The economics of supply and demand are as evident in rental housing as anywhere else. As vacancy rates decrease, prices trend upwards. The vacancy rate of Toronto has historically been declining, falling further and further below 2% over the past decade, hovering now just above 1%. This has meant a shortage of affordable housing—especially rental housing—for the city’s rapidly rising population.

But the vacancy rate doesn’t tell the whole story. Here’s why.

What is a “vacancy rate”?

Vacancy rate is a measure of available rental housing in an area, represented as a percentage of the whole. It contributes directly to the health assessments of a real estate market.

When discussing vacancy rates, you may come across the term “equilibrium”. The equilibrium vacancy rate is the point at which vacancy is no longer pressuring rents in an area, it is the point at which supply and demand are balanced.

It is worth noting that vacancy rate statistics are usually based solely on purpose-built rental housing, meaning apartment buildings most often. While the vacancy rate of a city is certainly worth discussion, it is important to bear in mind that it does not necessarily include private housing rentals.

The vacancy rate in Toronto.

The PricewaterhouseCoopers report on Toronto’s housing market seems to favour the sentiment that affordability is the primary challenge to overcome. Rent increases in Toronto have vastly outpaced the provincial guidelines.

For renters, the lack of housing has been an impediment to finding housing at or under 30% of their income. Landlords, on the other hand, have benefited from the number of tenants searching for housing, making it easy to fill rooms if a tenant moves out.

Recently, Toronto’s declining vacancy rate has begun to trend back upwards. This may be due to loosening rent controls which are bringing more purpose-built rental units to the market. In fact, the most recent data shows that Toronto’s rental vacancy rate has risen to 1.5% in the second quarter of 2019.

When rent control regulations expanded in early 2017, construction on new apartment buildings in the Greater Toronto Area quickly converted to being developed as condominiums. This decision may have been influenced by the ability to skirt the rent control policies present at the time. In effect, that has meant less available rental housing and an accelerated rise in the average rental pricing.

Rent control laws in Toronto have been loosened in 2019, allowing landlords who own units built or occupied after November 15th, 2018 more flexibility in increasing their rental rate to match market rate.

Vacancy in rental housing of Toronto

What the vacancy rate means for Toronto landlords.

The lack of affordable housing in Toronto has been a challenge for local and provincial governments to address. Rent controls, while well-intentioned, may have paradoxical effects where they lead to a decreasing supply of rental units on the market.

For this reason, the removal of rent controls may lead to a balancing of rents across the Greater Toronto Area. Landlords will be able to increase their rents to match market rates, which may displace some tenants, but developers will be incentivized to produce more purpose-built rental housing, bringing the average cost of rent back down.

That change may already be unfolding. Urbanation’s most recent report shows the speed of rent increase slowing down, but not enough to actually decrease. All of this means that landlords may be in their best interest to match market rates while they are able to—especially considering the tumultuous history of rent control policies in Toronto.

Until the vacancy rate equilibrium is reached, average rent prices will continue inching upwards. The rapid rise in population projected across Canada is sure to make it an ongoing challenge for major cities to reach that point.

The average vacancy rate across Canada is pegged at about 2.4% currently. With an abundance of renters seeking housing in Toronto and other major cities, finding the right tenant can be particularly challenging. We recommend screening tenants thoroughly so that you can rest assured that your renter is the right candidate for your property.

Curious how Naborly helps landlords secure their rent? Find out everything you need to know here!