Newton’s Third Law of Housing

NewtonIt was 325 years ago that Sir Isaac Newton wrote his “third law of housing.” (Or was it “motion?”)

Whatever. Either way, he concluded: “To every action there is…an equal and opposite reaction.”

In real estate, this principle applies routinely.

One action that’s currently shaking up housing in Canada is the government’s move to further restrict mortgage lending.

And one reaction that will be carefully watched is the impact on renters.

New limits on amortizations and debt ratios will make it harder for some folks to buy a suitable home. On top of that, many who would qualify regardless will now wait to see if home prices correct before buying.

Both of these groups need a roof to live under, and most will choose to rent (or rent longer).

rentingIn some cities, this mounting rental demand will collide with tight rental inventory. That could jack rents higher, at least in the medium term (perhaps until falling prices or rising incomes improve home buying affordability).

The total impact on renters is impossible to predict, but it probably won’t be positive. Here are related stories from the last few days, with a few highlights:

Vacancy Constraints (Vancouver Sun)

  • “Individuals are being forced to rent because they cannot afford to buy, a problem expected to get worse as recent changes to government-backed mortgages come into play.”

Canada’s Rental Housing Crunch (Huffington Post)

  • “Even though one-third of Canadians rent their homes, only 10% of new builds over the past decade were for rental purposes.”

U.S. Rental Imbalance (Financial Post)

  • Contrary to what some would believe, decimated home prices and all-time low mortgage rates have not helped the U.S. rental market.
  • “With…increased demand, rents in some cities have jumped by double-digit percentage rates.”
  • “We have falling incomes, rising rents and nothing but substantial upward pressure on those rents. And nothing in the cards suggests it will turn around anytime soon.” — Chris Herbert, director of Harvard University’s Joint Center for Housing Studies.

Adding to surging rental demand will be tighter supply.

rental-costsIn particular, stricter mortgage rules will slow the purchase of 1- to 4-unit rental properties. The impact won’t be colossal, but it will still affect the secondary rental market (i.e., rented condominiums, rented single family homes, etc.). CMHC says the secondary market accounts for one-third of Canadian rental housing.

This added supply constraint will compound the existing problem that many cities face — a long-term decline in rental units.

“Tightening mortgage rules is only half the equation,” says Federation of Canadian Municipalities (FCM) president Karen Leibovici. “As home buying slows down, you need to replace the lost construction jobs and you need to give Canadians somewhere else to live.”

The impact of all this will be felt in some areas much more than others. According to CMHC’s latest Rental Market Survey, Canada’s hottest rental markets include:

  • Regina, SK (0.6% vacancy)
  • Quebec City & Saguenay, QC (0.7% vacancy)
  • Guelph, ON (1.0% vacancy)

The coolest rental markets are:

  • Saint John, NB (8.4% vacancy)
  • Windsor, ON (7.7% vacancy)
  • Kelowna, BC (5.2% vacancy)

The rule of thumb for a balanced rental market is 3% vacancy. Nationwide, the average for a rental apartment was 2.3% in April, compared to 2.5% a year earlier.

In December, CMHC will release its next big Rental Market Survey. By then, it should be clear if Newton’s action-reaction theory has played out in housing as expected.


Rob McLister, CMT

  1. (In Vancouver) The reality is, there are lots of units available for rent. See craigslist. Those who claims a housing shortage must have ignored the large amount of investor-owned condos. There are rental listings for yet-complete condos.
    Besides, there are already many listings having $10k, $20k+ reductions (in GVRD, 40% of listings have price reductions per vancouverpricedrop blog). That can offset many months of rent increases due to the perceived “tight supply”.
    For example, the wannabe owner can afford to wait up to another 100 months for a $20k price reduction of his desired home even if his rent goes up by $200… and rent is cheaper than own in the first place.

  2. I doubt that. Renting is still cheaper than owning. And it was about time to restrict lending to risky borrowers.

  3. Are you talking about Vancouver, Washington???
    Vancouver, BC is renter hell! 1.1% vacancy is not exactly “lots of units available!” Go on craigslist and see what you get for $2000 a month. Try a 1 bedroom with 550 sq ft. You ain’t raising many kids in that Dom!

  4. The key punch line from CMHC’s rental survey.
    “The survey targets only privately initiated structures with at least three rental units, which have been on the market for at least three months.”

