Rental costs have spiked noticeably in recent months
While falling house prices in Canada’s hottest markets have been among the year’s biggest economic talking points, another trend has emerged in recent months that’s arguably just as noteworthy: rapidly rising rents and lower overall rental supply.
Unsurprisingly, that issue has been most pronounced in Toronto, where the average amount required to rent a one-bedroom apartment has spiked by 20% compared with last year, according to the Toronto Regional Real Estate Board (TRREB).
That coincides with a 30% plummet in rental listings on TRREB’s platform over the last year – and in the overall Canada market, rental rates are moving upwards too, with the median rent for all property listings on Rentals.ca for Q2 ($1,750) coming in 7% higher than the same time in 2021.
The extent of those rent increases amid declines in the cost of purchasing properties has been surprising, according to Clover Mortgage president and co-founder Steven Tulman (pictured top).
He told Canadian Mortgage Professional that the trend could have significant implications for the purchase market next year, especially if interest rates start to level off or fall in 2023.
“Rents are very quickly becoming unaffordable, while ownership of housing is becoming more affordable to those who have enough money saved up for a down payment and can afford the carrying costs associated with homeownership,” he said.
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“That’s really why I strongly believe that the purchasing market will start to grow again in 2023 once we see rate increases stabilize and begin to see more decreases again, although nothing compared to how low rates were during the peak of the pandemic.”
After surging for nearly two years during the housing market boom of the early pandemic, home price appreciation has tailed off and even declined in many parts of the country.
The average price of a home in Canada fell 5% in July compared with the same time last year, according to the latest data from the Canadian Real Estate Association (CREA), as the market continues to adjust to lower purchase demand and rising borrowing costs.
In the current climate, Tulman said a clear focus is helping buyers and property owners get quick and reliable appraisals that accurately reflect the value of their property, especially as undervaluation has become more common in an unpredictable market.
“It’s the duty of the broker [firstly] to ensure that the appraisal is ordered and conducted as quickly as possible to reduce the risk of a low appraised value due to the continued market downturn, and [secondly] to verify that the appraiser was using relevant comparables and accurately appraising the property in the event that an appraisal comes in below the estimated value,” he said.
“If we as brokers do our research and uncover more accurate and relevant comparables and other flaws in an appraisal, it’s our duty to our customers to advocate on their behalf and either help the appraiser realize and correct any potential errors, or get a different appraisal.”
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Brokers also need to be careful not to order appraisals frivolously, Tulman said, and ensure that due diligence has been done ahead of time to be confident that the value they’ve estimated is accurate.
“Furthermore, experienced and knowledgeable brokers should know what appraisers are most reliable and advise their customers accordingly,” he said.
An anticipated increase in the demand for rental accommodation across Canada is expected to continue driving up prices, while purchase prices are projected to fall steeply at the beginning of 2023 by market observers including TD Bank economist Rishi Sondhi.
Still, Tulman said that a market rebound could occur sooner than expected: while bond yields have picked up recently, they were on a marked downward trend in the weeks before, and could witness further declines in 2023.
Depending on how low bond yields go, that could mean fixed-rate drops as the economy nears the peak of a likely recession, meaning property prices will likely grow at a “more controlled pace” of about 5% to 10% a year through 2024 and 2025.
In the meantime, “we will not likely see the return of bidding wars for a while,” he said, “and homes will sit on the market for one to three months and sell near, in and around the listed price – as is the case in a healthy market.”
