Rent Inflation Is Cooling, but Don’t Expect a Quick Return to Affordability

Rent inflation has been getting a lot of attention of late. For most of 2024, Canada’s consumer price index for rent has been growing at its fastest rate in almost 40 years. Because rent CPI has accounted for an outsized share of recent Canadian inflation, rent prices are both a reason for the skyrocketing cost of living and the subject of monetary policy discussions. Despite recent rent strength, however, we’re also hearing stories of weakening rents and softer rental market demand in some corners. What could be ahead for Canadian rents and the overall cost of living?

While we’ve seen rent prices pick up nearly everywhere, it’s important to note that Canada’s rental market isn’t a monolith. Despite recent moderation, rent CPI growth is much stronger in Calgary than elsewhere (graph 1). Over history, the boom-and-bust nature of western oil-producing economies, paired with no rent control, has led to more ups and downs in rent inflation. Rent prices in Montreal and Toronto, which do enforce rent control, have seen stabler growth, though the two cities have diverged somewhat more since Ontario’s elimination of rent controls on new builds in late 2018. Meanwhile, until the spikes in Wild Rose Country, rent CPI gains in Halifax had been some of the strongest in Canada. This was likely influenced by Nova Scotia’s particularly strong population growth, which came in at nearly triple the record annual pre‑pandemic rate in 2022–23.

The demand outlook suggests more moderate rent price growth going forward. Our August 2024 forecast assumes a rising unemployment rate and slowing job creation in the quarters ahead. Ottawa’s planned reduction in non-permanent residents (NPR) to 5% of the total population over the next three years may be even more consequential. Demographic projections in the Bank of Canada’s July Monetary Policy Report and in more recent publications by the governments of Alberta and BC (graph 2) aren’t quite as extreme as those recently published by Statistics Canada. But in the coming years, we’ll still likely see a drop in admissions of international students and temporary foreign workers, and both groups tend to rent.

However, because it’s so expensive to buy a home, rental demand is unlikely to fall very much. The latest census revealed a broad-based rise in the share of households that rent between 2011 and 2021 as home prices grew increasingly out of reach. We anticipate that the Desjardins Affordability Index—our measure of homeownership affordability that incorporates household income, home prices, mortgage rates and taxes and fees—will improve as borrowing costs come down and home values only gradually increase. But we don’t see the index returning to pre-pandemic levels within the next three years. That’s the case in the four largest provinces External link., and we don’t think that will change even if there’s a recession or if listings surge.

The supply side of rental markets is at the intersection of multiple forces. On the one hand, builders across the country have clearly responded to strong rental demand by increasing condominium and purpose-built rental construction (graph 3). Various federal, provincial and municipal policy measures should also continue to support rental construction going forward. But despite this rental construction boom, most local markets remain severely undersupplied. The number of unabsorbed housing units is very low across most major cities. Moreover, the latest CMHC Rental Market Report External link. highlighted a record-low vacancy rate at the national level, with sharp declines across multiple major centres. These indicators suggest we could see quick absorption of any new supply, even if NPR levels decline. Finally, our work published this week identified the myriad challenges facing Canada’s homebuilding ambitions External link..

The key takeaway is that while we anticipate that rental price increases will slow in the months ahead, structural factors look likely to prevent a more significant improvement. Stay tuned for more research on this topic from Desjardins Economic Studies in the months ahead.