The numbers don’t add up in the multifamily housing market
By David Gargaro
Canada’s multifamily property developments are in jeopardy. There are significant financial and bureaucratic challenges to building purpose-built rental properties. And the condo market is on life support. Newly built and existing condos aren’t selling and there’s no incentive to put shovels in the ground to build new condo developments.
There’s still an affordable housing shortage. And if it doesn’t make financial sense to build new multifamily residential buildings, the housing shortage will get worse.
Multifamily housing starts are declining
Look at the Greater Toronto Area, which has had one of the hottest housing markets since the beginning of this millennium. Those days are gone, at least for now. According to research, there are 22 per cent fewer cranes in the GTA this year compared to last. Purpose-built rental apartment starts are down 30 per cent compared to 2023, and declining.
“FRPO continues to advocate for policies that support purpose-built rental construction including fast tracking infill developments, approving greater density along transit routes, and incentives like providing relief from development charges and property tax
abatements, which would stimulate many purpose-built rental projects that aren’t currently economically viable,” said Tony Irwin, President and CEO, FRPO.
The short-term future doesn’t look great for the multifamily residential industry.
Residential building permits fell by 5.2 per cent ($387.2 million) in August, mostly driven by multiunit properties. Ontario and BC led the way in this area. Across Canada, there were 18,500 new multifamily dwellings and 4,700 new singlefamily dwellings in August, which is a 4.1 per cent decrease in total permit-approved units.
“The recent cuts in interest rates are a strengthening factor for a rise in the number of purpose-built rental starts, but softer conditions on the revenue side in recent months in some markets will introduce new cautions to the market,” said Peter Norman, Vice President and Chief Economist, Economic Consulting, Altus Group. “The federal government’s recent announcement to reduce the net international migration at zero growth will have more impact on rental demand than ownership.”
The City of Toronto recently proposed a plan to create 20,000 new rental homes. This includes 16,000 purpose-built and 4,000 affordable units, with the City committing to build 7,000 rental homes using its own resources. The City hopes to incentivize development through development charge deferrals, property tax reductions, and financial support for affordable units. Projects must include 20 per cent affordable units and start construction by 2026 to qualify. However, the City’s plan currently relies on getting funding from the federal and provincial governments, and lacks concrete details and an effective strategy on moving forward on addressing the housing crisis. The plan also does not help privately led development projects (including more than 20,000 purpose-built rental units and 11,500 condos) to move forward.
Condo sales are through the floor
Every statistic involving condominium sales tells a story about the terrible state of this market. Condo sales are 81 per cent below the 10-year average. The Greater Toronto Hamilton Area (GTHA) new condominium market is down 66 per cent yearover-year in the second quarter of 2024, and falling 70 per cent below the 20-year average. Second quarter sales represented the lowest second quarter result of the past 20 years, excluding the initial months of COVID-19 in 2020. New condo sales in the first half of 2024 declined 57 per cent from a year ago and 72 per cent below the 10year average. It was the slowest first half for new condo sales since 1997.
“We expect fewer apartment starts overall next year, but that decline is generally being driven by the condo market more than the purpose-built rental market,” said Norman.
Only 17 per cent of presale condos launched in Q2-2024 were sold, which has not been seen in over 25 years. This is also less than one third of the decade average of 56 per cent. As a result of the drop in sales during the second quarter, total unsold inventory rose to over 25,000 units, which is approximately 10,000 units higher (over 60 per cent) than the 10-year and 20-year averages. When compared against sales over the past 12 months, unsold inventory equalled 34 months of supply, which is three times higher than the balanced figure. This year, months of supply almost doubled. Most unsold inventory was in pre-construction projects.
Development charges are driving up prices
One reason behind the decline is the rise in development charges (DCs). Home prices are four to five times higher than they were 20 years ago, and the price of land is 10 to 11 times higher as well over this same time. Development charges are also 30 per cent higher. In fact, government charges account for about 31 per cent of the cost of a new home. Municipal DCs have risen to the point of being a significant obstacle to construction development. Consider the GTA, where DCs for single-detached homes have increased by 993 per cent from 2010 to 2024 ($12,910 to $141,139). And in the past year, DCs have increased by 42 per cent. Compare this to Calgary, where DCs for comparable homes are only $22,000.
Development charges have risen across Ontario. In 2023, Vaughan raised DCs by 17.5 per cent, Mississauga increased DCs by 22 per cent, and Ottawa raised them by 11 per cent. In 2015, total DCs collected across Ontario municipalities equalled $2.1 billion. As of 2022, that number has more than doubled to $4.3 billion.
