GLOBAL ECONOMICS GLOBAL REAL ESTATE TRENDS

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1 November, 17 Growing Canada s Rental Market Part CONTACTS Rental housing demand is growing in all regions of the country. In addition to affordability considerations, demographic trends including millennials moving out of their parents home, downsizing seniors, and increased immigration are contributing to growing rental demand. Adrienne Warren 1..1 Scotiabank Economics adrienne.warren@scotiabank.com Private sector developers and investors are responding to the increased demand. For renting to be a viable and affordable option for a greater number of households, however, a further ramping up in the pace of rental construction is needed, particularly purpose-built rentals. GROWING RENTAL DEMAND The demand for rental housing has been rising steadily over the past decade. The number of renter households in Canada increased by almost, annually between 11 and 1, double the pace of the prior five-year period and up from virtually no growth over the previous decade (chart 1). For the first time since at least the 197s, renter household formation is outpacing the number of new homeowners. Rental demand is up across the country, with the largest increase in Ontario, Alberta, and British Columbia. Demographic trends, including an ageing population, are contributing to growing rental demand. The number of Canadians aged and older is increasing at its fastest rate in almost seven decades. Canada s homeownership rate peaks between the ages of and, before gradually declining. High and rising immigration also is lifting the demand for rental accommodation. Immigration to Canada totaled almost, last year, up from an average of, over the prior five-year period and its highest level in almost a century. Ottawa has recently announced an increase in its annual immigration target from, to, by. The majority of new immigrants to Canada initially settle into rental accommodation. Of recent immigrant households in 11, % were renters. Toronto, Vancouver and Montreal together attract more than half of new immigrants to Canada. However, a growing share of immigrants in recent years are settling into other census metropolitan areas, notably in the Prairies. Housing affordability pressures also appear to be contributing to increased rental demand. For the large cohort of millennials establishing their own households, renting may be the only option if they choose to reside in Canada s highest-cost urban centres. In Toronto, the cost of mortgage debt servicing, property taxes, fees, and heat as a share of median household income to purchase an averagepriced condominium is already pressing up against the maximum gross debt servicing ratio qualifying threshold of 9%. In Vancouver, it exceeds this level by about 1 percentage points. Chart Chart 1 Renter Household Formation annual increase in renter households, s Sources: Scotiabank Economics, Statistics Canada. Purpose-Built Rental Completions s of units The latest Census data confirm that millennials are at least delaying homeownership. The homeownership rate for Canadians under the age of fell from a record high of.9% in 11 to.1% in 1, though it remains slightly above the long-term average

2 November, 17 MORE AND VARIED RENTAL SUPPLY NEEDED Private sector developers are responding to the increased demand. Purpose-built rental completions last year totaled 9, units, the highest level since at least 199 (chart ). There are, additional units currently under construction. The average rental vacancy rate across CMAs is fairly stable and in line with its long-term average around ½%, suggesting at the national level purpose-built rental supply is largely meeting demand (chart ). Chart Vacancy Rate For Purpose- Built Rentals % (as at October) Toronto National Average However, regional conditions vary. In many centres in BC and Ontario, where high home prices represent a hurdle to homeownership, historically low vacancy rates imply that the rental market is undersupplied relative to demand. In Toronto, the vacancy rate for purpose-built rentals fell to 1.% last year, its lowest level in 1 years, while the availability rate in Vancouver dropped to just.7%. Outside of BC and parts of Ontario, rental market conditions are generally less constrained. Purpose-built rental construction in the GTA has picked up since 1, but has added only marginally to the overall stock of rental units. A total of, purpose-built rental units were completed last year, or just. units per 1, population (chart ). Vancouver s development pipeline has been stronger, with,1 completions, or 1. units per 1, population. Meanwhile, Montreal, which has the largest rental stock in the country, saw,91 completions last year, or 17 units per 1, population. 1 Vancouver Chart Purpose-Built Rental Completions Montreal (17.) The majority of the addition to the rental stock in major urban centres has been in the form of rented condominiums. Condominiums account for roughly % of the rental stock in Toronto and Vancouver, and 1% in Calgary (chart ). Purpose-built units continue to dominate in Montreal, with rented condominiums accounting for just %. Tight rental market conditions are evident here as well, despite record condominium completions in recent years and strong investor purchases. The vacancy rate for rented condominiums across major CMAs was just 1.9% last year. The availability rates in Toronto and Vancouver were 1.% and.%, respectively. Edmonton Vancouver Quebec City Calgary Toronto (.1) (17.) (7.) (1.) (completions per 1, population shown in parentheses) (.) units, 1 Condominiums are an important component of the urban rental stock. Condominiums are generally newer and offer better amenities. Yet, they typically garner a hefty premium over other rentals. The average rent on a -bedroom condominium in Toronto is % higher than for a purpose-built rental apartment. In Vancouver, the condominium rent premium is %. The supply of condominium rentals also is vulnerable to shifts in investor sentiment and future rental cash-flow projections, and units can be more easily converted back to owner-occupancy. For renting to be a viable and affordable option for a greater number of households, a further ramping up in the pace of rental construction is needed, particularly purposebuilt rentals. A one percentage point drop in the national homeownership rate would require the addition of about 1, new rental units. This comes on top of the almost, units needed annually to meet underlying household growth. Actual starts would need to be higher to account for demolitions and conversions. There is also the need for more diversity in the rental stock, including more dwellings suitable for families. This may entail growing the other secondary rental market, which includes detached- and semi-detached homes, townhomes, duplexes, laneway houses, and secondary suites. Almost a quarter of rental units in the secondary market have three or more bedrooms, compared with just 11% of purpose-built rentals. Chart Rental Units By Dwelling Type % share of rental dwellings Other dwellings Rented condos Purpose-built Vancouver Calgary Toronto Montreal

