Declining interest rates not enough to revive Ontario’s rental apartment construction: RESCON

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Apartment consttruction stock photo
©PHOTO BY BILANO

Michael Lewis

The Canada Mortgage and Housing Corporation is reporting a sharp pull back in construction of purpose-built rental apartments in the Toronto census metropolitan area amid elevated financing, material and labour costs and declining rents in a slowing economy.

Total housing starts in the Toronto CMA dropped 13 per cent in the first half of 2024 compared to the same period in 2023, the Canada Mortgage and Housing Corp. said in its Fall 2024 Housing Supply Report.

The decline was driven by a 40 per cent drop in rental apartment starts from last year’s multi-decade high.

The City of Toronto, where most of the region’s rental development is built, saw rental apartment starts fall by half in the first six months of 2024. Apart from Ajax, no new rental projects broke ground in the Toronto CMA’s suburban municipalities during the period, the report says.

When adjusted for population size, purpose-built rental apartment starts in the Toronto CMA were the lowest among Canada’s largest urban centres due to the high cost of financing which, in addition to “consecutive months of declining asking rents” cut into profits to make rental developments unviable.

The CMHC says the pace of cost growth for material and labour components associated with early-stage construction was weaker in the first half, suggesting a pivot away from starts and toward completions as developers prioritized clearing backlogs of projects under construction.

Richard Lyall, president of the Residential Construction Council of Ontario (RESCON), said declining interest rates and moderation in construction material inflation won’t be enough to turn around the rental apartment development market, noting that interest rates cuts have already hurt economic growth.

“A drop in rates is not going to do enough because of how far costs have gone up. We’ve got to get the costs down,” he said.

Lyall referred to taxes, fees and levies such as municipal development charges meant to fund infrastructure that are rising exponentially, including a 21 per cent increase in Toronto this year, with the cost passed on directly to consumers.

“It’s not like we haven’t faced this kind of challenge before and we met it successfully,” Lyall added. “Now it’s a bit mind boggling that three levels of government each with their fingers in the pie all have different levels in charge of different things.”

Lyall said 80 per cent of the current stock of rental apartments was built in the 1960s and 1970s “but somehow, we lost that narrative.”

Back then “we didn’t have development charges and approval times were lightning speed compared to today. It’s very simple. Why don’t we just look at what we were doing then and do it again.”

He also said pressure is on senior levels of government to stimulate housing construction, particularly in the apartment rental segment because “so far, the measures they have introduced aren’t really working, especially in Ontario.”

He said restrictions on how housing can be built need to be examined and “it would be nice to have a bit more clarity across the province on parking.”

Apartment completions increased slightly across the six largest CMAs encompassed in the study, setting new records in each one except Montréal and Vancouver before a slowdown began to emerge in the second half of 2023. Almost half of the apartments started in the first half of 2024 were purpose-built rentals – the highest share on record.

CMHC senior analyst, economics Jordan Nanowski noted that rental development surged over the decade ended last February to roughly 18,300 units from 1,850 in 2014, helped by government policies such as elimination of HST charges on some purpose-built projects (defined as developments made with the intention of renting out individual apartments.)

But while rental development had been on the rise, the number of units in the construction pipeline dropped sharply in March and April.

The report shows total housing starts in the six CMAs, meanwhile, rose by four per cent in the first half of 2024 compared to the same period in 2023, with new construction the second strongest since 1990.

Adjusted for population size, however, it says combined housing starts were close to the historical average and “weren’t enough to meet growing demographic demand.”

Except for Calgary and Edmonton, condominium starts fell in the first six months of 2024, a trend expected to continue as developers struggle to reach the minimum pre-construction sales needed to start construction.

The report says investors and end users have slashed purchases of new condominiums because of the impact of higher interest rates and as condo sellers forgo price discounts.

Across the Toronto CMA, condo starts fell one per cent in the first half compared to the 2023 period, plunging 33 per cent in the City of Toronto amid high interest rates and rising unemployment.

“A turnaround in housing starts will require improved financial and macroeconomic conditions to encourage renewed confidence in consumers and developers,” the CMHC report concludes.

Observers say policy steps to unlock rental housing developments could include tax changes to accelerate depreciation credits on rental assets and a widening of the HST waiver to include projects commenced before September 2023.

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