The Affordability Crisis in Rental Urban Housing

 

 

Executive Summary

Urban housing plays a critical role in economic development and continued growth in employment, wages, and residential investment. However, an essential factor that is not often considered is the affordability of rent, a key determinant of accessible housing. Due to the rising costs of property, homeownership continues to be an expensive investment for individuals and families, thereby increasing the demand for rental housing. The average income of Canadian renter households is $53,000. A substantial proportion of these households spend more than 30% of their income on rent. The most significant factors leading to increasing rental costs are low vacancy rate and inadequate income, indicating that the demand has outpaced the supply and contributes to unaffordable rent rates. As a result, many renting households have been pushed into the core housing need category, as they do not have adequate resources to move into suitable and affordable rental homes within the local community.

Introduction

Urban housing plays a significant role in yielding desirable economic outcomes in Canada. According to the Ontario Non-Profit Housing Association, housing construction generates approximately 17% of Canada’s economy through employment, wages, and residential investment.[1] In 2018, the housing construction industry created approximately 1.2 million jobs, generating an estimated $76.9 billion in wages, and contributed to a year-over-year increase in residential investment in condominiums and rental apartments.[2] Despite the desirable impact, a critical factor that is not sufficiently considered is affordability, which is a significant component in determining housing access. Given that homeownership is one of the single largest investments for Canadians, there has been a rising demand for affordable housing. The Canada Mortgage and Housing Corporation (CMHC) considers housing affordable when it costs 30% or less of a household’s before-tax income.[3] 

Although most Canadians aspire to buy their own homes, homeownership does not appear to be affordable for many. According to 2019 estimates, Canadians spent 56% of their median income ($68,220) to own a home up from 54% in 2018. In Toronto, Canada’s largest housing market, the cost of owning a house was expected to take up 79% of the median household income ($71,631) in 2019 up from 76% in 2018. In Vancouver, homeownership cost 88% of the median income ($77,410) in 2018 and remained the same in 2019. Other cities such as Montreal, Ottawa, and Edmonton were also expected to experience similar affordability trends as the cost of housing rose relative to household incomes.[4] As a result of increasing homeownership costs, CMHC  reported a record high household debt level at the end of 2018 despite mortgage activity relaxing.[5] The Royal Bank of Canada (RBC) predicted that the central bank’s hike in interests would require an average household to pay $1,000 more to service household debt in 2019 compared to 2018.[6] The rising cost of homeownership and interest rates across Canada make rental housing a more suitable and affordable option for an increasing number of residents. 

While affordable housing consists of multiple categories, the demand for rental accommodation has outpaced its supply over the years. The rise in demand is associated with several factors, including international migration, employment growth for those between the ages of 15 and 29, and the increase in the population above 65.[7] Apart from these factors, the demand for rental housing is closely linked with income. 

Based on census data gathered in 2016, the number of renting households totaled over 4.4 million, and the average annual wage of those renting was $53,000. Approximately 40% of Canadian households spend over 30% of their income on rent and utilities, and 18% of households are spending over 50%. This is primarily true of households in Ontario, British Columbia, Alberta, and Saskatchewan, which have been identified as ‘severely unaffordable’ by provincial not-for-profit housing associations.[8] 

Significant Barriers to Affordable Rental Housing

Low Vacancy Rates

Strong demand for rental housing in recent years has pushed vacancy rates to historically low levels. Low vacancy rates indicate a higher demand than the available supply of housing. The market is deemed to be at equilibrium when the vacancy rate is 3.0% or more. However, the overall national vacancy rate declined from 3.0% in 2017 to 2.4% in 2018 due to decreasing vacancy rates across most provinces. As Table 1 shows, the vacancy rate declined significantly between 2017 and 2018.  Due to its large proportion of rental housing compared to other provinces, the 1.1% decrease in vacancies in Quebec resulted in a significant drop in the overall national rate. 

