a one-bedroom condominium apartment, while the average two-bedroom rent increased by over nine per cent. 

Toronto realtor Anita Springate-Renaud saw an even steeper change at her brokerage, Engel & Völkers. During the first quarter of this year, it closed 51 leases compared to 14 from the same time last year.

“We started to notice crazy bidding wars,” recalls Springate-Renaud. “There was a shift, I guess, after June … the sales side of things slowed down, but the rental (side) was just crazy. I had a client who had his property up for sale — we couldn’t sell it and put it up for rent, and we had, I think, about five offers on it … they paid for the whole year upfront. And honestly, what they’re paying for rent would have covered the mortgage.”

The realtor feels the high rental rates are linked to low inventory and the fact that qualifying for mortgages has become quite onerous. “It’s a problem to the point where I’ve seen offer dates for leases, which is very bizarre,” she says.

Jason Mercer, TRREB’s chief market analyst, points out that the GTA sees record levels of immigration, which will only continue into the future, and all of these people need a place to live, whether they rent or own.

Over the last year, because of higher borrowing costs, a lot of would-be first-time buyers started taking a harder look at the rental market because it was more affordable. During the same time, the vacancy rate was cut in half due to a lack of supply — there just hasn’t been enough to keep up with that population growth.

Mercer comments, “You saw this cyclical movement out of ownership into rentals because of higher borrowing costs, at least initially, and at the same time population growth record levels on the back of immigration. So, the result is more competition for available units and strong upward pressure on rents.”

Similar issues are happening in British Columbia. Brendon Ogmundson, chief economist of the BC Real Estate Association, notes the high rental demand is reflected in the fact that rents are incredibly high and supply is so low. He also points out that qualifying for a mortgage with the stress test and high borrowing rates are to blame.

“(It’s) no surprise, because of where mortgage rates are, how difficult it is to come up with a down payment, and how difficult it is to pass the stress test, that a lot of potential buyers are being pushed in the market at a time when there’s not a lot of rental supply,” Ogmundson explains.

How the Bank of Canada’s most recent rate hike is impacting rentals

With banks forecasting another interest rate hike in July, current and would-be home buyers are becoming used to seeing rising rates. While Ogmundson isn’t sure that the latest 25-point bump will increase rental demand, he does feel it changes expectations.

“As soon as April inflation data came in, kind-of hot markets really shifted … qualifying is going to be harder and five-year fixed rates are going up … (the issue) isn’t so much the 25 basis points on top of what are already high mortgage rates. It’s the change and expectations for markets that it’s going to continue to be hard to qualify for longer.”

Springate-Renaud feels buyers have gotten used to the “free money blip.” She explains, “People think that this 4.75 is crazy, but it’s the median rate. If you graph over the years, we’re at the median — we’re not high, we’re not low. The two per cent (people) were getting is not going to happen. We were lucky — (it was) free money, and it was a blip.

Keaton Bessey, who owns and operates Greater Vancouver Tenant & Property Management, weighs in: “We always talk about the interest rate change, but a lot of people (already) had rates locked in. It also now depends on if they thought they were going to drop — then you don’t lock in your rates because you want to get the new (lower) one. But now, it’s going the other way.”

Bessey feels there are two sides: “More people (decide) not to buy anymore, but rent. That’s assuming they were trying to buy more space and they need to move … (the increase) will definitely affect people who are having kids or have moved into a one-bedroom with one kid and got by, and now they’re having another and need to move.”

He adds, “Then, there’s the other group that starts selling rental properties. I totally get why people would do that — however, we’ve got 150 individual properties with probably 120 individual clients. We’ve had one client list their property this year, and they told us two years ago, when they signed up with us, that’s what they were going to do. So, there is zero movement.

Most of Bessey’s clients are locals moving up and, for one reason or another, are keeping their first home as an income property. 

“I don’t even know if this type of purchase shows up and counts where it needs to — in realty listings, the lenders’ offices, taxes, wherever,” he points out. “Are you calling these people investors or not? Because, technically, they bought that one-bedroom 10 years ago, and now they’re buying a house, but they’re still going to keep the apartment.”

Mercer feels households have come to term with higher borrowing costs. He shares, “A good majority of the people looking to purchase a home yesterday are probably still considering (it) today even though we’ve seen this 25 basis point increase.

“But,” he notes, “There are always those on the margin of affordability that may look at renting to help with affordability. The problem is, then we get into this vicious circle where that’ll add competition for available rental units and push up that rental rate higher. And, eventually, we’ll see those people take a harder look again at ownership because the monthly rates continue to increase.”

Who’s renting, buying, and selling right now?

Mercer points out that the GTA’s population grows because of immigration and that there’s a mix of demographics looking to buy and sell.

“When you think about people looking to rent, they tend to be on the younger end of the spectrum. Particularly those that eventually make the move into first-time homeownership. You do have households that may be willing to sell the home they’re in because maybe it’s too big or whatever the case may be, and rent — but there are not a lot of options for them either. 

“And that’s been a real problem — whether you’re talking about home ownership or rental, there’s just not that diversity of housing available throughout the continuum.”

