The Decibel - The historic rise of rental costs in Canada

Episode Date: November 28, 2023

The latest Consumer Price Index (CPI) numbers revealed what BMO’s chief economist calls the “new villain” of inflation: rent. While inflation is finally cooling for items such as groceries, the ...price for renting a place to live has increased 8.2 per cent – the largest increase in more than 40 years.Matt Lundy is an economics reporter with The Globe’s Report on Business. He’s on the show to explain why rents keep climbing and whether there’s any relief in sight.Questions? Comments? Ideas? Email us at thedecibel@globeandmail.com

Transcript
Discussion (0)
Starting point is 00:00:00 Halifax rentals. Let's check it out. You know, $2,300 for an apartment. That was like the first listing. Yeah, two bedroom apartment for like $2,400. Yeah, I mean, that's really a lot. Matt Lundy is an economics reporter with the Globe's report on business. So I know last time we had you on the show, we were talking about housing prices and we were looking at the cost of houses.
Starting point is 00:00:29 We're talking about rent. So let's do the same with with rental units for today. We know rent is high in places like Toronto and Vancouver. Those are always kind of the big attention grabbing numbers. But let's look at like another city. Let's look at Halifax, for example, here. What do we see for rent in Halifax? Well, rent in Halifax has gone up a ton. We can see here just perusing through rentals.ca that condos well above $2,000 a month seems to be the norm. It used to be a place that was pretty affordable.
Starting point is 00:01:04 It drew a lot of people there over the course of the pandemic because they could get a little more space. It's a little more affordable. They could work remotely. But a city like that has gone through such a big change in the past sort of three years where it is quite unaffordable now. So like this sort of rental or housing crisis that we typically associated with Toronto and Vancouver for the previous decade, you find it in all corners of the country now. Matt's on the show to tell us what renting is like in Canada these days, why it's so expensive, and whether renters can expect a break anytime soon.
Starting point is 00:01:42 I'm Maina Karaman-Wilms, and this is The Decibel from The Globe and Mail. My first place was in Toronto like I want to say 2011 was like $1,100 a month which I split. Wow. It had a transit stop right outside. It's like this type of thing that doesn't exist. Yeah that's that's like the the dream that doesn't really ever. Yeah the only of thing that doesn't exist. Yeah, that's like the dream that doesn't really ever actualize. Yeah, the only problem is that like the floor was like clearly rotting and all these other aspects that weren't so good. It's like location amazing, the apartment itself, terrible. Matt, thank you so much for being here. Thanks for having me.
Starting point is 00:02:22 So I know that you've been following what's going on in the rental market for years now. And of course, we've been talking about how prices have been high for a long time. Matt, I'm curious, though, how would you describe this current moment in the rental market? We are in a crisis. It's been around for a while and it's just getting worse. It really is an unfortunate situation and one that, frankly, you could have seen coming from a mile away. This is something we were talking about before the pandemic. It's only really gotten worse.
Starting point is 00:02:57 You said if you were looking, you could see this coming from a mile away. Why is that? We have not been building a lot of rental apartments, particularly in the 1990s. Like that completely just fell off a cliff. So like as far as supply that was coming around, we just were not building a lot. Things have changed over time. Like the second half of the 2010s, developers started getting more interest in it. The country was growing, you know,
Starting point is 00:03:26 population wise quite a lot as well. So there was clearly a lot of rental demand, they started bringing that up. But I mean, these some of these projects take years and years and years in order to actually get built and people moving into them. There is a fundamental disconnect between how fast the country is growing and our pace of home building. So last year, for example, the population of Canada grew by just over 1 million people, which was a record. But that year we completed around 220,000 housing units. So that's stuff that you would buy or rent. All told, that is 4.8 new people for every completed home. So about five people for every home we made.
Starting point is 00:04:10 And that just shows you like how out of sync those two things are. Obviously, those five people are not all going to the same home. A lot of what we're building is small condo units. We just, we are not building enough for how many people are coming into the country. Well, let's talk about some of the numbers then. So new consumer price index numbers came out recently, and this measures the change in price for items over time. We've talked about CPI before, right? This is essentially like the basket of goods and services that we tend to buy.
