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There is a way for policymakers to significantly ameliorate a “full-blown affordability crisis” looming over the Greater Toronto Area housing market, says CIBC Deputy Chief Economist Benjamin Tal.

Spoiler alert: it’s not a foreign-buyer tax (though Tal agrees such a levy, if applied in Toronto, “will work to slow activity at the margin”).

Encouraging developers across the GTA to ramp up the construction of purpose-built rental apartments would have a more pronounced effect, suggests Tal.

“It’s becoming clear that the condo market can no longer be the only option available to renters,” writes Tal in the report.

Toronto’s condo market has become a secondary rental market. Anywhere from roughly 30 to 50 per cent of newly constructed condo towers are added to the city’s rental pool, according to one recent estimate.


But the supply of leasable condo units is falling and landlords are charging tenants higher rents. In the fourth quarter last year, condo rents surged 11.7 per cent over the same period the previous year, according to Urbanation, a research firm focused on the city’s condo segment which CIBC cites in its report.

“There is little doubt that the GTA’s rental market has never been hotter,” says the CIBC economist.

So Tal provides several suggestions for how municipalities can get developers to break ground for more rental buildings because “the invisible hand will not find the optimal path.”

“From conversations with developers it’s clear to us that expediting the approval process for purpose-built projects can make a significant difference in the final decision,” Tal writes.

So might allowing higher density for purpose-built rental buildings. Same goes with slashing HST developers are charged on rental projects, or cutting or waiving development charges applied to them, according to the report.

“Today the same charge is imposed on both condo and purpose-built projects,” Tal notes.

In the 416, the economist says the profitability gap between condos and purpose built is “very narrow,” with rent on apartments easily surpassing $3 per square foot, Tal estimates.

For the time being, condos are more profitable for developers, one market expert tells BuzzBuzzNews. “I think that condos still have an advantage over rental in terms of pricing and value for developers,” Dror Duchovny, developer Elad Canada’s director of marketing and business development, tells BuzzTV.

“Building a rental building to today’s standard is as expensive as building a condo,” he adds.


Nonetheless, the number of purpose-built rentals under construction is on the rise, CIBC suggests. Two years ago, builders were working on fewer than 2,000 new apartment units. Last quarter, 5,000 apartment units were actively being built and nearly 28,000 units were proposed, though Tal says that still isn’t enough.

One condition currently favouring the construction of purpose-built rental apartments is their appeal to publicly traded companies. “Markets attach higher valuations to steady cash flows derived from rent as opposed to a quick one-off profit obtained from a condo project,” he explains.

Duchovny echoes this view. “There are certain players in the market that are interested in that product. They are long-term horizon players mainly.”

Watch the full BuzzTV interview with Duchovny below:

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