In my first post on this website I explained how the housing market breaks down, identifying the categories of housing into which it can be separated. Readers should go back and read that post. In it I described the difference between purpose-built and non-purpose-built rentals, what I tend to refer casually as “official” and “unofficial” rentals—or de jure and de facto rentals if you like. I’ll use the terms purpose-built and official (and their inverses) interchangeably in this and future posts.
Purpose-built rentals are dwelling units intended to be used as rentals and are usually found in multi-unit apartment buildings and townhouse complexes. Non-purpose-built rentals are dwelling units intended to be owner occupied but at some point and for some period were rented by their owners to renters. Generally speaking, purpose-built rentals usually remain rentals for their entire period of use, while non-purpose-built rentals often switch back and forth between being occupied by the unit owners and by renters renting from the unit owners. In other words, the total supply of purpose-built rental dwellings or units is usually very stable and usually increasing, while the total supply of non-purpose-built rentals is always fluctuating and is unreliable.
Why are these distinctions important? In some cities and towns, non-purpose-built rentals can make up a considerable portion of the overall housing supply, and in some areas, renters are renting more non-purpose-built rentals than purpose-built rentals. This means that non-purpose-built rentals sometimes offer competition to purpose-built rentals, so they need to be considered when pricing new rentals. Perhaps more importantly, this also means that non-purpose-built rentals play a key role in gauging demand or depth-of-market for new rentals since non-purpose-built rentals are a pool of prospective renters for official rentals.
Let’s find out how large the non-purpose-built rental supply is. The chart below shows total rented dwellings separated into purpose-built and non-purpose-built rentals for the ten largest cities in southern Ontario. Non-purpose-built rentals are calculated by subtracting the number of purpose-built rentals reported by CMHC from the total number of rented dwellings reported in the Census. (For the record, I came up with this calculation back in 2012 as a way of showing that a significant number of de facto rentals existed in Markham despite Markham containing, at the time, only a handful of de jure purpose-built rental buildings.)
It’s clear that the size of the non-purpose-built rental housing supply is large, amounting to tens of thousands of units in nine of the ten cities. In Toronto, for example, which has slightly more non-purpose-built rentals than purpose-built, there are approximately 261,003 households renting unofficial rentals; in Vaughan, almost all rentals are non-purpose-built and there are approximately 9,662 households renting unofficial rentals. For developers pricing new rentals in these markets, or trying to gauge demand for new rentals, understanding the unofficial rental supply is obviously just as important as understanding the official supply.
In the second part of this post (to follow) I will discuss the three main types of non-purpose-built rentals and their importance.