The oil-producing provinces of Alberta and Saskatchewan also experienced a decrease in their respective vacancy rates but remained above the national average rate. Although both provinces continued to recover from the oil crisis in 2014, leading to a boost in demand for rental housing from substantial net migration, low supply led to a fall in the vacancy rates. Ontario and British Columbia saw an increase in their vacancy rates by 0.2% and 0.1% between 2017 and 2018, respectively. However, these slight increases could not neutralize the overall downward national trend. [9]

 

  2017 2018 Change
Prince Edward Island 1.2% 0.3%       ↓   0.6% 
Nova Scotia 2.6% 2.0%       ↓    0.6%
Newfoundland & Labrador 6.6% 6.0%       ↓   0.6% 
New Brunswick 4.1% 3.2%       ↓    0.6%
Quebec 3.4% 2.3%           1.1%
Alberta 7.5% 5.5%           2.0%
Saskatchewan 9.3% 8.7%           0.6%
Ontario 1.6% 1.8%           0.2%
British Columbia 1.3% 1.4%           0.1%
Manitoba 2.7% 2.9%           0.2%
Canada (National Average) 3.0% 2.4%           0.6%

Table 1: Change in Vacancy Rate between 2017-2018 (Canadian Mortgage and Housing Corporation, 2018)

Graphs 1, 2, and 3 show where major cities fall relative to the equilibrium rate in 2019. Graphs 1 and 2 show that some cities remained above the equilibrium in 2019, while others remain below. Winnipeg reached the equilibrium rate for the first time since 2000 (Graph 3). 

As Graph 1 indicates, although the four cities remain above equilibrium, all except Regina show a decrease in vacancy rates. This is because vacancy rates depend on several economic and other factors. For instance, in Calgary and Saskatoon, the local economy’s diversification and strong employment growth significantly benefitted those between 15-24 years of age. This increased the demand for rental housing as 78% of the cohort typically paid rent. By contrast, the fall in vacancy rate in Edmonton was mainly due to healthy growth of net international migration that increased the demand for rental housing as migrants generally rent before purchasing a home.[10] 

 

Vacancy Rates for major cities

Graph 1: Vacancy Rates for major cities above equilibrium in 2019 (Canada Mortgage and Housing Corporation, 2019)

As Graph 2 shows, Quebec, Montreal, and Halifax have experienced a sharp decrease in their vacancy rates among the cities below the equilibrium rate. This is mainly due to the rising number of seniors (above the age of 65) who chose to downsize, growth in employment for those age 15 to 24, and an increase in non-permanent residents (international students and temporary workers), especially in Montreal. On the other hand, Toronto and Vancouver have not reached equilibrium since the early 2000s as these two cities attract a large number of migrants, non-permanent residents (mainly international students), and workers (15 to 40 years of age), all contributing to high demand for rental housing that has outpaced the supply.[11]

Vacancy Rates for major cities

Graph 2: Vacancy Rate for major cities below equilibrium in 2019 (Canada Mortgage and Housing Corporation, 2019)

Winnipeg (Graph 3) and Regina (Graph 2) are the only two cities that have shown an upward trend in their vacancy rates since 2011. In 2019, Winnipeg’s vacancy rate reached equilibrium (3.0%), while Regina’s vacancy rate reached 7.8%. The significant reasons for Winnipeg’s stable vacancy rate are challenges in the homeownership market (rising mortgage rates and stricter mortgage qualifications), increasing populations of young adults (aged 24-34 years) and seniors (above 65 years of age) who are the prime renting cohorts, and a rise in international migration. Regina’s high vacancy rate has mainly been due to population growth, expansion of the labour force, and a rise in enrolment at the University of Regina and Saskatchewan Polytechnic-Regina. These post-secondary education institutes have attracted students from outside and within the province, increasing rental housing demand.[12]

Vacancy Rates for major cities

Graph 3: Vacancy Rate for a major city at equilibrium in 2019 (Canada Mortgage and Housing Corporation, 2019)

Rental Wage versus Hourly Wage

Affordability is closely related to income and a key determinant of access to housing. A study by the Canadian Centre for Policy Alternatives aimed to determine the hourly wage that a full-time worker would require to rent a two-bedroom apartment without spending more than 30% of their income. This is referred to as the rental wage. In Canada, the average rental wage for a two-bedroom unit is $22 per hour, and the average rental wage for a one-bedroom unit is approximately $20 per hour. However, about 1.8 million workers are not paid a rental wage. However, often workers are not employed full-time,[13] and the rental wage rates are several dollars higher than the minimum hourly wage, which varies between $11 and $16 across provinces and major cities.[14]

As Table 2 suggests, renting a one or two-bedroom apartment would require working for over 40 hours per week in most cities. In cities such as Vancouver, Toronto, Calgary, and Ottawa, there is a wide gap between the minimum hourly wage and the average one and two-bedroom rental wage, requiring full-time workers to work between 50 and 70 hours per week to qualify as securing affordable housing. Quebec and Montreal are the only cities where a full-time worker earning the provincially set minimum wage can comfortably earn the local rental wage. Overall, a full-time worker earning minimum wage can afford to rent a two-bedroom apartment in 24 of the 795 neighbourhoods constituting Canada’s census metropolitan areas (around 3%). On the other hand, among the 754 neighbourhoods with one-bedroom units available, a full-time worker can afford to rent in 70 of those neighbourhoods (9%). [15]

