2024 Rental Market Outlook

The purpose-built rental market in Canada broke new ground in 2023. Rental vacancy rates fell to a 35-year low, according to the Canadian Mortgage and Housing Corporation’s (CMHC) latest report. Meanwhile, average rent growth and asking rents ended the year having achieved record highs. The result was a historically tight rental market, shaped by demographic shifts, interest rates, and low housing supply. 

Reflecting on these trends’ lasting impacts, investors can achieve some clarity on what to expect in the year to come. With rentals charting a growth trajectory due to chronic undersupply and immigration, certain markets show exceptional promise. Factors like increased government support are likely to provide additional tailwinds over the long term. Ultimately, investors can expect the purpose-built market’s overheated conditions to gear down but remain tight.  

Rental growth to continue at a moderate pace 

In 2023, rental affordability declined nationwide as average Canadian rent growth (8%) exceeded average wage growth (4.1%) by a large margin. Notably, rent growth among purpose-built rentals (12.8%) outpaced other rental types, according to Rentals.ca. CMHC found that the share of units with rents below 30% of income was statistically zero in Toronto, Ottawa, and Vancouver, with declines in Edmonton, Calgary, and Montreal. 

However, this disparity is expected to moderate somewhat in 2024. The average Canadians’ salary is forecasted to increase by 3.6%. Meanwhile, record rent growth is expected to skew lower toward its five-year average of approximately 5%. A greater balance between the two reinforces healthy turnover rates. 

Comparatively more affordable markets like Edmonton may continue to see rent increases above the national average. However, rent increases in less affordable cities like Toronto and Vancouver are likely to remain below the baseline. High average rents may have a limited, if not short lived, moderating effect on turnover and subsequent opportunities to price rents to market. Though institutional investors have the advantage of a long investment horizon, a thoughtful approach to increasing revenue potential (such as leveraging renovations) can help make the most of each natural turnover. 

Signs of excess rental demand 

Purpose-built rentals completed in 2024 and beyond are well positioned to absorb chronically unmet demand at market rates. Of course, the question is whether construction can be made economically viable to capture this excess demand. In that regard, a broad trend of policy changes encouraging the construction of purpose-built rentals provides cause for optimism. Indeed, early signs suggest incentives may already have taken effect, with rental starts ending Q4 at a 10-quarter high. Nonetheless, it is important for governments to explore further incentives – tax breaks, zoning, streamlined permitting – to increase project viability. 

Insert map: Rental apartment supply grew in most large markets last year 

Though many factors contributed to excess rental demand across Canada, low supply was a key determinant of tight markets. That is not to say that there was no meaningful growth among purpose-built rentals. While purpose-built growth in the GTA paused in 2023 (-0.5%), rental stock expanded by 5.8% over the last decade. Ottawa added more than 3,500 rental units, a record high. Edmonton added 3.7% to its already broad supply, while Vancouver added 2.7%. Calgary made the greatest proportional leap with 6.2%. Nationally, demand still outpaced growth and vacancies fell to new lows.  

The parallel change in 2023 vacancy rates among rental condos offers yet another reliable indicator of undersupply. Despite adding new supply, condo vacancies fell from 1.6% to 0.9% nationally. Condo rents are at a premium compared to purpose-built units. In a high cost-of-living environment, the pace with which new condo supply was absorbed underscores the importance of expanding purpose-built rental stock.  

Immigration to continue driving rental demand 

Major urban centres represent promising markets with room for rental growth not only in 2024 but in years to come. There, high immigration coupled with low supply is expected to continue to generate low vacancies and higher rents. Population growth is on track for new highs, with Canada welcoming up to 485,000 permanent residents in 2024 and another million in the following two years. 

Immigration comprised the lion’s share of Canada’s population growth in 2023. The number of international students increased by 29%, or more than 300,000, over 2022. With a high tendency to rent, immigrants were observed as the main driver of tight market conditions in many markets. 

Toronto typically receives more newcomers than any other Canadian region, and Ontario added record numbers in Q3 2023. The story was much the same in British Columbia, where international migration grew by 56% compared to 2022. Quebec welcomed a record number of non-permanent residents in 2023, including students, of which Montreal attracts the largest share. Likewise, Edmonton and Calgary saw significant interprovincial migration encouraged by employment gains and an affordable cost of living. Even mid-size markets, such as Hamilton and London in Ontario, received record or heightened levels of international migration last year.  

Low homeownership affordability to drive rental market tightness 

With home prices anticipated to rise further in 2024, more Canadians can be expected to consider renting’s enhanced value proposition. In 2023, the national aggregate home price grew by 4.3% YoY.  Prices softened mid-year but increases in mortgage-servicing costs and condo maintenance fees far outpaced potential savings. In the Toronto area, for example, owners of a median-priced condo allocated a record share of income (more than 40%) to associated expenses.  

Although rents also increased across markets, the cost difference between renting and owning made renting even more attractive. In the clearest example, the average two-bedroom condo in Vancouver cost $2,212.74 more per month to own than to rent last year, owing in part to mortgage increases. Of course, in Edmonton, Canada’s most affordable major condo market in Q2 2023, the gap narrows dramatically. There, condo ownership costs amounted to 13.8% of household income, providing a relatively accessible alternative to renting. Nonetheless, rental vacancy rates nearly halved in 2023, underscoring potential buyers’ main hurdle: amassing a down payment in a rising price environment. It is safe to say that lower home affordability contributed to this second consecutive year of turnover declines in 2023. 

Look out for a growing group of new and young renters 

CMHC’s report identified the accelerated growth of potential renters aged 24 and under in 2023. Where this generation of future tenants goes, new rental demand is likely to follow. Creation of new supply in areas where this group chooses to put down roots can prove advantageous in the years to come. Likewise, property owners and developers will have to consider catering to this demographic’s lifestyle expectations. 

This demographic saw higher growth than other age groups in most provinces. In many regions, this population shift was attributed to employment gains which encouraged the formation of new households. For example, Alberta’s young renter growth was more than twice the national average as Edmonton and Calgary observed stable youth employment. Where employment gains were significant, including Toronto (+5.6%), Montreal (+2.7%), and London (+8%), young renters played a role supporting demand.  

2024 provides solid opportunities for purpose-built rentals 

Immigration, home unaffordability, and unmet rental demand are expected to continue to drive the performance of purpose-built rentals into 2024. As the markets respond to widely expected interest-rate cuts, the year ahead may well represent continued growth for investors as well as value for residents.