Canada Needs 300,000 Rental Units to Avoid Growing Gap

The rental housing shortage in Canada will quadruple to 120,000 units by 2026 without a surge in supply, the Royal Bank of Canada said in a report last week.

To reach what it called an optimal vacancy rate of 3%, Canada would need to add 332,000 rental units over the next three years, which would be a 20% increase over the 70,000 units built last year.

BOC’s research analyzed vacancy rate data released in January by the Canada Mortgage and Housing Corporation (CMHC). Canada’s vacancy rate dropped to 1.9% in 2022, its lowest point in 21 years, from 3.1% in 2021.

The shortage was exacerbated by a surge in immigration which the Canadian government has encouraged as a solution to labor shortages during the pandemic. New residents of Canada have flocked to the most densely populated urban centers, including the Greater Toronto Area (GTA).

The demand for units also fueled the highest annual increase in rent growth on record, a jump of 5.6% for a two-bedroom unit.

BOC’s report cited affordability and consumer preferences also driving demand, as more Canadians are choosing to live alone, meaning fewer incomes per household.

“You have a lot of people being funneled into the rental market who maybe would have liked to own something but it’s just not financially in the books for them right now,” RBC economist Rachel Battaglia told the Toronto Star.

The report estimated an existing deficit of 25,000 to 30,000 units of rental stock across Canada. In addition to building more units, it recommended turning condo units into rentals, converting commercial buildings into residential and adding rental suites to existing homes to help ease the pressure.

Without such measures, Battaglia said the market could “become infinitely more competitive.”

“Which is not something that we want to realize given the competition we’re already seeing,” she said. “You’re already seeing rents increase dramatically.”

Canada’s rental housing stock grew by 2.4% in 2022, led by Calgary at 7.4% and Ottawa-Gatineau at 5.5%, while Toronto and Montreal saw the smallest percentage increases at 2.1% and 1.4%, respectively.

“We haven’t seen that many additions to the purpose-built inventory in almost a decade, so you would think that added supply of units would ease some of the competition, but what the CMHC rental market data revealed to us was that it didn’t,” Battaglia said.

Slow growth in Canada’s largest cities has been outpaced by rapidly increasing demand, partly fueled by high immigration levels, she said. Annual federal immigration targets are set to grow 8% by 2025.