CMHC Rental Market Report 2024
Understanding the importance of turnover
The Canada Mortgage and Housing Corp. says the pace of rent growth cooled significantly this year amid Canada’s largest gain of purpose-built rental supply in more than three decades.
The federal housing agency said in a report published December 17th that the national vacancy rate for purpose-built rental apartments sat at 2.2 per cent in October, when it conducted the annual survey. That was up from the record low of 1.5 per cent last year. Vacancy rates for Vancouver and Victoria were 1.6% and 2.6% respectively.
The average rent for a two-bedroom purpose-built apartment, which the CMHC uses as its representative sample, grew 5.4 per cent to $1,447, compared with an eight per cent increase in 2023. In Vancouver average rent for a two-bedroom purpose-built rental grew 5.5 percent to $2,314 and in Victoria 3.6% to $1,993.
CMHC reported that Canada’s supply of purpose-built rental apartments grew 4.1 per cent year-over-year, the highest increase in more than 30 years. Rental apartment completions in Montreal remained among the highest on record, pushing vacancy rates higher, while in Vancouver, rental supply grew at a slower pace than the previous two years but still above historical rates. This growth in supply helped slow down average rent growth and raise vacancy rates closer to the historic average, underscoring the critical role of added supply in improving housing affordability.
The CMHC also said rents increased by 23.5 per cent when units turned over, which was close to 2023 rates.
Understanding the importance of turnover
Turnover and the opportunity to adjust rents to reflect market conditions is essential for both landlords and tenants to ensure a strong and healthy rental housing ecosystem. Economists point to the critical importance of turnover to drive a housing affordability phenomenon known as rental filtering, a process that occurs when housing units are gradually transitioned from higher-income households to lower-income households over time. This process is a long-term strategy to improve housing affordability and is considered the primary mechanism by which the housing market provides affordable supply.
How Does Filtering Provide More Affordable Housing? Vacancy Chains!
Vacancy chains unfold when households with higher income move into newly built units. Doing so releases their former units for occupancy by households with lower income. When lower-income households move into the newly vacated units, they in turn create vacancies in their former homes. Through vacancy chains, this new housing impacts households’ welfare, housing affordability, and local amenities.
Research done in the U.S. (Mast, 2023) shows that, for every 100 new units in above-median-income neighbourhoods, 70 vacancies would be generated in below-median-income neighbourhoods. Estimates show that it would take 2 to 5 years for these filtering effects to fully take place. However, they begin to occur with the first 2 vacancies. With Finnish data, Bratu et al. (2021) find that 60% of vacancy chains from a newly built unit reached households in the bottom half of the income distribution.
LandlordBC is concerned that the 2024 Rental Market Report lacks detailed background information to articulate the importance of turnover to the long-term health of the rental housing ecosystem. Furthermore, the report has not delineated the impacts of long tenured tenants in rent-controlled units in the turnover data provided, leaving readers with a distorted view of the reality on the ground.
Unit turnover is critically important for the rejuvenation of the existing rental stock so that new residents have access to safe and healthy homes. Turnover rates in Vancouver and Victoria are at or near the lowest levels we’ve witnessed in some time largely due to a dearth of supply. The result is a growing cohort of renters choosing to remain comfortably housed in their professionally managed rent-controlled apartments for longer periods of time. When longer tenured renters do eventually decide to move, the rent for these units is significantly below market meaning any increases to rent for those units will understandably be significantly larger, and would thus distort averages published in the report.
Turnover is the single opportunity for a landlord to respond to multiple years of rent subsidies they provide residents in rent-controlled jurisdictions like BC and is critical for the viability of the sector. It should be noted that units turning over for long tenured tenants will always require significant investment to upgrade and modernize the units for future tenants. These costs can easily reach or exceed $50,000 per unit in today’s business environment. The situation has been further exacerbated for landlords in BC due to rent increase freezes and caps imposed by the provincial government including for the upcoming calendar year 2025. Landlords are faced with an increasingly unsustainable business model.
Renting remains the most affordable form of housing
Ultimately, rents for existing older market purpose-built rental buildings in Vancouver and Victoria remain the most affordable form of housing when compared to rents in condos (typically 22% to 27% higher) and even more so when compared to the cost to purchase, finance and operate one’s own home. The ability to upgrade and modernize units and the potential to adjusts rents to reflect the market at turnover is critical for the long term health and viability of the rental housing ecosystem.
Find the report here