Short Term Rental Ban
Another factor slowing down the rental market is short term rentals. In May 2024 the BC Government introduced restrictions on short term rental properties. It effectively eliminated short term rentals in specific types of properties, those that are not part of a primary residence. How has this affected the rental market?.
Many of these short term rental properties that are now considered illegal have re-entered the regular rental market or they have entered the sales market. This has created a greater supply of product in both of these markets. When supply increases over the demand there is pressure on the prices to be reduced. We have not seen a significant decrease in sales prices yet which is still keeping some buyers away from the market, and forcing many of these products to the rental market.
The short term market is made up of furnished products and these are often geared towards the tourist and student markets. Both of these markets have also been affected as the economy has slowed, the trade issues with the US and the Federal Government’s change to immigration especially students, has affected this market greatly. With less foreign students allowed into the country the areas near schools are being affected dramatically. In tourist areas the ban has had an effect of increased hotel prices reducing the tourism in those areas which has an effect on other businesses in those regions as well.
The owners of the short term rental products are not happy as they had purchased and planned on renting out their properties in that market which is often more lucrative than the regular rental market. Any investment has risk and one needs to assess the risk of that investment. One key factor that can affect any investment is the change in laws that can happen at any time. Prior to the BC Government making this change cities around the world were making the same decision due to rising housing costs and therefore was not an unexpected change.
This is an example of when the government’s change in laws significantly changed the investment of short term rental properties.
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Foreign Buyers
We have talked over the past two weeks about reasons why rental rates are decreasing. Another factor is the restriction on foreign buyers.
In January 2023 the Federal government elected to put their feet in the water of how they can help reduce or control the fast rising housing prices. The federal government doesn’t control many factors related to housing so they looked at one area they can control and that is who is legally allowed to buy housing in Canada. The federal government chose to implement restrictions on the foreign buyers buying housing in Canada to prevent anyone who is not living in Canada and people who are living here but are not citizens or permanent residents you are prohibited from buying a property in Canada.
This was the beginning of the slow down in the new development sales construction. New developments are often sold to foreign buyers especially the Vancouver market to help with the building of the large towers. The slow down quickly transitioned to the pre-sales that were completing slowing as the previously built market started to slow down.
When the sales market starts to slow the rental market also slows. We first started to see an increase in rental inquiries from people who were in Canada and not permanent residents who were now prohibited from buying housing in Canada. That trend slowed down as the housing market started to slow even more and we found the potential tenants who were now looking for a place were just upgrading from where they currently lived. Maybe larger spaces and or closer to work. This was the first sign we were heading back to a “traditional” rental market.
A traditional rental market is when people are currently renting a place and then find a new place to live before they give notice to vacate where they live. Since January of 2023 the people we have been renting tow are not new to the country, have to give notice and are not in a hurry to move. All of these indicators show a market that has an over supply compared to the demand. When the market has less demand then supply the rental rates decrease.
The ban on foreign buyers helped contribute to the supply as it removed a segment of buyers the developers or the pre-sale buyers would sell to, the investor.
A ban on foreign buyers across the country may not be the best policy decision as it affects each region differently. In some areas there are no foreign buyers and it will not affect the market, in larger markets like Vancouver and Toronto where investor demand is higher it has a very negative effect on the housing and rental prices. In fact any federal policy will have different effects in each market place and maybe the housing policies should be more regionalized. Inthe end the Federal Government wanted to be seen doing something to help reduce the rising housing costs for sles and rental and the foreign buyers ban contributed to this effect in the markets.
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Who can rent their condo?
Another reason rental rates are declining is related to who has the right to rent their condo.
In 2010 the strata property act was changed requiring all new developments to indicate a time frame of how long a newly built strata lot could be a rental unit. Developers were first indicating units could be rented for 25 or 50 years, then they started indicating 100 and 200 years. Effectively meaning units will be a rental for as long as the building exists.
Prior to January of 2010 buildings were not required to identify a specific time frame and a unit purchased directly from the developer would be permitted to be rented as long as that owner owned the unit. These buildings were permitted to create bylaws restricting the number of rentals in their building. Once the original owner sold the property to a new owner that unit was no longer permitted to be rented if the building had a rental bylaw restriction. In November of 2022 the BC government changed the strata property act removing the ability for strata built before 2010 to have a rental restrictions bylaws. The intention of this change at the time was to add supply to a very tight rental market.
When this was first enacted it had no effect on the market, we are now seeing it affect the market due to a slower sales market. Prior to this change, if a person who needs to relocate for work would request special permission from the strata to rent their unit and if not granted would be forced to sell their property. Since 2010 there have been two different products in the rental market. Most of the new products were purchased by investors with the intention to rent the units for as long as they owned the property.
For units in buildings built before 2010 they were often rented for shorter terms of one or two years until the owner returned or then sold the unit. We are now seeing more of these units enter the market increasing the supply in the rental market. A major difference with these products is they are larger in size compared to newer products. Many of these products have also been owned longer and may have less costs involved to make the rental numbers affordable which is putting pressure on new products to lower their prices.
When you increase the supply of products compared to demand it has a direct effect on the prices in the market place. We don’t anticipate this downward pressure will stop for about two more years until the current development has completed and there is a gap in new products being developed.
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How increased interest rates affected the rental market
Last week we posted about various reasons that have affected the housing market and created a decrease in the rental rates. Over the next few weeks we will comment on each of the factors more in depth.
The first one we will talk about is the increase in interest rates.
