Canada's housing market is shifting sharply toward purpose-built rentals as condominium construction weakens, according to Desjardins Economic Studies in a note.
Rental starts reached roughly 130,000 units over the past four quarters, while condo starts dropped below 50,000, which is the lowest level since after the financial crisis, Desjardins said in a Friday note.
Higher interest rates, softer rents, slower population growth and elevated construction costs have weakened investor demand, making many condo projects uneconomic. By contrast, Canada Mortgage and Housing Corp. financing programs and the removal of GST on new rental construction have made purpose-built rental projects more financially viable, added Desjardins.
The shift is helping ease Canada's rental shortage, but it could leave a growing gap in housing available for purchase, said the bank. In the four quarters through the second quarter of this year, total housing starts were 43,000 units above 2019 levels, as a 73,000-unit increase in rental construction more than offset a 30,000-unit decline in ownership-oriented starts.
As a consequence, the share of housing starts intended for ownership has dropped from more than 70% to about 45%.
With condo projects taking years to complete, today's weaker pipeline could eventually constrain the supply of homes for purchase, putting renewed upward pressure on prices, according to Desjardins. Strong rental construction may mask a weakening ownership pipeline in headline housing-start figures.
"A balanced housing system can only be achieved by maintaining a robust pipeline of both rental and ownership construction," Desjardins Senior Economist Kari Norman wrote.