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Years of lacklustre construction and booming demand have led to waning vacancies and soaring rents. It’s a crisis decades in the making – and there’s no easy fix

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Rob Dobi/Rob Dobi

Amy Silliker knows where she’s living the next six months. Beyond that, it gets murky.

After many years out of province, she snagged a great job as a paralegal in Summerside, PEI, taking her back to her hometown nearby in February, and where she’s been house-sitting as she gets settled.

Six months into her rental search, she’s found nothing. She checks Kijiji every day, but listings are out of her budget. She’s on every apartment wait list imaginable, and calls each month to see whether anything has opened up. Nothing has. A single mother, Ms. Silliker has heard a harsh refrain from some landlords: They don’t want children.

The clock is ticking – and Ms. Silliker isn’t all that confident.

“I hope that I wouldn’t have to [leave] because I love my job,” the 25-year-old says. “But I mean, I can’t be homeless either.”

Welcome to the birthplace of Confederation, now home to arguably the worst market in the country for renters.

Prince Edward Island’s apartment vacancy rate plunged to 0.3 per cent in 2018, according to the Canada Mortgage and Housing Corp. (CMHC). Just five years earlier, it was 7.1 per cent.

After years of anemic construction and growing demand – thanks to an 8-per-cent population bump since 2014 – the average rent on a one-bedroom unit has climbed 16 per cent in five years. The vacancy rate for three-bedroom apartments on the island? Zero.

“We are using the word ‘crisis’ without exaggeration,” says Hannah Bell, an MLA for the provincial Green Party.

Toronto and Vancouver tend to hog the spotlight when it comes to discussions of the nation’s rental crisis, with vacancy rates in both metro areas sitting at around 1 per cent.

But renters – who account for more than 30 per cent of Canadian households – are struggling to find suitable housing in cities and towns from coast to coast. In Kelowna, B.C., the average rent on a two-bedroom apartment shot up nearly 10 per cent in 2018 from a year earlier. In nearby Revelstoke, B.C., a popular ski destination, the mayor says seasonal workers are sleeping 15 to a house. In Prince Edward County, Ont., homes are being converted into Airbnbs to accommodate floods of wine-drinking tourists, taking the homes off the rental market.

All of this means renters are often forced to stay in substandard, abusive or cramped conditions – or they’re being driven out of markets all together, taking them away from jobs, family and friends.

There’s no one issue to blame for the crisis. Instead, it springs from a combination of policy changes and tax reforms that have made rental construction less appealing, demographic shifts that mean demand is growing faster than supply, and a seemingly unstoppable housing market that has put home ownership out of reach for all but the wealthiest.

And there’s no quick fix.

Demand for rentals is “overwhelming the supply that’s coming online, and I just don’t see any silver bullet that’s going to change the supply equation overnight,” Michael Waters, the chief executive officer of Ottawa-based Minto Apartment real estate investment trust (REIT), said in a May earnings call.

“This will take quite a long time to remedy.”

Canadian developers used to build loads of apartments, but it has become much less appealing.

During some peak years in the 1960s and ’70s, more than 100,000 new rental units were completed, far greater than today’s construction levels.

Tax policies encouraged rental investments. Notably, owners could claim high levels of depreciation (up to 10 per cent annually) against a rental property’s income, helping to drive down taxable income during a building’s early years, when startup costs are higher and rents are lower. Owners could then use a property’s “paper loss” to reduce other sources of taxable income.

But in the early 1970s came a major tax overhaul with the primary goal of closing loopholes in the country’s tax structure. Rental incentives were collateral damage.

“There was little, if any, consideration of the adverse consequences on the flow of private capital” into rentals, wrote economist Frank Clayton in a 1998 report for the Canadian Federation of Apartment Associations.

As a result, allowable depreciations were reduced and the “paper loss” scheme eliminated. Sellers of rental buildings were also now subject to capital gains taxes, among other adverse changes.

Later on, Brian Mulroney’s Conservative government cut funding for social housing, leading to a sharp decrease in new affordable units in the 1990s.

