Our RESPONSE To News On CMHC Rental Market Report Suggesting Toronto Rents Soared By 29% In 2022!
Introduction
Last month, CMHC released its rental market report for 2022, causing a stir in the news about massive spikes in rent. Yes, rents have gone up a lot in the last year, but if we look at things over a longer horizon, there’s actually a lot more to it.
So in this video, let’s take a closer look at rent trends to help you understand more about how they might impact the housing market.
2018 - 2022 Toronto Rents vs Canada CPI
Since 2020, we actually saw huge drops in rents and then finally a recovery past year. And if we take the timeline back to 2018, you’ll see that rent growth since 2018 hasn’t been that outstanding compared to our CPI.
CMHC condo rents were just slightly higher than the CPI. Food, transportation, gasoline, and energy prices all rose more than rents in Toronto.
I like to get a better picture of the rental market since a lot of leases don’t actually get done through MLS, especially the more affordable rentals. So to get a more complete picture of the rental market, I went over to Zumper to see their data to fact-check.
As of the end of 2022, we actually haven’t even fully recovered back to the peak rents set back in 2018. It wasn’t until this year that we finally moved past that point.
Now what caused a lot of buzz was this highlight from the CMHC report that says the average 2 bedroom rent on turnover went up by 29%, whereas if a unit didn’t turnover, there was a big difference at 1.2%. This statement is sort of misleading, so let’s go back to the rent chart. The first thing to note is that there are huge swings in Toronto rents, so timing can make a huge difference.
For example, the low in Q1 2021 for a one-bedroom apartment was $1750, and by the end of December 2022, rents had risen to $2300—so that’s already more than 29%. But here’s the thing: Rents in Q1 2021 were actually abnormally low. Basically, whoever locked in rents then got an amazing deal, and the last time renters saw those prices was in late 2016 to early 2017.
If you end up plotting rents on a chart and draw a trend line, you’ll see that despite the huge swings, the average rent growth is around 3% per year, which is actually in line with inflation.
Interest Rates, Toronto Real Estate Prices, Toronto Rents
Falling interest rates typically make real estate prices go up and rents come down. Rising interest rates do the opposite and the reasoning always goes back to supply and demand. With lower interest rates, you’d see more renters become homeowners and more investors get into the market.
What this does to the rental market is free up rental supply from existing renters and encourage more rental supply creation from investors, and this increase in supply is what ends up pushing down rents. Then during the pandemic with a lot more work-from-home, renters ended up moving back home and that also freed up rental stock, and this is a big reason when rents came down.
Now that those effects are unwinding and rates are going up, rental stock is shrinking, renter demand is going up and that’s the big reason why rents saw a huge surge last year.
Smaller And Bigger Rental Units
It also looks like bigger units usually see more volatility than smaller units. One explanation might be that there’s just less bigger units for rent and also less renters for bigger units. Basically, because there’s less activity, they end up seeing bigger swings. And for the same reason perhaps, we also see a lag in rent movements compared to smaller 1 to 2 bedroom units too.
2023 Toronto Rental Outlook
Now, just like real estate prices and overall inflation, it’s hard to tell where rents will be by year end. The BoC predicts that shelter inflation will continue to be strong for the rest of this year, but the rate of increases should slow down into Q2. Beyond that, they don’t give many more details but they do say that rents should ease sooner than other services.
This could be the case assuming that our supply growth can meet growing demand from our huge immigration targets. Once rates hold stable at much higher levels, the real estate price adjustment downwards will eventually make things more affordable and attract more buyers, further easing the pressure on rents and level things off.
Generally, it’s also important to continue to monitor rental supply and demand dynamics. There’s been news recently that housing starts could be slowly which could be a problem.
Developers have been postponing projects until they secure enough buyers, and in this market, precon sales are just not nearly as popular as before. We’re also seeing more building delays simply because borrowing costs are too high to build right now. This is something to keep a close eye on, which might end up taking rents one way or another.
In the ideal scenario, interest rates can start to come down next year and then hopefully that will eventually speed up new rental supply creation again which is definitely needed if we’re looking for more normal rent growth moving forward.
How We Can Help
We just talked about rent trends. There’s also price trends, other inflation trends, interest rate trends, hoops to jump through on the mortgage side, plus things to think about on the renovations side. So we know real estate investing can be pretty intimidating for new investors. But that’s why we’re here. If you’re looking for an expert to help you navigate through all of this, we’re happy to chat.
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