Canada’s housing market is cooling as rates rise. But rents have never been hotter

The same forces cooling the national housing market are putting pressure on the country’s already-tight rental sector, driving rent through the roof in many large cities and complicating the Bank of Canada’s efforts to tame inflation, experts tell Global News.

Figures released from the Canadian Real Estate Association (CREA) on Friday confirmed what many economists suspected and what market watchers have been saying for months: rising interest rates are dragging the country’s ownership market down.

June home sales were down 24 per cent year over year, CREA said, following a trend that has seen housing activity slow drastically since April.

The spring’s housing market has marked a drastic shift from the past two years of the COVID-19 pandemic, which saw a flurry of activity driven, in part, by rock-bottom interest rates.

Bob Dugan, chief economist at the Canada Mortgage and Housing Corp. (CMHC), tells Global News the low rates helped lower the bar to homeownership and take pressure off the rental market as prospective buyers traded in their apartment leases for mortgages.

“When interest rates were still low, a lot of the demand was still funnelling towards homeownership. And we’ve really seen that begin to change,” Dugan says.

The Bank of Canada’s move to hike its policy rate by a full percentage point on Wednesday saw the benchmark interest rate in the country rise to 2.5 per cent, up from just 0.25 per cent at the start of the year.

Higher rates from the central bank lead to higher mortgage payments and make it more difficult for some prospective buyers to qualify for loans.

And as rising interest rates have coincided with a slowing in the property market, the rental market has meanwhile seen prices surge.

The average rent for all Canadian properties was $1,885 monthly in June, according to Rentals.ca, an increase of 9.5 per cent annually.

Prices are rising across the country but rent appreciation is even higher in major urban centres. In Vancouver last month, rent for an average one-bedroom apartment clocked in at $2,418, up almost 20 per cent year over year. The same type of unit in Toronto cost $2,192 a month, up roughly 18.5 per cent from a year ago.

Paul Danison, content director at Rentals.ca, says that with ownership increasingly out of reach for Canadians, the rental market is left to accommodate more and more people.

“Part of the cause is because as interest rates go up, people are less inclined to move out of the rental market and buy their first home, or they’ll wait along the sidelines,” he tells Global News.

Higher interest rates are not the only fuel heating up the rental market.

Danison says that at the height of the pandemic, vacancies were relatively high in major urban centres as renters sought more space and moved farther afield.

But at the start of this year, demand began to swing in the opposite direction.

“Now they’re coming back. So the smaller properties, the 800-square-foot properties in some of the highrises, the rents are starting to really rise on those. We’ve seen one-bedrooms go up quite a bit,” Danison says.

Canadians moving back to the urban core are not the only source of demand, as a recent influx of immigration is putting more pressure on vacancy rates in big cities, Dugan says.

With demand outweighing a limited supply in the rental market, he says his biggest area of concern is in the lower-priced units.

Dugan says only a “very small sliver of the rental market” is affordable to the 20 per cent of Canadians in the bottom quintile of income.

As higher-earning households are priced out of the ownership market and hold onto their rental units, the supply of affordable units is increasingly choked off, pushing demand — and therefore rents — higher and higher.

While affordability in the ownership market is mainly a pain point for higher-income households, Dugan worries that the surge in rent for low-income Canadians could push the housing system to its breaking point.

“Affordability in homeownership worries me a little less because homeownership is kind of like a choice. And if you can’t afford homeownership, you can fall back on the rental market. If you can’t afford the rental market, though, where do you turn?”

Danison says that while there’s no crystal ball for inflation or other economic forces, he would be surprised to see relief in Canada’s tight rental market on the horizon.

“I think we’re in for a little bit more pain. I don’t see rental rates going down any time in the near future.”

Affordability concerns for renters come at a time when the cost of living is surging across most line items in the household budget.

Statistics Canada said annual inflation hit 7.7 per cent in May as prices surged at the gas pumps and grocery stores. Royal Bank of Canada said Friday that it expects price growth to hit eight per cent in June, which would mark a new 40-year high.

The Bank of Canada’s interest rate hikes have targeted domestic sources of inflation, but RBC assistant chief economist Robert Hogue tells Global News the side effect of rising rents will “complicate” the central bank’s efforts in the short term.

Hogue says the Bank of Canada’s rate hikes will “eventually succeed” at taking the excess demand out of the Canadian economy and bring inflation back down to target. But while higher interest rates will drive down demand across most sectors of the economy, rents rising in turn could offset some of the central bank’s progress.

“Clearly, in a context where rent is going to remain under upward pressure, this will keep things challenging for the Bank of Canada to tackle the inflation issue,” he says.

Robert Kavcic, senior economist at Bank of Montreal, told Global News in an email that rising rents will indeed “add some persistence” to inflation figures, but he expects any spikes in rental prices to be diminished by declines in replacement costs for furniture and other housing services.

“From a housing perspective, it might be roughly a wash with respect to the impact on reported inflation,” he said.