The Capital Explains The Victoria Rental Crisis

As previously covered in The Capital, in a city already notorious for its high real estate prices, the rental market is even worse. As of this writing, the average price to rent out a mediocre Victoria one bedroom is nearly double the price renters are paying on Canada’s other coast —- and rents are continuing to rise well past the rate of inflation. We asked Victoria real estate numbers guru Leo Spalteholz, of the blog House Hunt Victoria , to crunch the data and find out if this renter’s nightmare will ever end.

Prices and availability are getting worse

According to the newly released CMHC Rental Market Survey. rental vacancies actually decreased a bit from last year’s 1.2% to just 1% which pushed rents for the average one bedroom unit up by $51/month to $1130 while an average two bedroom increased by $42 to $1454/month. Rents are high in Victoria, but Canada is a high-rent place. Even at historically high rental rates after rapid increases in the last few years, the Capital Region is only home to the 9th highest rental prices in Canada with Vancouver, Toronto, Ottawa, and various municipalities around Lake Ontario coming in higher.

Average rents in Canadian municipalities

Created with Raphaël 2.1.2

Saguenay

Saguenay

$500

$1,000

$1,466

Vancouver

$1,453

Toronto

$1,288

Barrie

$1,277

Ottawa

$1,237

Kingston

$1,230

Oshawa

$1,224

Guelph

$1,219

Victoria

$1,213

Kelowna

$1,180

Calgary

$1,159

Kitchener

$1,144

Edmonton

$1,131

Hamilton

$1,114

Halifax

$1,069

Winnipeg

$1,065

Belleville

$1,052

Peterborough

$1,048

Saskatoon

$1,042

Regina

$1,029

Abbotsford

$1,027

Niagara

$1,023

London

$1,016

Brantford

$995

Thunder Bay

$976

Lethbridge

$897

St. John's

$870

Windsor

$848

Gatineau

$840

Montreal

$832

Quebec

$831

Moncton

$765

Saint John

$648

Sherbrooke

$613

Saguenay

Victoria is still emerging from what could charitably be called a renter’s nightmare. Rental vacancy rates dropped from nearly 3% in 2013 to only 0.5% in 2016, which is as close to zero as it has gotten here in the past few decades. That’s excruciating for anyone hunting for a new rental and combined with our aging rental stock has led to BC having the highest proportion of forced moves in the country, mostly due to renovictions and non-payment of rent.

Forced moves by province

Created with Raphaël 2.1.2

0%

X

5%

10%

15%

10%

British Columbia

8%

Yukon

7%

Prince Edward Island

7%

Ontario

7%

Nunavut

6%

Northwest Territories

6%

New Brunswick

5%

Nova Scotia

5%

Alberta

5%

Quebec

5%

Newfoundland and Labrador

4%

Saskatchewan

4%

Manitoba

However, ultra-low rental vacancy rates are actually not new for Victoria. The last time we had an extremely tight rental market (between 2003 and 2008), the vacancy rate stayed well below 1%.  It should be no surprise to anyone that a near zero vacancy rate leads to landlords being able to quickly increase rents, and this is indeed happening now with the recent tight rental market leading to rents increasing 5% last year on top of the previous year’s unprecedented 9%.

‍ The Victoria “moving penalty”

Increases in existing rents are only half the story, because BC has a form of rent control by limiting the amount that rents can be raised each year. As a result, measuring the average rent of all units does not reflect how much higher the market rent really is. In other words, if you’ve been living in an apartment for some time, it’s quite likely you are paying less than market rent.  If you want to move, you’ll have to pay the “moving penalty”; the difference between your rent and the rent of the new place where the landlord is charging whatever the market can bear.  While the gap between market and existing rents narrowed in 2019, the average moving penalty for all unit types was still a formidable $245 per month, That is, while the average apartment was renting for $1219, the average empty apartment was being advertised for $1465 per month.  About one in five Victoria renters moved last year and were likely stuck paying nearly $3000 per year more in rent due to the “penalty.”

Is there any hope?

The good news is that like many things in real estate, rental vacancy rates tend to go through cycles. This means that after a period of extremely low vacancy rates, we can expect to get back to a more manageable rate of 3 to 4%, which in turn will cause rental increases to drop to below 1%.  That has happened twice in the past three decades (around the mid 90s and 2010s) and generally, it happens when the economy or population growth becomes more sluggish.

Vacancy rate vs. rent change in Victoria

0%1%2%3%4%5%6%7%8%19911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420152016201720182019

Vacancy Rate

Rent Change

Vacancy Rate

Rent Change

This trend is particularly notable given that there has been almost zero purpose built rental units built in Greater Victoria for more than a generation. Here, any extra rental units coming on the market since 1990  have come almost exclusively from private investors buying condos to rent out on the secondary market. While Victoria seems to have been particularly bad for its deficit of new rental buildings, the lack of dedicated rental construction has been a Canada-wide issue, with very little rental construction since the boom in the 1960s and 1970s when government social housing policies were in full swing.