3 November, 17 CANADIAN RESIDENTIAL MARKETS s of units, a.r. New Home Construction y/y % change s of units New Home Inventory Row & apartment Singles & semis 1 1 Housing starts (LHS) New housing price index (RHS) - 1 Sources: Scotiabank Economics, CMHC, Statistics Canada. -1 Existing Home Sales $, s s of units, a.r.. ratio of new listings-to-sales Existing Home Inventory Unit sales (RHS)... Roughly balanced market Average price (LHS) 1. 1 Sources: Scotiabank Economics, CREA. 1. Sources: Scotiabank Economics, CREA Housing Starts Canada B.C. Alberta Sask. Manitoba Ontario Quebec Atlantic (s units, sa ) ytd f f f (units, nsa) Vancouver Calgary Edmonton Toronto Ottawa Montreal Halifax St. John s 1 1,17 9, 9,99 9,19,,1,9 1, ,7 9,9 9, 9,7,79,719,9 1,9 1 19,7 1,1 1,7,1,,91,7,1 1 1,9 1, 1,9,7, 1,,9 1,7 1 19,1 17,11 1,7,99,7 1,7 1,77 1, 1, 1, 17,,7,97 1,7, ,91 9, 1, 9,7,9 17,, 17ytd,91 11, 11, 9,9,9,,17 7 Year-to-date data are expressed at seasonally adjusted annual rates.

4 November, 17 CANADIAN RESIDENTIAL MARKETS 1 1 % Residential Mortgage Rates 7 Household Mortgage Debt Service % of disposable income Interest and principal -Year conventional Interest only Prime Sources: Scotiabank Economics, Bank of Canada. Sources: Scotiabank Economics, Statistics Canada. 1 1 y/y % change Residential Mortgage Credit Residential mortgages.7... Residential Mortgage Arrears % of mortgages in arrears three or more months Mortgage arrears.. Sources: Scotiabank Economics, Bank of Canada..1 Sources: Scotiabank Economics, CBA. Home Sales Canada British Columbia Alberta Man.-Sask. Ontario Quebec Atlantic Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units 1 9,71 7,,11 7,,,,7,,79 1,,7, 19,,9 11,1,9 1,71 7,77,1,17 7,9,91, 197,,7 77,1,91,9 1,1 1, 1,9 7,,,9,7 7,,1 19,,9 77,7,,79 1,7, 7, 7,9,9,9 7, 7,1 1,979 19, 7, 71,19 9,9 1,11 1 7,9 77,7,91,, 71,7,97 7, 9,771,7 71,1 7, 9,,77 1,1,,7 1,1 9,1,7,,1, 1,71 7,7 7,1 7,9 1, ,,1 91,111 11,11 9,1,17 7,,9,,7, 7,1,, 17ytd,1 1,1 91,1 11,9 97,,,1,,,1 9, 1,9 7,7,7 Vancouver Calgary Edmonton Toronto Ottawa Montreal Halifax Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units Avg. Price Units 1 7, 1,1 9,7,99, 1,,,1,9 1, 9,,9,71, ,7,9,1,,9 1,9, 91,7,99 1, 9,1,,77,99 1 7,, 1,1,,1 17,1 9,97,17,17 1,9,1,,9,1 1 77,7,9 7, 9,9,977 19,,9,9,9 1,1,11,91 7,9, 1 1,,9,,1,7 19,7,91 9,7, 1,1 1,77,7 7,9,79 1 9,1,1,1,99 9, 1,7, 11,,1 1,9,7 7,9,, 1 1,17,,,7, 9, 1,99 79,91 11,7 7, 1,17 9,79 9,9,97,11 17ytd 99,7,79 7,179,997 7,7 1, 17,9 9,77 9, 17,,7,7 7,7,7 Sources: Scotiabank Economics, CREA, QFREB. Year-to-date data are expressed at seasonally adjusted annual rates.