He also notes this means that people simply stay where they are, even though it isn’t necessarily optimal for their circumstances. “You have a tight rental market in part because people would move around in the rental market or look to purchase a home, but there’s not really a home that meets their needs.

“They don’t feel they can find something different, so you don’t get that cycling through the market we were used to, say, a couple of decades ago.”

Vancouver’s rental market 

When it comes to Metro Vancouver’s rental market, Bessey is still seeing pressure on rents in a tight market.

“We just had a lease tenancy fall apart in North Burnaby. It’s a two-bedroom, brand new, rented for $3,500 or $3,600 — they pulled out last minute and already paid their deposit.

Bessey says the property was re-rented after one day of showings, “It was way easier to rent this month than it was 60 days ago. We’ve got multiple applications behind the one we’ve already approved.”

He likens the current rental market to selling stadium concert tickets: “We do a lot better in a five per cent vacancy environment because then it’s all about service and managing a business. (Now), it’s like selling Elton John tickets — they’re here, come get them, now they’re gone, sorry everyone. People get mad at you — we’ve been blamed for the whole housing crisis.”

Ogmundson points out that repeat buyers are always about 30 per cent of B.C.’s market, but there was a shift toward the end of last year. “Where we saw a bit of a change is with first-time homebuyers, usually at about half the market moving down to about mid-40 per cent. Investors went up to about 20 to 25 per cent of the market.”

He feels B.C. will probably see more long-term investors because it’s easier for them to qualify for mortgages, having more access to equity than first-time home buyers.

What’s next in the GTA

As for what will likely happen next in the GTA, Springate-Renaud feels things will be pretty much the same.

“I think the summer market isn’t going to be typical where it quiets down. I think people will eventually realize that the rates we have now are not horrible.”

She’s also finding that people are looking for creative ways to buy. “The vendor take-back mortgage is coming back. When my mom was doing real estate in the ’80s, it was very commonplace and also commonplace for realtors to help navigate that side of things. I think we’re getting back into that because you can make way more money on interest through a mortgage than you can through the bank.”

But, the big problem in her mind is the lack of supply, along with the policy that hinders new construction. “We have to get more inventory,” she stresses. “At the end of the day, that’s the problem. We need to get more development going.

Thankfully, the government shifted its stance on foreign investment for development. I wish they would take away the foreign buyers’ ban – they’re critical in the sense that foreigners bought a lot of the smaller units from developers, which allowed the developers to develop, as they have to stop (construction) before they get financing from their money released.”

Springate-Renaud also points out that, typically, foreign investors would buy four or five units as investments and rent them. “So, not only did it help development push ahead, but it also helped the rental market.”

She feels that it all comes full circle. “It’s good to have people investing in real estate because they allow development to go further, which then creates homes for other people. And then if they end up selling, that brings inventory into the market.”

Mercer highlights the fact that the rental market may be more affordable, but since renters aren’t paying down principal, the costs are quite similar in many cases. He sees people “Taking a hard look at ownership again, just because the rental markets are tight and average rents have gone up. But, even if those people don’t buy, there will be others looking to take their place because of the record population growth. So, it goes on and on.”

Mercer feels that “Rental transactions are going to continue to remain elevated and should continue to grow because the population is going to continue to grow. It’s just that if we don’t see more supply coming out to the market, there’ll be fewer opportunities for people to find rental accommodation.”

He points out that the GTA’s issue moving forward is people being driven away. “If individuals and households are moving here, and businesses are investing in the region, and it’s becoming tougher to find housing, whether it be rental or ownership, then people will start looking elsewhere. That’s the median longer-term risk of all of this.”

What’s next in Greater Vancouver

Bessey is interested to see what will happen in July and August. “We’re getting way more than usual townhouses and detached homes to rent out, which generally aren’t offered for rent. These people are moving to Europe for a career change, or they’ve upgraded because they can no longer fit in a three-bedroom. They’re holding onto the townhouse they bought 10 to 15 years ago because they think it’s a hot product.”

However, he points out that generally, it’s not advisable to hold onto these types of properties for cash flow reasons if the goal is strictly financial gain. “We’d say sell these things if you want to be in the rental market, go buy two one-bedroom condos instead (which) will make a lot more sense for you.”

Bessey says it will either be normal seasonal numbers — rents for what they expect to see – or they’ll see people who are tired of searching. “They’ll sit around and wait until the economy falls apart and then rent something they can afford, even though they’re high-income earners.

He adds, “I always say, if I knew what was gonna happen, I would have Elon Musk as my landscaper because I’d have that much money.”

Ogmundson points out that the rental market isn’t a much better option than owning. “Especially with competition in markets like Vancouver because we have a huge re-influx of foreign students. So, we look at population growth and the huge surge in temporary non-permanent residents — those numbers were enormous last year and mainly impacted the rental market … it’s not like, ‘I’ll just go rent something; there are plenty of options.’ It’s really challenging as well.”

Even smaller markets far from the Lower Mainland are rising significantly. For instance, Kelowna has seen average monthly rents rise by about $1,000 over the past few years. 

“They were at $1,600 a month and are now at about $2,600 a month,” he points out. “In B.C., there’s not really a refuge for affordability anymore. A lot of people are talking about Calgary now — it’s a lot more affordable, but prices are rising there, too.”