Rent Growth: Old vs New Purpose-Built Rentals

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Looking back, it turns out I haven’t talked about rent growth in any of my posts, so that’s what this post is going to be about. Every year CMHC reports average rents for purpose-built rentals for most major cities in Ontario. By looking at historical CMHC data and doing a few simple calculations we can compare rent growth over time and geography.

The chart below compares annualized growth in average rents for all purpose-built rentals (apartments and townhouses) in the seven largest cities in southern Ontario over the past decade (2009 to 2019). Rentals have been separated into “old” and “new” rentals: old rentals are those built before 2000 and new rental are those built in 2000 or later. In all cities, far more rentals were built before 2000 than after.

What can we take away from this chart?

First, we can see that rent growth has varied quite a bit from city to city. Rents have been climbing in all markets in southern Ontario for years but this data shows that rent growth is not evenly distributed (if I had included some smaller-size cities in the chart I think this unevenness would be even more stark). Somewhat surprisingly, Hamilton’s rentals, both old and new, had the highest annualized growth in average rents, exceeding even Toronto. Of course, this is not because Hamilton’s average rents are higher than Toronto’s or that Hamilton has a hotter rental market, but rather that Hamilton’s rentals have been underpriced for such a large city so they have a lot more ‘room’ for rent increases than in Toronto (where rents are extremely high). In Kitchener, where new rentals had the second-highest annualized growth in average rents, it’s a different story: ongoing construction of rental housing coupled with a strong local economy are likely behind high rent growth among new rentals.

Second, we can see that in most cities rent growth was significantly higher among new rentals than among old rentals. That’s to be expected since new rentals are (mostly) exempt from rent controls and landlords can theoretically raise rents as high as they want on lease expiry. In reality, most landlords only push rents for new rentals up by large amounts on turnover not annual lease expiries, so the absence of rent controls for new rentals explain only part of the story. Another factor is new construction: when a new rental building comes to market its units are typically priced high which pushes up average rents over a short period, resulting in higher calculated rent growth. I think it’s this which explains most cities in the chart—except Mississauga and London, which require a closer look and special discussion.

London is interesting because new rentals in the city had an annualized rent growth much lower than old rentals in the city, even though the city has large amounts of both new and old rentals and one might expect them to grow at similar rates. How can this difference be explained? One explanation is that the large number of new rentals entering the London rental housing market each year means there are now a lot of options/choices for renters, which means developers aren’t able to push rents in new buildings into the stratosphere. Another explanation is that London’s location means its rents aren’t being pushed upwards in reaction to an influx of people priced out of Toronto or the central GTA (which is happening in Hamilton as some Torontonians decamp to Hamilton’s more affordable housing market).

Mississauga is a different case: only a small amount of new rentals have been built over the past decade in the city, which is located in the GTA. Both of these factors suggest that rents among new rentals should be under pressure to increase faster than old rentals. But that’s evidently not happening. Why? Generally speaking, old rentals in Mississauga were not underpriced, so their strong annualized growth in average rents is not a process of catching up to what renters can afford. Instead, I think it’s due to an absence of critical mass: when a large city has a small number of new rentals there isn’t really a ‘market’ for new high-quality rentals, but when a greater amounts of new rentals are built a demand for them is created and their rents increase. I expect that when developers start adding thousands of new rentals to Mississauga—which is going to happen sooner or later—rent growth among new rentals will exceed rent growth in old rentals.

London and Mississauga, taken in context with the other cities included in the chart, and given the discussion above, suggests that rent growth for new rentals might follow a curve of sorts: as a small number of new rentals enter a market their rent growth is weak since demand for them is still weak (there’s no ‘market’ or demand for them yet); then, as the number of new rentals increases their rent growth increases as demand an a market is created for new high-quality rentals; finally, as the number or proportion of new rentals starts to become very high their rent growth slows as demand is mostly met (saturation point?). Although I have no way to ‘prove’ this theory at present, it’s an interesting idea and worth returning to in the future.