Measures to limit the spread of COVID-19 and protect Canadians’ health are contributing to a significant interruption in economic activity, including rental demand in most urban centres. Despite efforts taken by federal and provincial governments to limit this economic fallout, adverse impacts risk being large.
“COVID-19 has had unprecedented impacts on Canada’s urban centres,” said Aled ab Iorwerth, CMHC’s Deputy Chief Economist. “Short-term uncertainty will lead to severe declines in sales activity and in new construction. As the virus is overcome, cities will bounce back but there is significant uncertainty with respect to the path and timing of the recovery.”
In terms of the rental sector specifically, the report indicates that falling immigration will continue to curtail demand and fewer short-term rentals could make more units available for longer-term use.
Rental demand in specific markets:
To some degree, the Vancouver ownership markets are less exposed to the impacts of rising unemployment and a closed border, while the rental market is more sensitive to the shock. Real estate buyers tend to be older than renters, therefore they are less likely to have lost their employment as a result of the economic shutdown. The brunt of job losses has so far been borne by younger employees who are less likely to have the accumulated savings necessary to buy.
The same is true of population growth in the Vancouver CMA, which is largely driven by the influx of young migrants, most of whom are immigrants to Canada. The immediate decline in migration to Vancouver is expected to reduce rental demand directly. A rising vacancy rate from historical lows is a possibility in the near term, since with recent elevated purpose-built rental starts, there will be an increased supply of rental units coinciding with a fall in demand.
Net migration, from all sources, has historically been a key driver of population growth and rental demand in the Calgary CMA. Near-term immigration and interprovincial migration will be negatively impacted by the pandemic.
This will result in significantly reduced rental demand. At the same time, a large number of new rental units are anticipated to complete and be brought to market over the next few years, while some existing units previously used as short-term rentals may also add to the supply of long-term rental units in the near-term. The combined effect of a decline in demand and increase in supply could be a higher vacancy rate in the Calgary CMA over the next two years.
The demand for rental units is likely to decline in Edmonton because of the slower than expected growth in key demographics such as the population of young adults (aged 25-34 years) and international migrants. The imposition of travel restrictions is projected to affect international and interprovincial migration, which will restrain the demand for rental units in Edmonton.
On the supply side, there will be more rental units entering the market in both the purpose-built and condominium segments as the elevated number of units currently under construction complete over the next two years. The projected increases in supply with few or no additions to demand are likely to lead to increases in vacancy rates in Edmonton in 2020 and 2021.
Anticipated increases in supply, in terms of higher completions in primary rental units and more rental condominium apartments entering the secondary market should ease rent growth and vacancy rates in a historically tight rental market. Short-term job losses, which will likely persist mainly in the service and hospitality industries, are more likely to affect renters.
An uncertain job market will likely affect millennials that are looking to enter the job market. As a result, they may now delay their entry into the rental market and stay at home with parents and/or choose co-sharing living arrangements, thus reducing demand for rental units. Prolonged effects of the pandemic, such as border and airport closures, will reduce net migration inflows – particularly immigration which has been a key driver of rental demand in the GTA.
Prior to the pandemic, steady population growth fueled by rising net migration levels, an aging population and students (domestic and international) continued to support demand for rentals while supply was rising at a slower pace. These conditions held the purpose-built vacancy rate below two per cent since 2017.
Over the course of 2020, demand for rental accommodation could be tempered by universities offering online courses (including to international students), lower net migration, and some elderly reluctant to move in the current restrictive environment. However, as normalcy slowly resumes over the forecast horizon, demand for rental housing should remain robust given the uncertain repercussions of job and income losses, which may delay the transition into homeownership for some households.
On the supply side, year-to-date to April, there were 2,481 purpose-built rental apartments under construction to be completed roughly by the end of 2022 easing some of the supply pressures that existed before the onset of the pandemic. A reprieve on the supply side could also come from some short-term rental units being added back into the long-term rental universe. On balance, rental market conditions could see little change over the forecast horizon from pre-pandemic with some potential upward pressure on the already low vacancy rate.
Approximately 10,000 new rental units will arrive on the market in 2020, a record not seen in many years. Some short-term rental units could also move into the long-term supply, thereby adding to the number of new apartments.
This growth in supply will ease pressure on the rental market. As well, demand for rental housing will be supported by a slowdown in homeownership, but overall, this demand will continue to be heavily dependent on net migration. If net migration declines dramatically, the rental market is expected to ease. Otherwise, the Montréal vacancy rate should remain under 2 per cent.
Necessary actions to prevent the spread of COVID-19 have had severe short-term impacts on economic conditions in Canada’s major urban centres. Sales and construction have dropped. House prices will likely fall because of uncertainty over the economy’s path. Lower immigration and less mobility within Canada coupled with an overhang of buildings under construction could lead to vacancy rates increasing in the rental market. Any such spike is likely to be short-lived as demand for rental continues to grow in the medium term. The precise timing and speed of the recovery in major markets is highly uncertain and will vary considerably.
For more information, on CMHC’s Rental Market Outlook Report, or for housing information visit www.cmhc.ca