Rental market construction in Victoria

Created with Raphaël 2.1.2199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201420152016201720182019

2,000

X

500

1,000

1,500

2,000

227

499

410

421

170

78

140

138

34

48

39

458

134

196

84

62

63

28

52

88

218

283

360

347

341

726

1,099

1,578

2,106

1,530

But there is hope. In the past few years government funding and incentives have returned to the market, with provincial money for affordable housing (via BC Housing) combining with federal funding (via the National Housing Strategy) and local housing strategies that prioritize renters.  That funding combined with improving yields for rental housing has exploded the level of rental construction in Victoria. The most recent data indicates that 1647 rental units were built here in 2019. To put that into perspective, more units have started construction in the last 4 years than in the 26 before that.

Will tighter rent control stunt new housing?

Every year, BC has set a maximum allowable annual rent increase for existing tenants.  That is, your landord cannot increase rent more than the maximum allowed each year and can only raise rents once a year.  For many years that rate was the rate of inflation plus 2%. In 2019, in an effort to put a lid on spiraling rent, the government reduced the maximum increase to the rate of inflation. In general, the view on rent control by economists is that it backfires by reducing rental construction and leading to situations with higher rent than if landlords were free to set rent to the market. On the other hand, rent control protects existing tenants from payment shocks that they may not be able to afford.

In general, if rent controls limit rent increases to the point where rents cannot keep up with the market, then rent control will disincentivize rental construction by reducing returns for investors and thus reducing the amount of capital available to build new rentals. On that front, the previous limit to rent increases were not a barrier. As the chart below shows, the older limits allowed existing rents to roughly keep track with average rents, smoothing out increases to protect tenants from payment shocks.

However, under the new system adopted in 2019, maximum rent increase was set at the rate of inflation only without adding the 2% boost. If that system had been in place in the past 15 years, you can see that landlords could not have kept rents in line with the market, and that would have caused problems for rental buildings. The government should look carefully at those tighter rent controls before they cause problems with new rental supply.

In the end rent controls are merely a band aid. We wouldn’t have to control rent increases if vacancy was high enough (3-4%) to keep rent increases naturally moderate. That means putting focus on building enough new rentals by incentivizing those projects and expediting them through the municipal approval process.

What about those new taxes?

Outside of the support for rental housing construction, our provincial government has also been busy levying new taxes to try to make housing more affordable. The foreign buyers tax for purchases decreased the number of foreign buyers by almost 80% and slowed down the high end market in Victoria, but has had no impact on rentals.

The Speculation and Vacancy Tax introduced in 2018 charges Canadians that keep empty homes in Victoria 0.5% of the property value and foreign owners 2% of the property value every year. In Vancouver that has been partially credited with a large increase in rentals, but no such effect is observable in Victoria. CMHC’s estimate of condos being rented out increased by only 70 units in 2019 indicating that the tax didn’t motivate owners of empty homes to rent them out.   That may be because there just weren’t that many empty homes to start with. Provincial data indicates that only 344 owners in Greater Victoria paid the speculation tax in 2018.  Even if all of them rented out their homes tomorrow it wouldn’t be enough to move the needle.

Rents might stop rising so fast, but they’re not coming down

Even with all these new rental units, part of the new stock is going to be cancelled out by demolitions of existing rental buildings. If you’ve rented in Victoria you’ve probably spent time in the 1960s low rises that dot the city with their wonderful galley kitchens, worn carpet, and coin laundry. They’re perfectly acceptable places to live and because they’re basic they’re often more affordable, but there’s no getting around the fact that they are now getting on 70 years old and won’t last forever. In the coming years we can expect more of the older stock to be retired and that’s going to require even more new construction to replace it. In fact, in the latest numbers we’ve seen that despite construction of 1647 units, the stock of rental apartments only grew by 583.

Photo illustration by Dash Dixon

Don’t expect rents to go down with this new boom in rental construction, though. The units coming on board are new, and that means the ones that aren’t specifically set aside for affordable housing (i.e. most of them) will be expensive. We know that rents in newer apartments are much higher than those in older buildings, however these new units still help affordability because they will attract higher income residents that will then no longer be competing for existing units.  That will halt the rise of rents, and reduce some of the leverage that landlords currently hold over tenants that are paying less than market rates.

Victoria’s vacancy rate at 1% is better than it has been but it’s still very tight. Rents continue to increase  at well above the rate of inflation, and renovictions continue apace. However, with the wave of new construction there’s reason to be cautiously optimistic. After all, short of scaring people away, more housing is the only way to fix a rental crisis caused by a housing shortage (assuming the new housing doesn’t fall down).

Read more of Leo Spalteholz at the blog House Hunt Victoria .