The solution to Canada’s housing crisis

If you’re worried about a housing crash in Canada, you’re not alone. Benjamin Tal, deputy chief economist of CIBC World Markets, says people have continued to harbour fears and “describe the Toronto housing market as a bubble.”

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However, he finds this behaviour unproductive, preferring instead to look at how the government can solve the affordability crisis that’s holding back first-time homebuyers and families.

“We need to make sure we implement the right policies [so that] the housing market remains healthy,” says Tal. “The market will be tested, [and this] test will be either be higher interest rates or an economic recession.”

Read: Average home price in GTA surpasses $1 million

Before either of those events occur, he adds, a solution must be found. In his view, “the number one solution to the housing market’s problem in Canada in general—and in Toronto and Vancouver in particular—is more rental activity. Basically, we need to provide more rental solutions for first-time homebuyers.”

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Alongside the challenge of ballooning home prices, says Tal, “government regulations are pricing out homebuyers. And if you close a door, you should open a window.”

Read: Housing affordability reaches worst level in 8 years: RBC index

The future of the rental market

As housing prices have risen, the condo market has essentially been the rental market, says Tal. “Today, roughly 50% of new condo units are going to investors and, therefore, to supporting rental activity,” since many investors rent out their units after buying.

As a result, he explains, “the condo market has played a significant role in trying to stabilize the housing market.” Tal says low-rise properties, namely detached houses, have been hit hardest by price increases all over Canada. This has impacted families and first-time buyers, and has led them to look for more affordable rental opportunities.

Read: GTA house prices could rise 16% in 2017

The upside of this is “the propensity to rent in Canada is rising, especially if you look at Toronto and Vancouver,” and this will lead to more rental properties being built.

Then, says Tal, “you’ll see more families entering this market and boosting rental activity instead of buying.” He points to markets like New York, Chicago and London, which have all seen home price increases and, following that, surges in rental activity.

“Purpose-built apartments may provide another dimension of housing affordability,” he adds, given many rental properties are cheaper than condos—especially if they’re located outside of downtown cores.

Read: The kind of home $1M buys in 7 Canadian cities

Going forward, Tal predicts “the rental market will be the fastest-growing [housing] segment in Canada, [primarily] in Vancouver and Toronto. Within this framework, I see a significant increase in activity when it comes to purpose-built rentals.”

If that occurs, he suggests investors monitor REITs that focus on multi-residential apartments and construction. With more rental activity, these REITs will benefit.

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