vancouver condo supply Photo: Boris Mann/Flickr

In a report published on Thursday, CIBC economist Benjamin Tal said that the number of condos currently under construction in Toronto and Vancouver will raise the vacancy rate in the two cities, but the increase will not derail the rental markets.

Looking at market characteristics like a reliance on new immigrants and the impact of falling unit size, the report said that demographically driven demand for rental units had passed its peak in both cities. On the supply side, the number of condo completions expected in the next three years is a source of concern for those who believe that oversupply will spark a cascade of sales by real estate investors, who own a large portion of the new units.

In the report, Tal estimated that 45 per cent to 50 per cent of new condo units under construction in Toronto will be used for rental purposes. With an expected annual completion of approximately 20,000 units, combined with 1,500 to 2,000 annual completions of purpose-built rental units, Tal projected that there will be an excess supply of “just over 1,000 units a year.”

An analysis of the Vancouver market led Tal to draw similar conclusions.

“Such excess supply will raise vacancy rates in the condo space by an estimated 0.3 per cent to 0.4 per cent in both cities in the coming few years,” he said.

“That is not large enough a damage to derail the market or lead to a substantial softening in rent inflation.”

Interest rates are expected to remain low well into 2015, but the inevitable rate increase will lead investors to be more wary of higher financing or opportunity costs. Falling rents, however, will not pose a major challenge for investors.

Renters can look forward to some relief, as the higher vacancy rates will ease rent inflation.

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