Construction of rental properties has been booming, but this much-needed boost could be setting Canada up for a bigger housing problem down the road, warns an economist.
Kari Norman, senior economist at Desjardins Group, says that Canada’s housing market is undergoing one of its biggest shifts in decades as developers turn away from money-losing condo projects and pivot to purpose-built rentals.
Rental starts totalled 130,000 over the past year, while condo starts fell below 50,000 for the first time since the Great Financial Crisis.
“Although the shift helps ease Canada’s longstanding shortage of dedicated rental accommodation, it also raises an important question: could today’s rental boom become tomorrow’s homeownership shortage?,” said Norman.
The reasons developers are fleeing the condo market are well known. Higher interest rates , elevated construction costs and government fees have made many condo projects too pricey to build at current selling prices. As investors retreat, presales that builders depend on for financing have plummeted.
Meanwhile, after decades of under-building, the economics of purpose-built rental projects have been boosted by targeted Canada Mortgage and Housing Corporation financing programs and the removal of the GST on new rental construction, said Norman.
It’s not that the increase in rental construction is driving the condo downturn; that’s happening all on its own. Rather, “rental construction is helping sustain development activity during the ownership market downturn,” she said.
And the decline in homeownership construction is not limited to condos. Total housing starts over the past year are 43,000 higher than in 2019, but that’s only because of a 73,000-unit increase in rental starts, she said. Starts intended for ownership fell by 30,000.
“As a result, the ownership share of housing starts plunged from more than 70 per cent to about 45 per cent,” said Norman. “Simply put, Canada is building more homes, but fewer of them are being built for purchase.”
There is no shortage of homes for sale yet, but since it takes years to complete a condo project the dearth of starts today may not show up until later this decade, she said.
This could drive up prices down the road when demand begins to recover.
Norman says policies supporting rental properties should not be reversed because Canada still needs “substantially” more rental supply.
But policy makers should be aware that the rental construction boom may be masking the deterioration of the home ownership pipeline, and take action to support both.
“Ultimately, a balanced housing system can only be achieved by maintaining a robust pipeline of both rental and ownership construction,” she said.
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Bank of America’s bull and bear indicator is screaming sell.
The proprietary barometer that acts as a contrarian trading rule by measuring investor fear and greed hit a five-year high this past week.
“We remain in summer Retreat/Rotate not Reload camp,” said strategist Michael Hartnett, whose team recommends investors retreat from risk assets and/or rotate into “defensives, duration and the U.S. dollar.”
The warning comes after equities hit record highs last week as investors rushed back into semiconductor stocks, easing fears that the AI rally was waning.
BofA said U.S. equities attracted a net US$9.6 billion in the week through Aug. 5, putting them on track for a record year of inflows.
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Today’s Posthaste was written by Pamela Heaven with additional reporting from Financial Post staff and Bloomberg.
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