Why it's getting harder to find a cheap apartment

Declining first-time buyer demand and stronger immigration has seen apartment vacancy rates in the Toronto market drop sharply.

Vacancy rates were at 1.6 per cent in April compared with 2.7 per cent a year earlier, according to the Canada Mortgage and Housing Corporation in a report released Thursday.

A 1.6 per cent vacancy rate means that only 16 of every 1000 apartments remain vacant.

“That’s one of the tightest vacancies we’ve seen over the last decade,” said Shaun Hildebrand, CMHC senior market analyst. “Demand for renting has been growing stronger than supply."

The CMHC says employment in households over the age of 25 has improved, increasing the demand for labour and rental accommodation. Immigration has also been a big factor in the tight vacancies.

“A global economic recovery led to less uncertainty and likely encouraged more international travel,” said the report. “Immigrants typically lack the savings and work experience to qualify for home ownership.”

Approximately 75 per cent of immigrants opt to rent when first arriving in Canada, according to the federal housing agency.

The prospects of new mortgage rules in March and higher interest rates has also taken some first time buyers out of the market, as they opt to rent instead.

“Consequently with fewer renter households shifting from renting to owning a home – vacancy rates moved lower this spring,” said the CMHC.

Despite the tighter rates, rents stayed about the same, averaging at $1,045 for all types of accommodation, compared with $1,044 last year. Ontario rent controls that only allowed a 0.7 per cent increase by landlords kept a lid on price increases.

Vacancy rates also went down despite the fact that there are many more condominium apartments to choose from as the city goes through a high rise boom.

“Higher condominium and conventional rental completions created headwinds for existing rental accommodation,” said the CMHC. “Condominiums are a form of competing rental supply for the higher end primary rental segment as investors subsequently lease these units out.”

More supply in the pipeline will reduce pressure on vacancy rates. But while condos are adding to the rental stock, that is not a guarantee that investors will continue to rent their units in the future.

Buyers who purchased their units three or four years ago will likely be able to cover their carrying costs if they rented them out today. But it will be more difficult for investors who buy at today’s higher prices to cover their costs based on higher prices and interest rates, according to analysts.

“It will be a challenge for rents to keep up with carrying costs,” said Hildebrand.

According to condo research firm Urbanation Inc., about 45 to 60 per cent of all new condos are bought by investors in the Toronto market. But higher prices for condos and rents that have barely budged from 2007 prices means that investors will be incentivized to sell rather than rent.