Skip to main content

The rapid rise in borrowing cost has chilled the Canadian real estate market.COLE BURSTON/The Canadian Press

Canadian home prices are dropping fast after surging during the coronavirus pandemic, but that is offering little relief for consumers who face sky-rocketing rents and fading buying power as interest rates rise.

Desperate would-be buyers found themselves caught in a frenzy of bidding wars for real estate during the pandemic, when home prices in Canada rose more than 50 per cent in just two years.

Now the competition has moved to rentals, with landlords demanding months of rent upfront and, at times, even pitting tenants against one another to see who will pay more, according to real estate agents and media reports.

The average rent on a one-bedroom apartment in Canada is up 13.7 per cent from the start of the year, data from Rentals.ca shows, with year-on-year rents surging 18.5 per cent in Toronto and 19.2 per cent in Vancouver.

The shift from frantic demand for homes-to-buy to homes-to-rent makes plain a broader issue with Canadian housing: that there simply is not enough of it, said Dan Scarrow, president of Macdonald Realty in Vancouver.

“Higher (interest) rates are not destroying demand for housing, it’s just shifting the demand from buying to renting,” he said. “The demand just sloshes between renters and buyers, depending on where rates are so long as you have constrained supply.”

The Bank of Canada has raised its policy interest rate to 2.5 per cent now from 0.25 per cent at the start of the year to fight inflation, which hit a near 40-year high of 8.1 per cent in June.

The rapid rise in borrowing costs has chilled the real estate market, pulling down Canada’s average home price by 18.5 per cent from its February peak, according to data from the Canadian Real Estate Association.

But softer prices do not appear to be helping would-be buyers, who now can’t get loans due to far higher mortgage qualifying rates. And that, in turn, is driving up rental demand.

“Rents have gone insane because people have to have a place to live,” said Paul Eviston, a Vancouver-based real estate agent. “Demand on the rental market has really taken off as a lot of people that were would-be buyers are now forced to rent.”

That hot rental demand has put a floor under condo prices in large cities, real estate agents said, with investors feeling confident enough to wait out price dips and some even looking to snap up more investment properties.

Toronto agent Imran Khan just sold a loft apartment to an investor who was able to lease it out within days of closing.

“I’ve listed properties for rent … and we get multiple offers… . Like right away,” said Mr. Khan.

Rising immigration and a post-pandemic return to urban centres will further bolster demand for city condos, said Mr. Khan. Landlords, for their part, are pushing for higher rents when units turn over, agents said.

The shift from owned homes to rental homes is also starting to show up in Canada’s inflation data, with homeowners’ replacement cost increases easing sharply to 10 per cent from 13 per cent in April, while rent inflation remains near the 32-year high hit in April.

Mortgage interest costs, which fell sharply as the pandemic took hold and rates were slashed, are now surging. Homeowners who took out variable loans or those with mortgages coming up for renewal are feeling the most pinch.

“Right now is actually one of those unique moments where buyers, sellers, and renters are probably all struggling,” said Mr. Scarrow. “Usually, there is a winner. But I think this time it’s a struggle really for everyone.”

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.