  5. That’s correct CW. CMHC’s Rental Market Survey (RMS) looks at multi-unit rental properties and uses standard assumptions to compare different urban areas. It’s a widely referenced publication that reasonably reflects supply/demand pressures in much of the rental market. RMS numbers are most useful in a relative sense (as opposed to being perfect measures of a given market).

  6. I don’t care about the 1.1% or whatever vacancy number. The fact is, it’s not too hard to find a rental in vancouver. If you want to rent in downtown, then yes $2000 doesn’t get you much. But don’t tell me you can’t find a 1000SF+ place in Burnaby for that money, which is not a faraway suburb by any means.

  7. With high house price appreciation in the last few years, a large number of move up buyers have been reluctant to “miss out” on future gains on their existing home so have kept it as a rental. Without the previous home selling, so many of these buyers are 5% down on the new house and just squeak through on debt servicing. With record high home ownership rates I’m glad there will be strength in the rental market to keep folks highly dependent on rents from running in to trouble on the multiple mortgages they are juggling.

  8. I am envisioning a seesaw effect
    Rents first go up because mortgage rules force more people to rent.
    Rents then go down because home prices drop and owners who can’t sell try to rent out their properties.
    Rents then go back up because people are too scared to buy after the crash.
    Does this make any sense?

  9. “It can be used to monitor a particular market, but nowhere near an entire market.”
    What does that even mean?
    Nice randoms stats as usual “Watchdog.” You dispute government data but provide no source of your own. Typical.

  10. Yes. Plus, rents for affordable housing multi unit types will follow a different trajectory than rents for large single family homes. I expect rents for the latter to fall with lower house prices as more people decide to rent rather than ‘sell at a loss’.

  11. I both own and rent – I am looking to raise my rental rate substantially when the current lease is up because I expect that there will be more renters on the market (and I have no need to sell any time soon). I don’t know of any landlords that don’t also own property so there will be many others in my position. You can bet that rental rates will sky rocket and there will be little choice for the renters. The government was clearly wrong to do this. It is dangerous to make such sudden changes and the forces of the market will make this obvious soon enough.
    McGuinty, if you really want to lower prices then just eliminate jobs or make Toronto less desirable. It’s income and demand that drives real estate prices, not low interest rates, not amortization terms, not down payments, etc.

  12. Rents will jump now that more people are shut out of buying. There is no doubt in my mind. In markets with low vacancy, I see this extra demand forcing up rents 5-10% within one year.

  13. I agree. It’s not too hard to find a rental in Vancouver…if you’re loaded or don’t mind living in a tool shed.

  14. …whereas if you have to own a place instead of renting, you would have to be even more loaded. All relative..

  15. I have to echo the previous comments about the limitations of CMHC vacancy data. Remember folks, CMHC vacancy rates refer only to units in larger buildings that are actually vacant (physically unoccupied) and available for rent.
    Units where the previous tenant has given notice, but hasn’t moved out yet, are not counted (even if there is no new tenant lined up).
    Units where the landlord does not disclose the rental status are not counted (major issue in the Toronto condo market).
    Units in smaller buildings are not counted. Basement apartments are not counted. Units in duplexes are not counted.
    Landlords may tend to lower their rents if they cannot find tenants for their units. This appears to be the case in Toronto, where index rents have been stagnant for some time. The per sq ft YOY rent increase
    for Toronto condos in 2010-2011 was reportedly under 2%.
    It might be better to look at index rents, rather than vacancy, as a better gauge of supply-demand in the rental market.

  16. “The government was clearly wrong to do this. It is dangerous to make such sudden changes and the forces of the market will make this obvious soon enough.”
    “It’s income and demand that drives real estate prices, not low interest rates, not amortization terms, not down payments, etc.”
    Some internal inconsistency there.

  17. We use CMHC’s Rental Market Survey in our analysis. I find it more than adequate for city-to-city comparisons because the methodology is standardized.
    Smaller buildings and basement suites are a minority of the market and not mandatory for general regional comparisons. If you want that data you can get it in CMHC’s fall report.

  18. If you’re doing city-to-city comparisons, that’s fine. But making absolute claims about the vacancy rate in a big-city market based on CMHC data is still problematic, for the reasons I outlined in my post.

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