Starting point is 00:04:37 So things like food, gasoline, and housing, of course, right? Things we spend our money on. And essentially, this is what we look at to measure inflation. And the cost of rent is now driving up overall inflation or overall CPI. Rent rose 8.2% in October from a year earlier. So Matt, can you, I guess, can you put that in context? Is that a lot? That is definitely a lot. We have not seen rent increases in the 8% range since the early 1980s. So this is a multi-decade sort of event that we're seeing right now. And something to keep in mind, 8.2%, it might not actually sound like a lot if you've moved recently and you're paying 30% more for rent, but it's taking everyone into account. So if you have someone covered by
Starting point is 00:05:27 rent control with a two percent annual increase, they're part of that CPI 8.2 percent number, right? That gives you an idea of that when people are moving, they're paying way more and that's driving up the inflation stats for rent. Another thing that I would say as well is that the inflation story is very much about housing at this point. It's rent, it's mortgage interest payments. Those are the main things that are driving up the consumer price index right now. If you take shelter out of the equation, inflation is running at about 2%. That's like right on the Bank of Canada's target. So inflation increasingly is a housing story. You mentioned that we haven't seen these numbers since the early 80s. So I guess I'm wondering what happened 40 years ago and how did we get out of it then? Yeah, the early 1980s
Starting point is 00:06:20 were characterized by one, there was a recession. We had really high inflation at the time. We had very high interest rates as well. Alberta, for one, phased out rent control. So when I say rent control, I'm talking about legislation around annual increases. Ontario's rent control was 6% in the early 80s. So you could raise rent a fair amount. You had a lot of landlords who were trying to recoup their costs amid higher interest rates. You had a lot of landlords who were trying to recoup their costs amid higher interest rates. You had strong demand for rentals as well because the economy was not doing so well. And all of that really pushed rent up a lot. As far as what helped the situation, eventually we saw an economic recovery through the 80s. Home prices
Starting point is 00:07:02 were somewhat reasonable. So as interest rates went down, people could get back into the housing market. We also were not too removed from what was a really fertile time for apartment construction. The late 60s, early 70s, we were building more than 100,000 purpose-built rental units a year, which is more than we do now. So there was a lot more supply at that time. Interesting. And of course, it's different across the country, but where are we seeing the biggest increase in rent in Canada today? Yeah. So if we're going by StatsCan's numbers, if we look over the last four years, Atlantic Canada really stands out. We're seeing increases of 25 plus percent in New Brunswick and in Nova Scotia.
Starting point is 00:07:54 PEI and Newfoundland aren't that far behind either. You're seeing rent inflation everywhere, but Atlantic Canada really stands out as the one where the increases are the largest. Okay. So what's going on in Atlantic Canada that causes the prices to increase so much? They have had a huge influx of demand there. And it follows a time when they really weren't building all that much. They had weak population growth. And in the case of Newfoundland, actually population decline. So the development industry wasn't really building a lot.
Starting point is 00:08:26 Then over the pandemic, we had a lot of remote workers who were moving out there. We've also seen a lot of universities there really lean into bringing in foreign student enrollment, which has brought a ton of new demand to, in often cases, pretty small cities. And those are all people who would rent then too. Yeah, exactly. Like these are, you know, temporary foreign workers, international students. These are like classic renters, right? So that brings in a lot of rental demand. And just to give you like a sense of how big this influx was
Starting point is 00:08:56 from 2016 to 2021, the Maritimes grew faster than the Prairie Provinces for the first time since the 1940s. So we saw this total demographic shift that was happening there that we had not seen for decades. And of course, so it sounds like the biggest increase, if we're looking at that, is Atlantic Canada. But in terms of overall numbers, is rent still the highest in the big cities like Toronto, Vancouver? Yeah, the big cities are still where things are the most expensive. If you look at rentals.ca, the average listing in Vancouver is about $3,200 a month, whereas in Toronto, it's about $2,900 a month. Those are listed prices as well. If you have a lot of demand for a particular unit, you could have people bidding up the price. This is not uncommon in cities with low vacancy rates that someone might go in and say, I'll give you a couple hundred dollars extra a month.
