Is Canada Becoming a Nation of Renters?
Homeowner construction has fallen to a 27-year low while rental builds hit record highs.
Housing starts fell 8.6% m/m in June to hit 239k on an annualized basis. The 6-month trend is still running at 251k, a stunningly high number in the context of a declining population.
Starts were also down relative to last year (-12.6% y/y) due primarily to a 38% collapse in the condo segment….a trend that was well telegraphed by falling new condo sales.
This has much further to fall from here, and the chart below forms the investing thesis of the “vulture funds” now circling the new condo market in Toronto: There will be virtually NO NEW supply coming from 2030 onwards as falling starts lead to falling completions roughly 5 years out.
In fact, “homeowner” housing starts (ie condos + single-family) have fallen to the lowest level since 1997. This is the sort of thing you would expect to see near a housing bottom:
What has not slowed at all is rental construction. There are now a record 218,000 rental units under construction in centres of 10,000 or more across the country. They now represent well over half of the 402,000 total dwellings in the pipeline:
That represents a whopping 8.5% of the existing purpose-built rental stock across the country.
I struggle with how these units will be absorbed given rental demand growth is being heavily constrained by the continued outflow of temporary residents which continues in Q2. On that front, the latest transit ridership data from Brampton- an epicentre of the temp resident boom- continued to plunge in June….down 16% y/y and 24% from the 2024 highs.
For their part, CMHC -which is financing most of these builds- does not appear concerned. Their CEO was interviewed this week by Rob McLister at Mortgagelogic.news. Some key highlights are below (emphasis mine):
On multi-family risk:
CMHC has a record number of multi-family mortgages on its book, and has doubled its multi-family volume in five years. 56% of its book is now multis, so with the flood of purpose-built rentals, I asked her, what are the odds that a glut of multi-family units spikes defaults?
“We’re an insurance company and we underwrite for that risk. So we look at all of those factors when we underwrite a property. We look at what we expect for—we look at the market, the location, the building itself, but we also look very specifically at the rents and the likelihood of rental achievement...How long will it take to get the rents that they’ve anticipated? And are those rents sustainable into the long term? So, we build this in, and as we do that analysis, we are considering what else is being built, has been built, what does the location like...”
“So, we have a very sophisticated underwriting process when we look at these, and we’re pretty comfortable with our risk assessment.”
“We are an insurance company. We have reserves set aside for expected losses, and we have capital for unexpected losses.”
“We aren’t seeing a lot of [multi-family] claims at the moment...We’re not expecting that there will be a big glut and we’re not preparing for a doomsday scenario on that front. The market is fairly comfortable,” Volk summarized.
I asked her if the dropoff in immigration could prevent builders from achieving the rents they’re projecting. She said, “Longer term, we’re not concerned about that...In the future, while we agree that immigration levels have declined, there is still a lot of pent-up demand from previous immigration and from previous Canadians.”
“We do think that what’s going on right now is temporary...There is an overabundance in just a couple of segments. Toronto and Vancouver, high-end apartments generally, that’s what we’re seeing.”
“Many of [upper-end units] are being rented out, and that is competing with the purpose-built rental market. And so we’re seeing a bit of a higher-than-normal vacancy rate in those high-end units. It hasn’t changed the fact that the lower-end units still have very low vacancy rates and we still need more.”
I don’t think we see a bottom in the rental market until i) the feds loosen the taps on immigration, and ii) CMHC gets nervous and curtails this program. Neither look likely this year.
This has been a guest post from Loonie Hour bestie Ben Rabidoux. For more of his content, check out www.edgeanalytics.ca if you are a builder or real estate/mortgage professional, and www.northcove.net if you are an institutional investor.
The excess needs to be allowed to work off; with luck the pain is born by those that have so greatly profited from the bull market.