“Municipalities are currently not adhering to longestablished best practices for establishing and negotiating community amenity contributions and developmental cost charges,” said David Hutniak, CEO, LandlordBC. “Recent increases have been excessive. This inconsistency is disrupting the delivery of housing and unfairly increasing costs for new homeowners and renters. A bolder measure would be to freeze all municipal fees and charges and impose a moratorium on new fees effective January 1, 2025.”
Construction costs are affecting development
According to Statistics Canada’s quarterly Building Construction Price Index, the cost of building residential and non-residential buildings increased in the second quarter of 2024. Year over year, construction costs for residential buildings in 11 census metropolitan areas (CMAs) rose 4.2 per cent in the second quarter. Calgary led the way with a 7.3 per cent year-over-year increase in residential building construction costs. Compared to the first quarter of 2024, residential building construction costs increased 0.8 per cent.
“The biggest challenges we face are delays in permit approvals and rising construction costs,” said Corey Pacht, Partner and Executive Vice President, Operations, Fitzrovia. “These factors put pressure on our ability to scale and deliver new homes quickly. Although interest rates have dropped recently, they’re still high compared to a few years ago, and construction costs have gone up significantly. The recent cuts are a positive step, but we don’t expect a major rebound in multifamily housing starts without bold government policies that incentivize building more rentals.”
Skilled labour shortages, higher labour rates, building code updates, and other factors affected the construction sector in the second quarter. Labour shortages have also extended project timelines, which has led to higher construction and borrowing costs. All residential building construction divisions (except concrete) increased costs in the second quarter, with masonry and utilities up by more than 2 per cent.
“Reorient priorities within immigration and nonpermanent residents toward construction trades and labour, and ensure CMHC programs MLI Select and RCFI continue to be adequately funded and responsive to demand from developers applying to these programs,” said Irwin.
Toronto and Vancouver have weakened
Both Toronto and Vancouver have traditionally been among the most desirable cities to live in Canada, with very strong real estate markets and prices. This is no longer the case.
The sales to new listing ratio (SNLR) is a good indicator of whether a city is a good buyers’ market or a good sellers’ market. A ratio between 40 and 60 per cent is considered “balanced.” A city with an SNLR above 60 per cent is considered a sellers’ market, while an SNLR below 40 per cent is considered a buyers’ market. The national SNLR fell to 44.5 per cent in September, which makes Canada close to a buyers' market.
Toronto and Vancouver have the weakest demand for real estate in Canada. The GTA had an SNLR of 27.6 per cent in September, which was the lowest in Canada. Vancouver was second worst with an SNLR of 30.3 per cent. They have declined by 1 point and 4.7 points, respectively, from last year.
Housing starts in both cities are in decline. In Toronto, year-to-date housing starts are down 20 per cent from 2023, while Vancouver’s housing starts are down 19 per cent from 2023. However, both cities had record-high housing starts in 2023. Compare these figures to Montreal, which is up 15 per cent compared to last year, which had a historically low year in 2023.
“Municipalities have been hesitant to assess their actual housing needs,” said Hutniak. “We must understand these needs and set realistic targets to address the acute housing shortage. Even if population growth slowed tomorrow, CMHC estimates that BC is short approximately 570,000 homes by 2030. In an average year, we build about 23,000 homes in Metro Vancouver. Clearly, we need to start setting and meeting more ambitious objectives.”
Even with those poor ratios, housing prices have not truly declined in either city. Neither city has seen real declines in housing prices since 2022. Homeowners don’t want to sell, as they seem to be waiting for demand to go back up. While a mandated return to office would increase the number of people looking for homes closer to the city, this has yet to happen in significant numbers.
Conclusion
Canada’s multifamily housing industry is facing a critical downturn, characterized by a large decline in housing starts and condo sales, particularly in major markets. Rising development charges and construction costs have made the situation more financially challenging to invest in new developments. Even with lower interest rates and the cap on immigration, the affordable housing shortage will continue to get worse. Government intervention will be needed to incentivize construction and lighten the financial burdens on developers.
“Lower rates alone won’t solve the housing crisis,” said Pacht. “We need innovative approaches to how we build and fund rental housing. Measures like tax abatements, reduced development charges, and government-backed funding for sustainable building methods are essential for increasing supply. Without these, the current decline in housing starts will only worsen, and the industry won’t be able to meet the growing demand.”