Supply & Demand (& Rents)

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Over the last year or so I’ve come across articles discussing if new rentals entering a housing market suppress rents and cause them to flatten or decrease, in sort of a supply versus demand relationship. Some articles claim to have found that rents overall increase with supply growth while other articles claim to have found that rents decrease with supply growth. There are too many of these articles to discuss here; most are too technical or esoteric to easily summarize and I don’t want to turn this into a literature review. The basic takeaway is that it’s apparently not a settled science yet.

Rent data from Seattle suggests that a big increase in rental supply might push down rents. The Seattle Times, on January 12, 2018, reported that data collected by a local data firm called Apartment Insights/RealData showed that “the largest rent decreases were mostly in the popular Seattle neighborhoods that are getting the most new apartments.” After showing some numbers and charts, the article goes on to quote the chief economist of RealData who says that other large cities in the US had already seen this “cool-down trend” and Seattle’s market had remained stronger, longer. You can read the full article via the link below.

There are probably a bunch of reasons for rents dropping beyond the big increase in supply, but Apartment Insights/RealData has been studying the Seattle rental market for over a decade so I’m going to accept their conclusions at face value. Could rent drops like in Seattle happen in southern Ontario’s rental housing market?

The purpose-built rental supply in Ontario still lags well behind demand in most cities in Ontario, and new rentals are being absorbed without difficulty. Vacancies remain low in most areas of the province and I am not aware of rents being deliberately lowered anyplace, at least not among purpose-built rentals. This suggests that Ontario’s largest cities probably have a lower supply of rentals relative to population than Seattle or other major US cities and that supply hasn’t caught up with demand.

But does Seattle have a greater supply of rentals than Ontario largest cities? To find out, I’ve calculated the rental supply density of Seattle, defined as the number of rented dwellings versus population, and compared it to calculations for twenty-one major US cities and Ontario’s ten largest cities. The chart below shows the results of this comparison. I’ve also added rental supply densities for Canada’s largest cities. Readers should note that “renter occupied private dwellings” includes both purpose-built and non-purpose-built rentals.

The chart shows that Canada’s largest cities have much lower amounts of rental housing versus population than the US’s largest cities, with a few exceptions. Perhaps surprisingly, Montreal (the city/ville, not the region) leads with the highest rental supply density among all the cities included in the chart, by a notable margin. Seattle, the subject of the media article discussed earlier, ranks sixth in the chart, one place ahead of Vancouver. Most of the ten largest Ontario cities rank well behind the US cities.

However, the chart ranks cities by rental supply density only, without regard for population. How do cities of similar population compare? The table below compares pairs of Canadian and US cities with more or less the same total population.

The US cities in the table all have more rentals per 1,000 people than their Canadian pairings. The smallest gap between cities is between Toronto and Chicago: the difference in total population between these two large, urbanized cities is negligible, but Chicago has about 10% more rentals per 1,000 people than Toronto. The biggest gap is between Vaughan and Pittsburgh: the US city has two hundred more rentals than the GTA suburb, or 7.25 times more rentals, even though Vaughan has only about four thousand more people. Seattle has 2.6 times as many rentals as Mississauga, the Canadian city with practically speaking the same population.

Why do US cities consistently have more rentals than Canadian cities? It’s because large amounts of new purpose-built rentals have been developed in US cities—we’re talking the construction of thousands of new rental units per year, not a few hundred as in most Canadian cities. That means big US cities often have more advanced, mature rental markets offering a large number of rentals at a variety of price points, than Canadian cities of similar population.

Let’s circle back to the impact of new rental construction on rents—do new rentals cause rents to flatten or decrease? I can see both sides of this argument being plausible. On one hand, it makes sense that when a large number of new rentals are delivered into a housing market over a relatively short period vacancies in both the new and older (existing) rentals increase and landlords react by lowering rents to try to eliminate those vacancies. This happened in Calgary several years back when the price of oil collapsed and job losses hit the real estate market—one of my friends who lives in Calgary was offered, without him asking, a rent reduction by his landlord to encourage him to renew his lease (naturally, he accepted). On the other hand, I think it’s possible that a large number of new rentals delivered into a housing market, perhaps over a longer period, would rent increases by creating a sub-market for new rentals at higher rents, in the process buoying rents across most of the rental supply. This is an interesting possibility and I’ll return to it in a future post.

Whatever the case may be, I suspect that Ontario’s cities remain so deeply under-supplied with rentals, and that so few new rentals are on the development horizon, that their rental markets are in no danger of rent decreases like those that have been seen in Seattle in the foreseeable future.