 

City

Minimum hourly wage

One-bedroom rental wage

Hours of work required to afford a one-bedroom unit

Two-bedroom rental wage

Hours of work required to afford a two-bedroom unit

Vancouver

$12.65

$26.72

84

$35.43

112

Toronto

$14.00

$27.74

79

$33.70

96

Calgary

$15.00

$20.98

56

$26.97

72

Ottawa

$14.00

$21.29

61

$26.08

75

Edmonton

$15.00

$19.89

53

$24.67

66

Winnipeg

$11.35

$17.84

63

$22.97

81

Regina

$11.06

$17.98

65

$22.62

82

Halifax

$11.55

$17.49

61

$22.57

78

Saskatoon

$11.06

$18.05

65

$21.63

78

Quebec

$12.00

$14.06

47

$16.36

55

Montreal

$12.00

$14.12

47

$16.09

54

Table 2: Minimum hourly wage and rental wage for full-time workers in major cities (Canadian Centre for Policy Alternatives, 2019)

Unaffordable Rents and Impact on Canadians

The value of rent is influenced by unit availability, home buying affordability, and net migration. The average national annual rent increase has been consistently rising over the last few years, from 3.5% in 2018 to 3.9% in 2019, with the highest increases in Ontario, Nova Scotia, and Quebec.[16] 

The continuous rise in housing prices and the corresponding increase in rental rates has led renting households to spend more than 30% of their before-tax income on housing costs. The groups most affected by high rental prices are immigrants and seniors, with new Canadians significantly impacted by consistently increasing housing costs. 

2016 census data found that the average reported income of immigrant households had not kept pace with housing costs. While progress in this area correlates with the length of time families have resided in Canada, immigrant households continue to spend a disproportionate percentage of their income on rental and housing costs. For instance, the average incomes of a new immigrant household, a five-year immigrant household, and a ten-year immigrant household were $50,549, $54,782, and $53,129, respectively. Despite having lived in Canada for different lengths of time, the five-year and ten-year immigrant households still spent approximately 45% of their total income on rent, and new immigrant households spent over 50%.[17] 

Canadian seniors’ average income ranges between $28,000 and $41,000.[18] As the average rent has been increasing at a rate of 4.7%,[19] many seniors have had to spend more than 30% of their income on rent. Even though a large number of seniors receive an average monthly pension of $679[20] through the Canadian Pension Plan (CPP), it not sufficient to afford rent.[21] Furthermore, the rapid expansion of the senior population has led to low vacancies at retirement homes, pushing a larger segment of this population into the core housing need category (25%).[22]

Unaffordable rents and inadequate income have resulted in more households being pushed into the core housing need category. A household is considered in core housing need when the dwelling is unaffordable and unsuitable, and income levels are not high enough to afford suitable alternative housing. According to the 2016 census, renter households in this category has remained stagnant at 27% since 2006. Data shows that approximately 1.1 million renter households are in core housing need, and 20% of those households cannot afford alternative and adequate housing. Most of these households consist of senior-led families, single females, lone-parent families, Indigenous peoples, especially the Inuit, and immigrants.[23]

Conclusion

Affordability is an essential factor in both understanding and defining accessible housing. The rising property prices have made it difficult to purchase homes, pushing more households to rent. This has increased the demand for rental housing, indicated by the low vacancy rates across provinces and major cities. Additionally, inadequate income poses further barriers. High rental wages required to afford rental housing, compared to low actual minimum hourly wages, compounded with rising rent prices, have made rental housing unaffordable. This is especially true for seniors and immigrants who typically spent over 30% of their income on rent. Together, these factors account for why renter households tend to be in the core housing need category, with the number of renter households in this category consistently rising over the past 15 years. 

