Ontario Rental Market Overview - February 2017

Ted Tsiakopoulos
Regional Economist, CMHC
ttsiakop@cmhc.ca

CANADA MORTGAGE AND HOUSING CORPORATION

KEY TAKEAWAYS

 Ontario & BC Remain Tightest Rental Markets

 Tight Rental Markets in South – Cooler in North
 Economy, Affordability, Immigration Add to Demand
 Vacancy Rates Still Have Room To Fall - Rents Will Grow
 Private Multi Unit Rental Investments Will Grow
 Investors/Builders Should Keep Eye on Potential
Demand @ High End
 National Housing Strategy & Other Policies To Play a
Pivotal Role

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BC & Ontario Remain Tightest Rental Markets

Rental Apartment Vacancy Rates - Overall

9 8.1
8
7 6.5
6 5.6
5 4.3 4.4 4.1
4 3.5 3.7
3 2.4 2.1
2 1.2 1.3
1
0
BC ALTA ONT QUE NFLD CAN
2015 2016
Source: CMHC Rental Market Survey
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Toronto, London, Ottawa Contribute Most To Vacancy Drop

Rental Apartment Vacancy Rates - Overall

6
5
4
3
2
1
0

2015 2016

Source: CMHC Rental Market Survey

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Southern Ontario Rents Grow Faster vs North & East

Same Sample 2bed Apt Rent - % chg.

6
5
4
3
2
1
0

2015 2016

Source: CMHC Rental Market Survey

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Younger University Towns Post Higher Turnover Rates

Turnover Rate by CMA

35.0
30.0
25.0
20.0
15.0
10.0
5.0
0.0

Source: CMHC Rental Market Survey

*Poor quality data (suppressed)
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Factors Impacting Ontario Vacancy Rates: 2015/16

FACTORS 2015 2016

Job Market/Economy U D
Demographics U D
Cost Gap (Own vs Rent) D D
New Rental Supply U+ U
NET EFFECT U D
D=Downward Pressure U=Upward Pressure N=Neutral

Source: CMHC Rental Market Survey, Statistics Canada

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Downtrend in Rental Vacancy Rates Will Continue

Ontario Rental Apartment Vacancy Rates - Overall

4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: CMHC Rental Market Survey,

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How Low Can Ontario Vacancy Rates Go?
Historical Annual Rental Apartment Vacancy Rates - Overall
12
10
Historical Hi Historical Low Fall 2016
8
6
4
2
0

Source: CMHC Rental Market Survey,

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 Ontario Economy Will Be Among Growth Leaders But…
Employment(F) % chg.

3
BC
2.5

1.5
ONT
CAN
1 MAN
SAS QUE
0.5
ALTA
0
-1.5 -1 -0.5 0 0.5 1 1.5 2 2.5 3 3.5
NFLD -0.5
GDP (F) % chg.
-1

-1.5
Source: Statistics Canada Economic Accounts, Statistics Canada LFS, CMHC Mean Forecast (F) 2016-18

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…Will Grow At Slower Rate Especially vs Pre 2008
Best Years For Ontario Economy Likely Behind Us

11

Source: Statistics Canada Economic Accounts, Statistics Canada LFS, CMHC Forecast (f) 2016-18
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Lower Paying Jobs Leading – More Supportive of Rental Demand

Year 2016 Job Growth % of Ontario Avg Earnings

Part Time 1.5
Full Time 0.97
Total Services 2.1 98
Total Goods 1.6 110
Source: Statistics Canada

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International Migration Impacted By Global Factors
Net International Migration - CANADA
Syrian
International Migration Impacted By Global Conditions
Credit Refugees
350000
Crisis
300000
Sept 911

250000
Asian
Currency
Recession
200000
Crisis
150000

100000

50000

2016e
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
13

Source: Statistics Canada, CMHC Estimate(e)

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Some Millennial Finding Ownership Option Prohibitive
Inflation adjusted rent and home ownership index (Year 2000=100) - ONTARIO
140

130

120

110

100

90

80
2000 2002 2004 2006 2008 2010 2012 2014 2016
rent own
Source: Statistics Canada, Bank of Canada, CMHC
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Especially in Less Affordable Markets in Ontario
Actual Income
Affordability as %
Erosion of Required Income
Encourages to Purchase
Spillover Demand Average Resale Home – 2016
to Neighbouring GTA Markets
Windsor 176

Thunder Bay 166

Ottawa 149

London 139

Kitchener 131

Guelph 129

Barrie 120

Hamilton 110

Oshawa 97
More affordable (>100)
Toronto 76

0 20 40 60 80 100 120 140 160 180 200

Source: Statistics Canada, CMHC calculation & estimates(e) based on 5yr mtg, 10% dp, 25 yr amortization

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Demand/Supply Balance Favours More Rental Investment

20000
Rental Completions* New Rental Households
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
2006-11 2011-16 2016-2021
Source: CMHC Ontario Estimate 2011-21, Statistics Canada
*Does not include condominiums completed and available for rent

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Condominium Rentals – Biggest Source of New Rental
Percentage of Condominium Universe Held By Investors – Ontario
40
2015 2016
35

30

25

20

15

10

0
Hamilton Kitchener London Ottawa Toronto

Source: CMHC Rental Market Survey

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Growing Appetite for More Primary Rental Investment
Purpose-Built Rental Starts – Ontario
16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: CMHC Starts & Completions Survey

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Purpose-Built Rental Starts Occurring Across The Province

% Share Distribution* of Rental Starts By CMA - 2016

Toronto
18% Hamilton
Ottawa
Primary 36%
Kitchener
12% Rental
London
Starts
Rest of Ont
3%
21%
10%

Source: CMHC Rental Market Survey

*may not add up to 100% due to rounding
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 Will These New Investments Be Absorbed?

Required* median income to rent as % of actual median Required* median income to rent as % of actual median
income - ALL UNITS Income - NEW UNITS Completed - ONTARIO

100%
150%
90%
80% 145%
70%
140%
60%
50% 135%
40%
30% 130%

20% 125%
10%
0% 120%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015e2016e
Hamilton Kitchener London Ottawa Toronto ONTARIO

2015e 2016e
Source: CMHC RMS Survey, CMHC median renter income estimates(e), Statistics Canada
• Assumes 32% affordability ratio for renters, 2bed apt units
• Ratios <100=affordable, >100=unaffordableCANADA MORTGAGE AND HOUSING CORPORATION 20
Multi Unit Cap Rates Still Attractive in Low Interest Rate World
Selected Interest Rates %
7

6
Tbill_3 5yr Cap Rates
5

0
2007Q1 2009Q1 2011Q1 2013Q1 2015Q1

Source: Bank of Canada, CBRE (Class A Toronto Properties)

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Not Just About Returns – Real Estate Offers Stability
Historical Volatility (CV)*

Stocks

Gold

Single Family & Condo

Bonds

Multi Unit Rental

Residential REIT

0 0.2 0.4 0.6 0.8 1

Source: Altus, CREA, Bloomberg, CMHC calculation, Statistics Canada
*CV = Coefficient of Variation; CV close to 0 = low volatility; CV close to 1 = high volatility

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Risks To Ontario Rental Vacancy Rates/Rents – 2017/18

Risks Exerting Upward Pressure

• Policy Uncertainty and/or Slower Global Growth

• Elevated Household Debt
• A Rental Supply Shock @ High End

Risks Exerting Downward Pressure

• Stronger US Growth
• Further Erosion of Affordability
• Housing Imbalances Continue Growing
• Stronger International Migration

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