Is the rental housing industry recession-proof? Ontario’s rental housing industry seemed to sail through the 2008 and 2009 recession without encountering too many rocks, at least based on what I could see from my deck chair, and in fact the industry seemed to get steadily busier as if the recession never happened. What will happen in the next major recession, which many think is imminent? Will the rental housing industry slip through unscathed?
I think the industry’s biggest vulnerability in the next recession will be luxury rentals. These are more discretionary than low- or mid-priced rentals and asking rents at the luxury end of the supply are equivalent to the costs of condominium and house ownership—in fact, they’re often more expensive. As people’s jobs and incomes are negatively affected by a recession they tend to reduce their expenses, and will seek to switch from a high-rent building to a low-rent building, while some homeowners who are suddenly unable to pay their mortgages will seek to sell their house or condo and switch to rentals. But, in reality, in a recession demand for low- and mid-priced rentals would be so high that renters trying to downgrade from luxury rentals, or homeowners turning to rental housing, may not be able to find any vacancies thanks to low vacancies in the industry. This will be exacerbated by the tendency for tenants whose units fall under rent control to stay put, while landlords will crank up asking rents on the few units that actually turn over.
None of this is good news if you own a luxury rental building, or if a big part of your portfolio is made up of luxury rentals (or if you are a tenant or homeowner who has “too much house”). On the other hand, it’s possible that demand for rentals exceeds supply by such a wide gap that even luxury rentals will stay fully occupied in a recession. By contrast, if you own low- and mid-priced rental buildings, you’re going to be fine, and in fact you’ll be overwhelmed by demand for your product—these owners and landlords will slip through the next major recession more or less unscathed.