Starting point is 00:09:50 And when we talk about renters, Matt, who rents in Canada? Well, overall, younger people, newcomers to the country as well. Uh, people who are sort of building up their wealth who traditionally, uh, over time are hopefully going to buy a home, right? Uh, but one thing that we've seen recently is that there's been a pretty large increase in six-figure households, earning six figures who are renters. These are people who traditionally over time would get into the home ownership market, but things are just so expensive in
Starting point is 00:10:40 most cities in Canada now that you're not getting that normal flow of people into home ownership. And that puts a lot of pressure in rentals as well, that you have people at the high end who are white collar workers with huge incomes who are occupying spaces. Yeah. BMO's chief economist went so far as to call rent the new villain of inflation. So Matt, with rent inflation at decades high, I guess, what does that mean for those who do rent? The BMO economist pointed out a pretty massive shift in people's wages and what they're paying for rent. So he found that rent was increasing at a faster pace than disposable income for the first time in six
Starting point is 00:11:26 decades. So that really shows you how much financial pressure people are under from their shelter costs. This points to a really challenging situation, and I think you can see it materialize in a lot of areas. Like in urban areas, we have higher rates of overcrowding in apartments or in any housing where there aren't enough bedrooms for everyone living there. Toronto has pretty high rates of this. We've also seen from certain urban areas like Toronto, an acceleration of people leaving the city. So Toronto is growing. Vancouver, Montreal, the same thing. This is largely through immigration, whereas you're seeing a lot of families with parents in their early 40s, with kids as well, and acceleration of them leaving cities because, frankly, there's not affordable spaces, right?
Starting point is 00:12:18 And this is just a sign of where affordability is at. We'll be right back. All right. So we've established that rents are high because there's low supply. And we also have competition from people making more money, six-figure salaries who've been essentially priced out of the housing market. So there's the option for them is to rent. And then there's people like students who might be coming to Canada to live temporarily. So they're looking to rent as well. But another part of the equation, Matt, are landlords too. So kind of the other side of things. They control how much they're going to charge for a place. So are landlords raising prices now? And I guess, why would they be doing that? aspect of the most recent inflation report is that they showed property taxes across the country went up the most since the early 1980s as well. And they mentioned that municipal budgets are under
Starting point is 00:13:31 pressure. So they're hiking those property tax rates to put themselves in a better financial situation. The other thing is that when there is a scarcity of rental units, landlords are going to probably increase the prices because they can. We do, of course, have those rent controls, which in a lot of areas of the country limit what they can do. But in Ontario, for instance, I mean, you hear horror stories about newer units. So there's no rent control for units built after late 2018. So for some of these new condo builds where you have mom and pop investors who bought a unit, they're renting it out, their mortgage goes way up. Sometimes you hear about, oh, my landlord raised the rent by 500 or $1,000 per month. And now that person's left with a pretty difficult decision on their hands.
Starting point is 00:14:24 Do they go out into the market, which they know is undersupplied, and they might have to spend an extra $500 or $1,000 anyway, or do they stay put and do whatever they can to make that rent? Yeah, that puts people in a really difficult situation. CIBC recently put out a report saying Canada's housing market is in a recession, and we'll start to see more units come onto the market, but without buyers essentially who are able to afford those. So that makes it sound like there's going to be a cooling off period essentially in the housing market. So what would that do to the rental market? It would certainly help if those six figure renters that we mentioned had more opportunities in homeownership. If we do see that softening or a continued softening in the resale market, you could get some of those people
Starting point is 00:15:13 out at the high end who finally could afford a place that would maybe free up some units and get rid of that pressure in the system. I don't think that's necessarily a housing solution, though. As far as the rental market goes, like people selling some of their units or a few more forced sales that we could see because people are contending with higher interest rates. I don't think we're like CMHC said, we are short millions of homes that we need. And the solution there is to get way more supply. So it's build more places, basically. Yeah, absolutely. A lot of people are looking to the government, right, to help find a solution. So what is the government doing? I asked specifically because the federal government put out their mini fall budget recently, right? And it has some things in it for home owners. What about for renters? Yeah, so the federal government, you know, previous to the fall economic statement, they removed some taxes from purpose-built construction. They also allocated billions in new funding for apartment construction. They are not going to allow tax deductions from short-term rentals such as Airbnb in places where they are restricted. The idea there is that potentially tens of thousands of units on the market, which could be rented by people for the long term, are instead being used for financial gain as de facto hotels, let's say.
