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The Toronto region is facing the largest apartment rental shortage of any major city in Canada as inadequate new construction and soaring population growth are expected to worsen an existing shortfall and push rents even higher.

An analysis released on Wednesday by Royal Bank of Canada economist Robert Hogue concludes Toronto needs a package of policy measures – such as offering tax incentives to encourage more rental construction and regulating Airbnb short-term rentals – to improve the city’s apartment inventory.

The report estimates the Toronto area had a deficit of 9,100 rental units at the end of last year compared with demand, while the number of new households looking for rentals is also forecast to grow by an average of 22,000 units each year between 2019 and 2023 as Toronto’s population climbs.

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To make up the existing backlog and cover the annual growth in renter demand, Mr. Hogue estimates Toronto needs 53,500 new rental units over the next two years, or 26,800 a year. Construction activity is far from reaching that target, however.

Over the 12 months ended July 31, completed new purpose-built apartments surged in the Toronto region, hitting a 25-year high of 4,300 units. But that amounted to just 20 per cent of what’s required, the report says.

In the same period, developers completed construction on another 15,800 condominiums in Toronto. Assuming half of them, or 7,900 units, were purchased by investors and rented out to tenants, the report says a total of 12,200 new apartment and condo units were possibly added to the rental market in the past year, which is still less than half of the estimated requirement.

Although there are many rental projects under construction, Mr. Hogue said it is unlikely the region’s 1-per-cent vacancy rate will improve significantly in the short term given the rate of population growth. That means further rent increases are likely on the horizon.

“As long as the vacancy rate is below 3 per cent, there is going to be constant upward pressure on rents,” Mr. Hogue said in an interview.

“For me, it’s hard to imagine a situation where suddenly there is going to be some lessening of rent increases in the context of a very, very tight rental market.”

The RBC report used data for the Toronto census metropolitan area, which is a wide region stretching around the city of Toronto that includes communities such as Brampton, Mississauga, Richmond Hill and Pickering.

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Average rents for two-bedroom apartments across the region climbed by 4.5 per cent in 2018, while condominium units had 4-per-cent rent growth last year, the report said. Average monthly rent for a two-bedroom apartment was $1,633 at the end of 2018, it said.

He said policy makers in the Toronto region need a clear strategy similar to Vancouver’s 10-year plan to improve housing affordability, with a target of hitting a 4-per-cent rental vacancy rate.

He suggested municipalities could remove disadvantageous property-tax treatment for apartment buildings, offer rebates on development charges and change restrictive zoning bylaws that do not allow rental construction in some locations.

Toronto should also regulate short-term Airbnb rentals to make more units are available for long-term tenants, the report said. Toronto City Council has already passed proposed measures, but they are under appeal.

Mr. Hogue said there should also be federal or provincial tax relief and financing programs for rental construction. In past decades when more rental housing was built, he said it was because there were incentives to spur development.

Current policy measures, which include a federal loan program to encourage rental-housing construction, haven’t gone far enough and need to be broadened beyond affordable housing, he said. While there were past controversies about offering tax incentives to for-profit builders, he believes the public would today support targeted measures.

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“If our starting point is an affordability crisis, the public should be open to having a set of measures that might be out-of-the-box, for a period of time at least, to get things going,” he said.

While Toronto’s rental market is facing the prospect of worsening shortages, the RBC report concludes other major cities are facing a better rental future.

In the Vancouver region, which has Canada’s highest average rents, the existing rental housing deficit is estimated to be 3,800 units, and growth is projected at 9,400 units annually between 2019 and 2023.

New supply is expected to be close to meeting demand, however, after an estimated 11,000 new apartments and condos hit the rental market in the past year. Mr. Hogue said strong construction in the city “bodes well for achieving balance” within the next couple of years, assuming 40 per cent of new condos become rental units.

Montreal has seen an even bigger rental apartment building boom, with completions reaching a decades-high level of 11,500 units in the year ended July 31. The level is almost identical to the 11,600 units Mr. Hogue estimates are needed to close the rental gap in the region, but Mr. Hogue said it may not be sustainable in coming years.

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