What Will Rent Cost in Two Years?

The Rental Market

It's no secret that at today's lending rates, renting works out cheaper than buying with a mortgage, since the loan payment, maintenance, and annual taxes on a purchased unit all end up costing more than renting a comparable one. How long will that last? Might it actually be more advantageous to just keep renting, and not buy at all? Let's take a closer look at whether that's really the case.

Right now, buyer activity in Toronto's housing market is at its lowest level in 27 years. Nobody wants to buy new-construction units in Ontario at today's sky-high prices, developers can't sell the 75% of a project needed to secure construction financing, and as a result, virtually no new projects have broken ground in nearly two years. Work is only continuing on construction sites for projects that were sold previously, and even then, not all of them. Many projects have been cancelled outright, and some developers have declared bankruptcy. Unfortunately, given how sharply construction costs have risen, along with the enormously increased fees charged by municipal governments, developers simply can't afford to sell at lower prices, and the outcome here is already crystal clear. In 2-3 years, right around when all the projects that got stuck in recent years should have been completing, we're going to run into a severe housing shortage. By that point, lending rates will have come back down, enormous pent-up demand will return to the market, whatever inventory is still available will get snapped up quickly, and prices will inevitably shoot back up.

Nothing can change this trajectory at this point, so today's home prices are going to look downright laughable in just a few years. But prices are one thing, what's going to happen with rent?

A great many people are renting today. The ranks of renters, traditionally made up mainly of new immigrants and students, have now been swelled by people who simply can't afford to buy at today's lending rates, and there are a lot of them. In 2024, the number of rental transactions in the GTA rose by 26%. Some people have come away with the impression that renting isn't so bad after all, since it's considerably cheaper than paying for a unit bought with a mortgage, and right now, that's genuinely true.

Despite enormous demand, rental prices have actually softened slightly compared to last year, driven by a record number of condo projects completing that broke ground back in 2018-2020. For example, in a good downtown Toronto condominium, you can rent a studio today for under $2,000, 4% cheaper than last year; a one-bedroom for two and a half thousand, 3% cheaper than a year ago; a two-bedroom for $3,200, also 3% cheaper than last year; while rent on three-bedroom units has dropped 12%, with a three-bedroom now renting for $4,000.

Let's take a look at whether renting a two-bedroom unit is genuinely more cost-effective today than owning one.

The average rent for a two-bedroom in downtown Toronto is $3,257. The price of a comparable unit with parking and a locker, given that prices today sit well below their February 2022 peak, comes to roughly $750,000. Let's say you bought that unit with a 20% down payment, giving you a $600,000 mortgage. Mortgages today can already be had at 5%, meaning your loan payment would come to $3,200, of which roughly $800 a month goes toward paying down the principal.

So the loan itself would effectively cost you $2,400. You'd also need to pay $600 a month in maintenance fees and $300 a month in property taxes. All told, a two-bedroom unit in downtown Toronto bought with a mortgage would cost you $3,300 a month. And the average rent on a comparable unit is $3,257. Essentially the same. But that's today.

Once mortgage rates fall to 3%, and that's not far off now, that same unit bought with a mortgage would cost just $2,300: a loan payment of $2,500, minus $1,100 in principal repayment, plus $600 in maintenance and $300 in taxes a month, already a thousand dollars a month cheaper than renting that same unit.

And of course, we shouldn't forget that, however you look at it, real estate appreciates at least 5% a year over the long run, which means that over 5 years, living in your own unit, which is naturally more pleasant than renting, you'd see $200,000 in appreciation, plus $60,000 saved from the difference between rent and your loan payment. That adds up to $260,000 over 5 years, even assuming your landlord never once raises the rent over that entire period. So the idea that renting is more advantageous than buying is really just a myth, invented by people who simply can't afford to buy.

But that's still not all. What's going to happen with rental prices going forward? Across all of 2023, 28,510 units were listed for rent in Toronto. This year, in just the first 6 months alone, thanks to a large wave of construction completions and units that were extremely difficult to resell right after completion, more than 44,000 units were listed for rent. Naturally, with that much supply available, rental prices have stayed stable. But we shouldn't forget that Canada takes in 500,000 immigrants a year, and the government plans to keep immigration at roughly this same level for at least the next 10 years. Statistically, of the 500,000 immigrants arriving in the country, roughly 150,000 settle right in the GTA, and given that the average family, statistically, is about two and a half people, with 90% of newcomers being potential renters, housing them requires more than 50,000 new rental units every single year. Today, thanks to the large number of completed projects, Toronto has plenty of rental supply, but tomorrow, once the construction industry's downturn of the past two years catches up and virtually no projects are completing, the situation will change fundamentally. Demand will vastly outstrip supply, and rental prices will jump sharply. Between 2027 and 2030, we expect a genuinely catastrophic shortage of housing, both for rent and for purchase. And that will be the moment when a two-bedroom unit in a good downtown Toronto project, one you can buy today for $750,000, will be priced well above a million, and units like that will rent for $5,000 a month, not today's $3,200.

So if you don't own your own home and you're currently renting, buy a property as soon as you possibly can. Right now, with lending rates coming down, a large number of listings on the market, and prices having softened, this is exactly the time to think seriously about buying your first home. Tomorrow may already be too late. And the sense of comfortable stability that comes with renting today is deeply misleading, and won't end well for anyone who stays a renter for long.