Strong demand and limited supply keep rental market tight
Canada's apartment market showed signs of cooling in the second quarter of 2024, but demand continues to outpace supply amid strong population growth and insufficient housing construction.
The average national in-place rent reached a record high of $1,521 in Q2, according to Yardi Canada's latest multifamily report. This represents an increase of $18 or 1.2% quarter over quarter, and 6.3% year-over-year.
While the annual growth rate has decreased slightly from 6.5% in the previous two quarters, it remains well above long-term averages. The national vacancy rate also increased to 3%, the highest since Q2 2022, indicating some easing in the market.
"Canada's apartment market is demonstrating signs of cooling, but remains fundamentally strong," said Peter Altobelli, vice president and general manager of Yardi Canada. "While rent growth has begun to decelerate from its peak, it persists at a robust level due to ongoing supply constraints. The disparity between housing demand and available units continues to be a significant factor shaping the rental landscape."
The report showed a gap between housing demand and available units. Despite apartment construction reaching multi-decade highs, with 112,819 apartments delivered in 2023 (representing 60.1% of all new housing units), supply still falls short of meeting the needs of Canada's growing population.
“Rent growth is likely to continue decelerating, but slowly as demand is heightened by ongoing population growth while delivery levels are stagnating,” Yardi wrote in the report.
Canada's economic backdrop remains mixed. GDP rose at a 1.7% annual rate in the first quarter, according to Statistics Canada. The unemployment rate stood at 6.4% in June, up 1.3 percentage points since April 2023 but still below long-term averages. However, a notable age cohort gap exists, with unemployment at 5.4% for those aged 25-54, but 13.5% for those under 25.
The Bank of Canada's recent decision to cut interest rates is expected to have a positive impact on the economy, including the rental market. Lower interest rates free up more money for homeowners, potentially increasing demand for goods and services, which could stimulate economic growth.
“The Bank of Canada was proactive compared to the US Federal Reserve by cutting the policy rate by 25 basis points to 4.75% in June, and it made clear its inclination to continue reducing rates to stimulate the economy,” Yardi said. “The BOC’s plans seemingly were complicated when the May inflation rate increased to 2.9%. But June’s inflation print (released in mid-July) unexpectedly fell to a benign 2.7%, making another rate cut imminent. Interest rates are a critical component in Canada’s economy, and the impact of lower rates will be positive, if not immediate.
“Rising rates have squeezed homeowners by increasing mortgage debt-service payments. The impact is most acute in mortgages with short-term maturities and variable rates. Reducing rates and mortgage payments gives homeowners more money to use for goods and services, which translates to higher economic growth.”
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