FILLING THE RENTAL GAP
More corporate landlords are getting into the game of buying and renting out single-family homes
As the home ownership rate falls because of deteriorating affordability, there is an increased need for rental housing. That need can only be met by investors who then rent those units out.
— Jean-françois Perrault, CHIEF Economist scotiabank at
If James Robinson, a mortgage agent, wanted to buy the Victorian house he already owns in Port Hope, Ont., today, he would be faced with an inconvenient truth. In the shoes of a first-time homebuyer he wouldn’t be able to afford it based on his current income and the required down payment — a stiff 20 per cent on any property valued over $1 million.
He’s not alone. Only 45 per cent of households in this country can afford to buy even an entry-level condo based on their income — compared to 60 per cent pre-pandemic, RBC Economics notes in its latest affordability report. And a mere 26 per cent can afford a single-family home like the detached house Robinson bought with his wife 10 years ago. In Toronto and Vancouver that figure dips further to 22 and 10 per cent respectively.
“It’s a little surprising,” says Robinson, who owns a Dominion Lending Centres franchise. “But the reality in this country is that the population is growing faster than the housing market. My son may never own a home unless he moves out of Toronto.”
Given a majority of Canadians are unable to buy a residence based on income alone, a growing number are turning to the rental market as their only option. A large chunk of that inventory is supplied by individuals and numbered companies who own one or more homes as an investment.
A more recent trend, however, is larger corporations getting into the business of renting out single-family homes, a model that is well-established in the U.S. but has only entered Canada in recent years. Companies getting into the game include Avanew Inc. — which buys both owner-occupied and rental homes it renovates and then rents — Tricon Residential and Blackstone Group. Last month Blackstone announced it’s acquiring Toronto-based Tricon, which has 4,015 apartments under development in Canada.
The financialization of housing is a controversial topic; some critics argue it increases competition for homebuyers in an undersupplied real estate market.
But given the significant barriers to entry for first-time homebuyers in Canada, certain stakeholders, including some of the banks, are speaking up in support of corporate landlords.
“As the home ownership rate falls because of deteriorating affordability, there is an increased need for rental housing,” says Jean-françois Perrault, senior VP and chief economist at Scotiabank. “That need can only be met by investors who then rent those units out.”
Not surprisingly, Corey Hawtin agrees. The executive chair of Avanew, the Toronto-based company that is the first to specialize in single-family rentals (SFR) as an asset class in Canada, believes that “in the larger context, increasing the supply of single-family rental housing is a necessity.”
Avanew’s renters typically fall into one of four categories: graduate students, young professionals, young families and individuals experiencing a life transition such as divorce or moving to a new city. “These people need alternative solutions to apartments and SFRS provide that,” says Hawtin.
By Avanew’s calculations, it’s at least 40 per cent less expensive to rent a single-family home valued under $1 million in a secondary market like Oshawa or Hamilton, compared to making a minimum down payment and carrying a big-bank mortgage at today’s rates (5.63 per cent five-year fixed) plus paying property taxes, house insurance and maintenance.
He further points out that Ontario has a total of 550,000 SFRS, accounting for just 10 per cent of the total housing stock and 33 per cent of the rental stock, compared to 1.2 million apartments and rental condos. “That’s an insufficient supply of SFRS and an unacceptably large skew in favour of rental apartments,” says Hawtin, citing an Environics Research study that found 81 per cent of GTA residents under the age of 40 aspire to live in a single-family home.
Avanew, a subsidiary of Core Development Group, has so far accumulated a portfolio of 550 homes in smaller Ontario markets such as Kingston, Hamilton and Peterborough. But the plan is to expand across Canada with 10,000 SFRS over the next five years, a portion of which will be build-to-rent (BTR) homes. Avanew’s construction program starts this year and is expects to deliver 250 to 500 residences per year.
“Home ownership will remain out of reach for most first-time buyers for the foreseeable future,” says Justin Ditkofsky, VP of sales at Toronto’s Dash Group, a real estate developer and broker. “High levels of immigration combined with historically rigid planning and development practices are not a great marriage.”
As a father helping raise two young daughters, Ditkofsky adds he’s experienced the difficulty of finding rentals designed for families.
The fact is that Canada’s population-adjusted housing stock is the lowest in the G7, according to Scotiabank Economics. And Ontario, the most populous province with 14.7 million inhabitants (approximately equal to Sweden and Denmark combined) requires more than 650,000 homes for its ratio of dwellings to population to match the rest of the country.
“We believe the best way to address the rental housing shortage in Canada is to build a lot more purpose-built apartments,” says Robert Hogue, economist at RBC Economics in Toronto. He adds it’s unclear whether corporate ownership of homes will “move the market’s needle at a macro level” in terms of either rental supply or affordability for homebuyers.
Mitch Kosny, professor emeritus at Toronto Metropolitan University’s School of Urban and Regional Planning, says fixing the housing shortage should not be left to the private sector alone. “Non-profits and co-ops should play a role because they’re typically better at creating communities and a sense of permanence,” he says.
He points to the revitalization of Toronto’s Regent Park by Toronto Community Housing with Daniels Corp. and the Woodsworth Housing Co-operative in the city’s St. Lawrence neighbourhood as two such examples.
In the absence of a housing boom that delivers millions of new homes, Hawtin of Avanew expects continued erosion in the population-adjusted housing stock and housing affordability, placing Canada even further behind other G7 countries “Until we address the root cause of declining affordability that’s not going to change,” he says.