Tighter mortgage rules appear to have taken an unintended victim in Canada’s largest city: the renter.
Toronto rents are on the rise due in part to increased demand from would-be home buyers, some of whom are unable to get the necessary financing to purchase a home.
A record 5,315 condo apartments were rented on the Multiple Listing Service (MLS) from April to June, a 20-per-cent spike from the same time last year, says Toronto condo market research firm, Urbanation Inc.
Average rents also jumped 4.1 per cent in the second quarter, compared to the same time in 2012, to about $1,847 per month. Renters are reporting bidding wars for apartments in downtown Toronto.
“I don't think it's a coincidence that rental demand really started to heat up right after the [mortgage] changes came into effect a year ago,” said Urbanation senior vice president Shaun Hildebrand.
At the same time, Urbanation said the number of new condo apartment sales fell by 18 per cent in the second quarter to 3,903 and unsold inventory rose to 19,394 units, most of which (11,265 units) was in pre-construction.
“With sales below historical averages and unsold inventory at record highs, pricing remained fairly flat,” Urbanation said.
Ottawa tightened Canada’s mortgage rules last summer by reducing the maximum amortization period for insured mortgage to 25 years from 30. It was the fourth such move in as many years as the federal government tries to cool the housing market and prevent a U.S.-style crash.
A recent Bank of Montreal study suggested the new rules have postponed purchase for one in five potential first-time buyers, while a Bank of Nova Scotia report estimated the mortgage rule changes may have pushed 10 per cent of all would-be buyers out of the market.
More condo owners appear to be renting out their units, waiting out the current volatility in the housing market.
Urbanation said the number of units listed for rent on the MLS grew 22 per cent in the second quarter versus a year ago.
“Most investors are proving to have longer-term intentions by holding onto their units. While rental yields, in general, have come down for new units, many properties continue to achieve strong returns with almost no vacancies” added Hildebrand.
Bank of Nova Scotia economist Adrienne Warren said strong demand, low rental vacancy rates, and increased immigration are some of the factors driving up rent prices in Toronto.
Still, the picture is expected to change as more units now under construction hit the market in the years ahead.
“I would expect rental demand to remain relatively strong over the next few years, but for rent growth to slow as more new condo units come onto the rental market,” Warren said.
There were 256 high-rise developments - representing 66,126 new homes - under construction in the Greater Toronto Area as of July 31, according to RealNet Canada Inc. It said more than 17,000 of those are expected to be completed by the end of the year.