5 November, 17 US RESIDENTIAL MARKETS.. 1. mns of units, a.r. Housing Starts Total mns of units, a.r. Housing Starts by Region South 1. Single-Unit. Multiple-Unit.. Sources: Scotiabank Economics, US Census Bureau.. West. Midwest. Northeast. Sources: Scotiabank Economics, US Census Bureau mns of units, a.r., MMA New Home Sales Average price (RHS) Unit sales (LHS) $, s, MMA. Sources: Scotiabank Economics, US Census Bureau mns of units, a.r., MMA Existing Home Sales Average price (RHS) $, s,mma Unit sales (LHS) 1 1 Sources: Scotiabank Economics, National Association of Realtors (NAR). Housing Starts Permits Total Singles Multis West South Midwest Northeast Total Singles Multis (millions of units) (millions of units) ytd f 1. 1f 1. 19f 1. Sources: Scotiabank Economics, US Census Bureau. Year-to-date data are expressed at seasonally-adjusted annual rates.

6 November, 17 US RESIDENTIAL MARKETS 9 7 % Mortgage Rates and Applications -year mortgage rate (LHS) MBA mortgage application index purchases only (RHS) index Consumer Price Index, y/y % change Owners' equivalent rent Housing Costs Rent of primary residence Sources: Scotiabank Economics, Mortgage Bankers Association (MBA), FHLMC. 1 - Sources: Scotiabank Economics, US Bureau of Labor Statistics. 1 1 New and Existing Home Inventories months' supply, MMA 1 1 % Apartment Vacancy Rates South 1 Existing New 1 1 Midwest Northeast West Sources: Scotiabank Economics, US Census Bureau, National Association of Realtors (NAR). Sources: Scotiabank Economics, US Census Bureau. Existing Home Sales New Home Sales Total Avg Months North Avg Price Months West South Midwest Total Price Supply Eas t ($s) Supply (sa) (nsa) (nsa) (million units, saar, unless otherwise noted) ytd Sources: Scotiabank Economics, National Association of Realtors (NAR), US Census Bureau. Year-to-date data are expressed at seasonally-adjusted annual rates.

7 November, 17 INTERNATIONAL RESIDENTIAL MARKETS International House Prices (Inflation-adjusted, y/y % change) Q 1Q 17Q1 17Q Australia Canada France Germany Ireland Italy Japan Spain Sw eden Sw itzerland United Kingdom United States Rus sia Brazil Chile Colombia Mexico Peru China India Indonesia South Korea Thailand Sources: Scotiabank Economics, Bank for International Settlements Real house prices, 199=1 UK Sweden Real house prices, 199=1 Australia Switzerland 1 Canada United States 9 9 Sources: Scotiabank Economics, BIS, OECD. 9 9 Sources: Scotiabank Economics, BIS, OECD. 1 1 Real house prices, 199=1 Ireland France Spain 9 9 Sources: Scotiabank Economics, BIS, OECD. 1 1 Real house prices, 199=1 Germany Italy Japan 9 9 Sources: Scotiabank Economics, BIS, OECD. 7

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