Landlords in Canada's largest province will have to deal with an annual mandated cap on residential rent increases of 2.5% for another year despite inflation levels being higher than that limit.
Ontario's provincial government said it would cap rental increases at that level for the 1.4 million tenants covered under the Rental Tenancies Act despite. The legislation affects buildings and rented-out condominium units constructed before 2018.
"This is currently the lowest rate in the country," the government noted in its release. "The guideline is capped at 2.5% to help protect tenants from rising interest rates that would result in higher rent."
The overall inflation rate in May in Ontario was 3%, according to Statistics Canada.
Tony Irwin, president and CEO of the Toronto-based Federation of Rental-Housing Providers of Ontario, said his group understands the Ontario government’s decision is intended to help residents manage the rising cost of living amid ongoing economic challenges.
"That’s why we support portable housing benefits and many of our members offer tenant relief programs for residents in need," Irwin said in an email to CoStar News. "2025 will be the third year in a row that rent increases are capped at 2.5%. Over the same period, rental housing providers have faced significant cost increases for insurance, property taxes, utilities and maintenance that are far greater than the rent cap."
However, he said, "rent increases tied to inflation support the continued viability of Ontario’s aging rental stock, the majority of which was built before 1980, which is especially important during Canada’s housing supply crisis."
New Supply Underway
Rental housing starts reached the highest in decades in 2022 and 2023, with more than 80,000 new units started each year. Starts are expected to rise further in 2024 as demand and new policy measures help developers address issues such as inflation and labour shortages.
Rachel Battaglia, an economist at the Royal Bank of Canada, said in a report this week that there hasn’t been this much rental housing under construction in Canada in a generation. She called it encouraging news, given the acute supply shortages across the country.
"But even more construction will be needed as rental demand continues to rise rapidly in the years ahead, said Battaglia.
She noted that the rental market supply shortage is still massive, with the all-time high national vacancy rate of 1.5% in 2023. That's well below the equilibrium level of 3% needed in almost all census metropolitan areas, according to the report.
"Demand for rentals has increased more than three times faster than the purpose-built rental stock has grown between 2017 and 2023," Battaglia said. "The ramp-up of rental housing starts is welcome and should help rebalance Canada’s rental housing market over time. The challenge, though, will be delivering units Canadians can afford in the right locations. Steep development and construction costs, along with restrictive (although easing) zoning policies still pose serious challenges to growing the supply of affordable rental housing."
While construction starts for multifamily are rising, investment demand continues to cool. A CBRE report last month found multifamily investment was $1.9 billion across the country in the first quarter of 2024, down from almost $2.5 billion a year earlier.
Marcus & Millichap noted in a recent report of its own report policy support helped the multifamily sector with housing affordability issues.
"With declining financing costs and federal funding directed toward rental apartment development, sustained growth in multifamily supply is anticipated in the foreseeable future. While short-term challenges will remain, this expansion could stabilize multifamily vacancy rates and help to address Canada’s housing shortage and home ownership challenges over the long term," said the real estate company in its report.
The real estate company believes investment activity in the multifamily sector will likely also improve as financing conditions ease.
"Among all property types, apartment buildings will likely be one of the most sought-after assets due to strong fundamentals backed by demographic tailwinds. Investors may allocate more resources to high-potential markets, including Calgary and Edmonton, where population gains are being driven by robust economic growth, domestic in-migration and less impact in recent changes in immigration policy," said Marcus & Millichap.