At the same time, market dynamics were changing. Though the 1990s kicked off with a recession, the ensuing years saw robust economic growth. Home prices were modest and mortgage rates had declined precipitously, from double digits in the 1980s to about 7 per cent by the late nineties for a five-year rate. Canadians jumped at the opportunity to become homeowners, and the number of renters declined between 1996 and 2006.

To satiate demand, developers turned their attention to another form of high-rise: condominiums.

Condo construction exploded. Since 1990, condo starts nationwide have averaged 46,500 a year, compared with 21,000 for rental housing. Toronto provides an extreme example: Over the past decade, about 80,000 new condo units have come onto the market, compared with just 4,500 purpose-built rentals, according to a city report from January.

From a developer’s standpoint, there are obvious reasons to build condos. For one, you can presell the units, helping to secure part of the necessary financing.

“It’s simply easier to build condo product: presell 70 to 80 per cent of the units, build the building and then move on to your next project and collect a fairly large profit along the way,” says Paul Morassutti, vice-chairman at real estate services firm CBRE Ltd.

Of course, condos can be a lucrative to mom-and-pop investors – the average two-bedroom condo in the Toronto area rents for roughly $2,400 a month, according to CMHC, and about $2,000 in Metro Vancouver – and many units end up on the rental market. Depending where you look, they contribute significantly to a city’s new rental supply: About one-third of the Toronto area’s condos are used as rentals, versus 19 per cent in 2007.

But from a renter’s perspective, condo living – indeed, living in any unit that’s not purpose-built – can be precarious. Eventually, the owner may opt to move in, or decide to lock in profits and sell.

“It doesn’t allow renters to have confidence that their rental unit is theirs as long as they continue to pay rent on time,” says Graham Haines, research manager at the Ryerson City Building Institute.

Then there’s the Airbnb effect. Increasingly, owners are bypassing the rental market entirely. A recent McGill University report found more than 31,000 homes (including condos) were rented out so often on Airbnb in 2018 that they were likely removed from Canada’s long-term rental supply. (The company disputes the figure and the study’s methodology.)

What’s clear is that condos, increasingly, aren’t places where families can live and grow.

The median size of condos built in Ontario from 1981 to 1990 is just over 1,000 square feet, according to Statistics Canada; for those built in 2016 and 2017, it is 665 square feet. In B.C., it declined to 775 square feet from 922 square feet.

“We’re building condos not based on what the rental market needs, but what the investors who want to buy one condo will want instead,” Mr. Haines says.

Rental demand is strong, and it’s only getting stronger.

Since coming into office in 2015, the federal Liberals have pursued higher levels of immigration to help stoke economic growth and ease long-term demographic concerns. Canada welcomes more than 300,000 immigrants annually, and Ottawa is targeting higher intakes in coming years. This has led to some of the country’s strongest population growth in decades.

It’s a policy rooted in sound economic theory. But most newcomers also rent, and combined with decades of meagre rental construction, the result is that demand has overwhelmed supply.

“We just haven’t been building traditional apartment buildings to keep up with expansions in population,” says David Macdonald, senior economist at the Canadian Centre for Policy Alternatives (CCPA).

Consider PEI. To help boost its fortunes, the province has pursued an “aggressive population growth strategy,” says Ms. Bell, the MLA, seeking out both immigrants and luring native islanders back home. Over the four years that ended in mid-2018, PEI’s population grew 6.2 per cent, the highest among the provinces. In addition to immigration, rental demand has been topped up by those moving to Charlottetown from rural areas, Ms. Bell says.

But with lacklustre construction, and a vibrant short-term rental market, vacancies have all but dried up.

“We are genuinely concerned that we are going into yet another fall and winter where we have people who are in crisis,” Ms. Bell says.

The problem is magnified in major employment centres such as Toronto and Vancouver, which are hubs for newcomers.

Indeed, in the 12 months ending July 1, 2018, the Toronto region’s population grew by roughly 125,000 people, or 56 per cent higher than the previous 10-year average, Statistics Canada reports. For both the Toronto and Vancouver areas, population growth was entirely due to international migration, including permanent residents and foreign students.