Starting point is 00:16:48 So if they're removing some of the financial incentive there, people might have to either list those places and sell them or rent it out to a proper long-term tenant. So, yeah, I mean, look, the feds have been under a ton of pressure recently. Their polling numbers are not so good. People are not happy about the housing situation, and they've been throwing a lot of ideas at this recently. Can we expect any changes to the cost of rents on the horizon anytime soon, Matt? Is this something that people can maybe look forward to? So I've heard some voices out there saying that they expect things will maybe slow down a little bit.
Starting point is 00:17:28 On places like rentals.ca, you would often see, you know, last year, for instance, or the year before, year over year increases of like 20 or 30% in rental listings. And in some cases, those have like settled down a bit. So like the growth is not what it was. Would we actually see rents go in reverse and go down? Probably not. I don't know. That's really difficult to forecast. But, you know, as long as there is a significant supply shortage in the country, I just don't see how rents would go down, actually. But wouldn't there be a limit here? I mean, I guess this is kind of like a more of a philosophical question about how capitalism works here. But like, you know, isn't there a point where people eventually can't pay and if the price of housing just keeps going up and up? Like, I guess, yeah,
Starting point is 00:18:17 what's going to happen in the long term? Yeah, I mean, there has to be some kind of threshold or some friction there as far as like rent to income ratios, right? As far as what that level is, I'm not quite sure. Like in 2016, 40% of renter households were spending more than 30% of their income on rent and, you know, spending more than 30% of your income on housing, that's considered like a, you know, broad affordability ratio. So if four in 10 renter households were spending more at that point, you know, how much higher could it go? I'm not sure, but there has to be some kind of
Starting point is 00:18:55 threshold or pain point there where people just can't afford it. But then again, like, you know, people might move to new city or they might move further outside of the city and commute in. It might mean people having more roommates. It might mean, you know, downgrading your living situation to somewhere else. I mean, I think people are going to have to make whatever decision there to make it work. Yeah. This honestly kind of feels a little bit like doom and gloom, Matt, here for renters in Canada. I guess, is there anything here that, you know, you've been following this for a while. Is there anything that you see as kind of a bright note in all of this? If I was looking at it from a glass half full perspective. Please. And yeah. Well, for me, the big difference is that a few years ago, so much policymaking around housing was all about how to help people buy a home. So it was the first time home buyer incentive.
Starting point is 00:19:52 It was allowing people to tap their RSPs to a greater degree to make down payments. It was all these measures where I think they were misdiagnosing the problem. They were looking at it as, well, people don't have money. So, you know, let's help them spend more money. Of course, that just inflates home prices because you can bid more on them. The problem of why homes were so expensive is that we didn't have a lot of supply, right? So now we're starting to see supply measures come around where the federal government is trying to take an active role with funding that is tied to building more and frankly, building more dense housing as well. Like the fact that we're changing our municipal zoning codes in a lot of parts of the country to allow high rises instead of just single family homes, that is a huge difference as well. So the fact
Starting point is 00:20:45 that we're talking about supply, that is a huge shift because before it was all demand side measures. Okay. Well, we can hang on to that bright spot, I guess, for a little bit then. Yes. Matt, thank you so much for joining me today. Thank you. That's it for today. I'm Mainika Raman-Wilms. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrian Cheung is our senior producer.
Starting point is 00:21:15 And Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.

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