On Thursday, the federal government announced the removal of GST on new rental construction. While a number of development sector stakeholders told STOREYS last week that the policy change is long overdue and stands to “move the needle” on new rental construction, some economists are cautioning that it won’t restore affordability to Canadian rental markets any time soon.

In a report from Friday, RBC Economist Rachel Battaglia notes that rental vacancy in Canada is currently at a two-decade low. Considering that context, she says that “any measure to boost rental apartment construction is certainly welcome.”

In theory, more supply should help to quell competition and bring down rental rates, which, month after month, have soared to new heights. But it’s not so cut and dry, says Battaglia.

“While the removal of GST on rental construction projects will improve their financial viability — and with it, hopefully spur more development — it isn’t likely to lower rents in short order,” she writes. “With Canada’s rental market in a severe deficit position, and given the time it takes to build new supply, the measure won’t be a silver bullet.”

To a similar tune, BMO's Chief Economist Douglas Porter says there’s no disputing the need for more rental supply in Canada, but there’s still the challenge of the sector's building capacity.

“It takes years (and years) to build multiple-unit structures, and the industry is already operating almost flat out,” he writes. “The all-time record high for housing completions was 257,000 (in 1974), or roughly half of what CMHC reckons we need per year for the next seven years.”

Porter also draws attention to recent data from the Bank of Canada, which indicates that the country’s homeownership market is increasingly being cornered by investors.

“As long as investors are scooping up 30% (or more) of the supply, even torrid supply may simply fall into the bottomless pit of demand,” Porter cautions.

“Our key message on this front is that if we are counting on supply alone to fix the affordability issue, we are all going to be waiting a very long time indeed.”

Real Estate News