It all adds up to a national vacancy rate for purpose-built apartments of 2.4 per cent in 2018, down from 3 per cent in 2017, according to CMHC, which cited immigration as a key factor in the decline.

In turn, rents are shooting up. The average apartment rate in Victoria climbed 7.4 per cent in 2018 from a year earlier, CMHC data show. In Peterborough, Ont., rents climbed 6.9 per cent. And for the average two-bedroom in the Oshawa area, rates rose 6 per cent.

It’s no surprise that Toronto and Vancouver are exceptionally pricey. The average two-bedroom apartment in the Toronto area runs $1,467 a month, with Metro Vancouver at $1,649. Want a bigger space, or condo, in the city? Be prepared to spend more. And bear in mind, new listings command far steeper rates. The median asking rent in July for a two-bedroom unit in Toronto was $2,850 a month, according to rental site PadMapper. In Vancouver, it topped $3,000.

No wonder rising rents are stretching wallets. CMHC says housing is “affordable” when a household spends less than 30 per cent of its pretax income on shelter. In the last census, close to 1.8 million tenant households spent in excess of that threshold.

By that measure, a full-time worker would need to earn $35.43 an hour to afford an average two-bedroom in the Vancouver area, according to a recent CCPA report. (The think tank used CMHC’s prices in its calculation.) It was $33.70 an hour for the Toronto area, and $22.40 an hour for Canada over all.

Meanwhile, Statscan data show that roughly 29 per cent of Canada’s 13.8 million full-time workers are earning less than $20 an hour.

The consequence is that “households don’t have as much money for other priorities and buying other things in the economy,” Mr. Macdonald says.

To avoid financial strain, many have little choice but to hunker down.

Nava Dabby and her family are a prime example. She and her husband live in what’s billed as a two-bedroom apartment in Toronto’s St. Clair West area. But their 16-month-old son’s room is cramped, with a “teeny-tiny, little window.”

Ms. Dabby, a 34-year-old yoga studio manager, would love more space, but at $1,450 a month, her current rent is half what she would pay for a larger place in the same neighbourhood. They’ve looked into buying. To that end, they’ve socked away $75,000 for a down payment and have been preapproved for a mortgage of roughly $450,000 – a sum that falls well short of going rates for houses in the city.

“If I ever magically saw this $500,000 house, I would probably buy it,” Ms. Dabby says. “But I haven’t seen one in the last two years that I’ve been getting real estate e-mails.”

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Nava Dabby, her husband Alex Bien, and their son Leo, are seen at their Toronto home. They have plenty saved for a down payment, but home-buying is out of reach in their neighbourhood.Mark Blinch/The Globe and Mail

Ryan Aird, 29, finds himself similarly stuck. After a bitter dispute with the landlord, he and his girlfriend looked to move out of their one-bedroom apartment near Toronto’s High Park, which costs just over $1,500 a month.

But four years after they moved in, the market had changed drastically. “Prices have gone just so high now that we’d be downsizing or moving into a basement unit, and still paying more than we pay now,” Mr. Aird says.

Like most renters in Ontario, Mr. Aird is covered by rent control, which ties his unit’s annual price hikes to provincial inflation. But once a unit is vacated, landlords can set the price. In Mr. Aird’s building, for instance, identical one-bedrooms are being listed for at least $2,000 a month.

For obvious reasons, renters largely support rent control, because the predictable and relatively modest increases give them long-term financial stability. The downside, however, is that many tenants end up enduring nasty landlords, noisy neighbours, poorly kept buildings and even abusive relationships to hold on to rent-controlled rates.

Moreover, economists typically agree that rent control scares off developers and crimps new supply, thereby making rental markets tighter and pricier.

In 2017, the previous Ontario Liberal government expanded rent control to all units; it had earlier covered units built before 1991. The expansion was roundly criticized on Bay Street. “There is a clear risk that the broadening of Ontario’s rent-control policy may worsen rental stock availability,” said a Toronto-Dominion Bank research report.

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A sign advertising RioCan's rental building in midtown Toronto.Christopher Katsarov/The Globe and Mail

Finally, the math is getting better for developers.