Bibliography

[1]  Greg Suttor, and Wyndham Bettencourt-McCarthy, Affordable Housing as Economic Development: How housing can spark growth in northern and southwestern Ontario, Toronto: Ontario Non-Profit Housing Association, 2014, https://share.hscorp.ca/affordable-housing/?upf=dl&id=4768
[2] Canada Home Builders’ Association, Economic Impacts of Residential Construction, Ottawa: Canadian Home Builders’ Association, 2018, https://www.chba.ca/CHBADocs/CHBA/HousingCanada/Information-Statistics/Impacts/3%20Canada%20Total%20Residential%20Construction%20and%20Renovations%202018.pdf
[3]  “About Affordable Housing in Canada,” Canadian Mortgage and Housing Corporation, March 31, 2018, https://www.cmhc-schl.gc.ca/en/developing-and-renovating/develop-new-affordable-housing/programs-and-information/about-affordable-housing-in-canada.
[4]  Rajeshni Naidu-Ghelani, “Homeownership costs to rise in 2019 even as housing market cools: RBC,” CBC News, January 5, 2019, https://www.cbc.ca/news/business/house-prices-affordability-income-1.4966211.
[5]  Jonathan Forani, Troubling”: Home prices nearly double what Canadian millennials can afford, says report,” CTV News, June 13, 2019, https://www.ctvnews.ca/canada/troubling-home-prices-nearly-double-what-canadian-millennials-can-afford-says-report-1.4464569.
[6] Ghelani, “Home ownership costs to rise in 2019.”
[7] Canada Mortgage and Housing Corporation, Rental Market Report: Canada Highlights, Ottawa, Canadian Mortgage and Housing Corporation, 2018, https://assets.cmhc-schl.gc.ca/sf/project/cmhc/pubsandreports/rental-market-reports-canada-provincial-highlights/2018/rental-market-reports-canada-64667-2018-a01-en.pdf?rev=1468fa60-5050-4122-ab3c-bc45b6da4433
[8] BC Non-Profit Housing Association, “Rental Housing Data,” Rental Housing Index, http://rentalhousingindex.ca/en/#intro
[9]  “National vacancy rate falls below average of last 10 years,” Canada Mortgage and Housing Corporation, November 28, 2018, https://www.cmhc-schl.gc.ca/en/housing-observer-online/2018-housing-observer/national-vacancy-rate-falls-below-average-last-10-years
[10] Canada Mortgage and Housing Corporation, Rental Market Reports-Major Centers, Ottawa: Canada Mortgage and Housing Corporation, 2019, https://www.cmhc-schl.gc.ca/en/data-and-research/publications-and-reports/rental-market-reports-major-centres
[11] Canada Mortgage and Housing Corporation, Rental Market Reports-Major Centres.
[12] Canada Mortgage and Housing Corporation, Rental Market Reports-Major Centres.
[13] David Macdonald, Unaccommodating Rental Housing Wage in Canada, Ottawa: Canadian Centre for Policy Alternatives, 2019, https://www.policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2019/07/Unaccommodating%20-%20Rental%20Wage%20in%20Canada.pdf
[14]  “Minimum Wage Updates,” The Canadian Payroll Association, 2020, https://www.payroll.ca/Compliance/Legislative/Minimum-Wage-Updates
[15] “Minimum Wage Updates,” The Canadian Payroll Association.  
[16] “Average Rent in Canada Increases,” Canada Mortgage and Housing Corporation, February 10, 2020, https://www.cmhc-schl.gc.ca/en/housing-observer-online/2020-housing-observer/average-rent-canada-increases
[17]  BC Non-Profit Housing Association, “Rental Housing Data.”
[18]  BC Non-Profit Housing Association, “Rental Housing Data.”
[19] Naomi Powell, “A looming housing affordability crisis is poised to hit seniors across Canada,” Financial Post, May 13, 2018, https://business.financialpost.com/personal-finance/mortgages-real-estate/housing-crisis-to-hit-canadian-seniors-as-retirement-homes-fail-to-keep-up-with-demand
[20] Government of Canada, CPP Retirement Pension: Overview,” Government of Canada, April 27, 2020, https://www.canada.ca/en/services/benefits/publicpensions/cpp.html
[21] Naomi Powell, “A looming housing affordability crisis is poised to hit seniors.”
[22]  Employment and Social Development Canada, Report on Housing Needs of Seniors, Ottawa: Government of Canada, 2019, https://www.canada.ca/en/employment-social-development/corporate/seniors/forum/report-seniors-housing-needs.html#h2.3
[23] “Characteristics-Households-Core-Housing-Need-Canada-PT-CMAs,” Canada Mortgage and Housing Corporation, July 9, 2020, https://www.cmhc-schl.gc.ca/en/data-and-research/data-tables/characteristics-households-core-housing-need-canada-pt-cmas

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