Understanding the impact of demographics on Canada's housing market

Predicting changes in the housing market is a formidable challenge, and one of the factors influencing housing that had previously been ignored is demographics. In Canada, a prolonged trend of an aging population coupled with a declining birth rate has compelled the federal government to respond by targeting more immigration. However, the considerable increase in the population has amplified the need to expand housing options, particularly an urgent demand for new purpose-built rental accommodations.

The economics of building purpose-built rentals have been challenging due to multiple factors: Rising land costs, higher government charges, soaring construction costs and, more recently, higher borrowing costs due to the increase in interest rates. The present economic realities, coupled with the huge decline in rents that occurred during the pandemic, have made the development industry and their capital partners reluctant to make the necessary financial investment in rental apartments, even as the need has been growing.

Advocating for change

In the GTA, developers are much more likely to build condominium apartments due to the lower upfront equity requirements, the revenue certainty that comes with selling the product upfront, and the greater availability of construction financing dollars. Since 2000, these realities have resulted in a significant disparity in the GTA between condominium and rental tenured buildings. Between 2000 and 2022, metro area developers have been building about 17,000 condo unit per year, compared to less than 2,500 rental apartments.

While it is true that many of these condos have been purchased by investors who rent the units out, providing much-needed supply to tenants, there is concern about the long-term viability of relying on individual investors to create housing and the problem of tenant security when that suite can be sold at any time. Developers have been advocating for a change in the way new buildings are taxed to allow them to build more dedicated rental buildings, and create a better tenant experience.

Recently, both the Liberal and Conservative federal parties have announced incentives to help motivate developers to build more purpose-built rentals. Most significantly, both parties will remove the GST and/or HST from these developments, making them immediately more financially viable. At the same time, the Conservatives plan to offer, in the words of their leader Peter Poilievre, a “carrot-and-stick approach.” If municipalities increase housing stock by 15 per cent, they will receive government funding bonuses, and if they don’t, they will have funding clawed back.

Homework and research

The lack of supply is already evident in today’s market. Since the recovery from the pandemic started, rental and condo apartment rental rates in many GTA municipalities have increased by almost 50 per cent – a staggering figure. Economics 101 would tell you that this massive increase in revenue should encourage more developers to build apartments, but government fees that are absurdly high, unnecessary planning obstacles, and NIMBY (Not in My Backyard) resistance to tall buildings have made many of these projects “no longer pencil out,” as they say. Removing GST may greenlight more of these projects, but more creative financing is needed, as well as the removal of municipal and provincial red tape.

As our government continues to tackle housing affordability, it is clear how difficult that task is due to inflation, higher rates, environmental concerns, lack of land availability, lack of skilled trades and many more risk factors. To be completely honest, there are a lot of people who do not want house prices or rents to decline, and they will vote down politicians who want to make substantial changes to the housing landscape.

If I were a betting person (which I am not), I’d wager on decreasing affordability and higher house prices in five years. Don’t take my word for it; do your homework and conduct your own research. Consider hiring a reputable realtor and mortgage broker, and good luck.