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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