From a financial standpoint, developing rentals is still challenging, given rising construction costs and pricey land, especially in big markets. But owning them long-term? That’s an increasingly attractive asset – and some big names want a piece.

RioCan REIT, better known for shopping malls, started leasing units in Toronto and Ottawa this year. Oxford Properties, the property arm of Ontario Municipal Employees Retirement System pension fund, is trying to build a four-acre development near the CN Tower that includes 800 rental units in two towers. And Minto has added buildings in Calgary, Montreal and elsewhere to its portfolio.

“The front-end returns are somewhat skinny,” says Mr. Morassutti of CBRE. “But all of those owners feel that, over time, especially if you’ve got a 30-year horizon, the overall return will be quite healthy, as rents continue to grow.”

The construction data reflect this growing appetite. The number of rental starts climbed to nearly 50,000 units in 2018, nearly double the previous 10-year average, CMHC says. More than 10,000 new units are under construction in Greater Toronto alone, and another 44,000 are planned but have yet to break ground, according to research firm Urbanation.

The policy climate appears to have improved for developers, as well. Ontario’s current Progressive Conservative government has scrapped rent control on new units completed after late 2018, and will allow developers to postpone development charges for rental and non-profit housing by five years, easing startup costs.

More broadly, governments at all levels have dedicated billions toward rental development, much of it in affordable housing. Through a series of programs, CMHC is looking to deliver more than 110,000 new units by 2027-28. Its Rental Construction Financing Initiative provides low-cost loans to developers, and 23 projects have been announced to date.

As for tenants, some relief is on the way: the Canada Housing Benefit, which launches next year, will provide an average rent subsidy of $2,500 a year, and eventually reach 300,000 families.

But with rip-roaring population growth, it might not be enough.

“We’re still under-building [in Toronto],” says Shaun Hildebrand, president of Urbanation. “Even though we’re seeing the level of development ramp up, it’s coming off of a depressed level, right? So the numbers all look very exaggerated.”

Mr. Hildebrand says three times as much rental construction is needed to satisfy Toronto’s demand.

And what’s being built isn’t for everyone. Ottawa is seeing a spate of high-end rentals come to market with one-bedroom units at $2,100 a month.

As such, “increased rental starts have not been due to public funding or tax incentives, but rather answer a demand for new, mostly luxury rentals for people priced out of the housing market,” said the CCPA report.

So, how can Canada unlock a flood of new, purpose-built rentals, including affordable units?

Many municipalities are hampered by zoning bylaws that restrict high-density development. In Vancouver, for instance, city council recently turned down a rezoning application to build 21 rental townhomes in the Shaughnessy neighbourhood. The project was opposed by an end-of-life hospice next door.

Now, the lot’s owners are planning to build a single, 12,000-square-foot mansion.

The situation is much the same in Toronto. “I think it’s utterly insane that, in 2019, if you’re building a building that’s within a pitching wedge of a subway station, that you should have to scratch and claw just to build nine or 10 storeys,” Mr. Morassutti says.

As for the Canada Housing Benefit, it will reach just a fraction of the millions of Canadians who are now spending too much on rent. Likewise, though funding for social housing has picked up, construction sits below heyday norms, suggesting even more cash is needed.

Tax reform, including a reinstatement of some bygone incentives, would turn heads in the private sector. Tighter regulation of short-term rentals – in particular, cracking down on commercial Airbnb operators – could free up supply and, where rules are in place, tougher enforcement is needed. (Quebec has struggled to clamp down on explosive Airbnb growth.) Taxes on uninhabited homes could help, too, in places where they don’t already exist.

But all of this will take time.

Laura Cappell, for one, will be watching to see how all this pans out from afar. A communications freelancer, she felt like she was “being held hostage” by rent prices in Toronto. So she decided to move – all the way to Puerto Vallarta, Mexico. Her fully furnished three-bedroom house (pool and most utilities included) costs just under $1,400 a month, or about $350 less than her one-bedroom apartment in midtown Toronto.

“You know, Toronto will always be home,” Ms. Cappell says. “But I don’t have to live there.”

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