In 2020 covid spread around the world, slowing economies everywhere as everyone adjusted to staying and working from home. Governments around the world increased money supply propping up their domestic economies. The effect of all this spending was inflation, which increased to rates governments had not seen in years. When inflation increases governments seem to only have one course of action to bring it under control, which is to raise the bank interest rate. Raising interest rates causes the economy to slow by restricting the access to money being lent. The same money the government injected into the system to keep it moving is now being restricted.
In April 2022 the Canadian government decided it had to raise interest rates to cool the economy. The first increase was a quarter percent increase. This would be the first of many increases through July 2023 and rates went from 1.5% to over 6% during this time.
The rapid increase in interest rates had a tremendous effect on the rental housing market.
Rental and sales markets have a symbiotic relationship. When the sales market slows, so does the rental market. Increasing the interest rates slowed lending and therefore slowed the sales market causing people to move their product to the rental market increasing rental stock causing supply to out pace demand.
Interest rates were at extremely low rates for a long time in North America including Canada. Lower interest rates increase the ability for people to borrow money which encourages borrowing. The question is are lower interest rates good for the economy?. It helps businesses borrow money which in effect increase a bank’s revenue through lending, but it also increases cost for products and services, especially housing for end users.
We are now seeing a rapid decrease in rental rates due to the over supply of product and decreased demand. Interest rates have had a contribution to this lowering of rental rates, though they are only one of multiple factors why rents are declining.
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Why are rental prices declining?
I am often asked why are rental prices declining in BC?. People ask if it is the Air BNB Ban, higher interest rates, the removal of the rental restriction law in stratas, foreign buyers ban, immigration reductions, the slower economy, the answer to all these questions is yes.
What I mean by saying yes to all of these is that the decline in the rental prices are not affected by one factor, many factors that different levels of governments have taken have affected the rental housing prices. Let’s look at when these occurred and how they affected the market.
In April of 2022 the bank of Canada introduced its first interest rate increase in many years and this would be the first of many to follow in the next two years. There would not be rate reduction until the summer of 2024. How does this affect the rental market?. The interest rate increase slows the selling of properties which in turn causes owners who don’t want to reduce the selling price to turn to the rental market to rent their property hoping that the market will recover and then sell it during the next up swing. This causes more rental products to be added to the market which decreases the demand by increasing the supply for rental properties.
In November of 2022 the BC provincial government removed the ability of some strata corporations in BC to have a rental restriction bylaw. There was the ability for strata properties built before 2010 to have a bylaw preventing rentals or limiting the amount of rentals in their building. At the time the government was trying to add more products to the rental market as the demand outweighed the supply at that time. It didn’t automatically cause many units to enter the market but as the sales market slowed it allowed owners who resided in one of these buildings the option of adding their property to the rental supply. Over time this has done what the government expected and added more products to the rental market.
In January 2023 the federal government banned foreign buyers from buying property in Canada. This was not only for people who live outside the country but even for people who are living in the country but are only on temporary visas. You were prohibited from buying property if you were not a citizen or a permanent resident. The intention of this was to decrease the demand for the ever increasing housing market, which by the time this was implemented was already slowing down.
This did reduce the number of buyers for properties for sale, which then caused some owners who are not willing to sell at a lower price move their product to the rental market, again increasing the supply of rental products.
In May 2024 the BC government banned short term rentals in non primary residences, except in smaller tourist communities. This meant that if you owned a house and were renting the entire property you were unable to now rent that through short term rental platforms. The idea of this is that housing should be used for living in and not for tourists.
The ban caused many furnished properties to enter the rental market again increasing the supply of rental stock.
In 2024 the federal government changes the limits for the amount of immigrants coming into the country annually, especially for students. This reduced the need for short term rental mostly furnished properties. The student and new immigrant market often rent furnished properties until they find themselves on their feet in their new country. This was implemented due to the public reaction that too much immigration was causing part of the increase in house prices. The effect here is that it once again reduced the number of people seeking rental properties creating less demand for rental properties.
All of the above actions have either increased the supply of rental products or reduced the demand for rental products. Basic economics says when you increase supply demand weakens. When you increase supply and reduce demand there is going to be movement on the prices and in this case the movement is downward rental rates. The rental rates rapidly increased during covid which is why these actions were taken by the Provincial and Federal governments.
One other factor that we have not mentioned is that many new developments were approved to be built and a number of these projects are now finishing with many units entering the sales and or rental market. In BC, especially the lower mainland, most of the new development is purchased by investors who either sell the product when it is finally finished or they add it to the rental market.
With the slower sales market we are seeing more products entering the rental market again increasing the supply compared to the demand. Many developments that were planned but not started have now chosen to delay building which eventually will reduce the number of products added to the selling and rental market.
All of these factors have resulted in a slower rental market and rapidly decreasing rental rates in BC especially in the greater Vancouver area market. We are not expecting a change to this market for at least two years until all the current development has completed and no new buildings are being built. At that time we will see a slower increase in the amount of rental products added to the market which should stabilize the market. When that occurs we will then again hear the cry that we are not building enough rental products for what the demand in the market is.
The housing market is probably the hardest thing for the Federal, Provincial and local government to control to meet the demand of the market. Housing takes time to approve and time to build. As often happens the Federal and Provincial governments were late to the party with their actions and one action had some effect and then the next action had similar action to the market. We are now seeing all the effects of these actions implemented along with a global slow down in the economy.
Need help managing your investment properties. Cartref Properties can assist you, call today to discuss your needs. You can find more information about us at: www.cartrefproperties.com