This article is part of a six part series. Read the full series:
1. Government Policy & Rental Supply | Rental Housing Supply 1
2. Ottawa’s Historical Renting Data | Rental Housing Supply 2
3. Corporations | Rental Housing Supply 3
4. Individual Investors | Rental Housing Supply 4
5. Rent Control | Rental Housing Supply 5
6. Final Recommendations | Rental Housing Supply 6
I never guess. It is a capital mistake to theorize before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts.”
– Sir Arthur Conan Doyle, Author of Sherlock Holmes stories
In the first article, we discussed the high demand for rental housing and the areas of policy that have affected the supply side of the equation. In part 2 of this series, we will examine some of Ottawa’s historical data to help put this growing problem into context.
All data discussed in this section are derived directly from one of the following sources: Statistics Canada, CMHC and The Prism Report (commissioned by the City of Ottawa). It is also important to understand that CMHC segments its data, and one of the key measures is their concept of “Primary Stock” which refers to rental apartments in buildings that contain at least three units. In other words, much of their data segmentation revolves around this Primary Stock and excludes rental single-family homes, duplexes and Secondary Dwelling Units (SDUs).
To begin with, let’s look at the population of Ottawa, which has grown significantly over the years as seen in Figure 1. Those familiar with the city will realize that Ottawa is in fact part of a larger community, which includes Gatineau, Quebec. We will not include Gatineau in this analysis for two reasons: The data provided by the data sources do not completely cover the two regions together; and the two regions exist under very different legislative regimes.
Figure 1: Total Population Growth in Ottawa
Additionally, we are looking at a period starting at approximately 1980 to take out the potential effects documented in the first article, where new purpose–built rental apartment construction dropped precipitously from 1972 to 1975, vacancy rates dropped to near 1%, and rent controls were introduced in 1975.
Looking at the current boundaries, according to Statistics Canada, Ottawa had a population of 546,849 in 1981. By 2019 the population had grown to 1,000,000 people. That is a growth of 83% over almost 40 years.
Figure 2: Percentage Growth of The Population of Ottawa
At the same time, as of 2018, Ottawa had approximately 133,000 rental units  of which 63,000 were considered Primary stock by CMHC. However, in 1980 there were 53,000 Primary Stock rental units. That is a surprisingly slow growth of 19% in apartment units over the same period that the population grew by 83%.
Now at the same time, according to CMHC, the percentage of the population that rented decreased from 38% to 33% in 1980 and 2018 respectively. If we adjust for this in the population data, then approximately 208,000 (38% of 546,849) people were in rental accommodations in 1980 versus approximately 330,000 (33% of 1,000,000) in 2019 which is still a growth of 59% in the renter population. In essence home ownership was growing and that is not a coincidence. In the second half of the twentieth century, the government adopted expansionary policies put in place to encourage home ownership. For example, first time home buyer’s incentives, which require very little down payment to qualify for a mortgage.
So, we have a renter base that increased by 59% but primary rental stock only increasing by 19%. Where did the renters live?
Interestingly, the improved incentives for home ownership also enabled small individual investors to convert smaller buildings (non–primary rental stock) of one or two units into rental accommodations. This demographic of small individual investors became a great stress relief point for the rental housing market and the small investor population began to flourish. Government policy later began to encourage the creation of rental units in the individual investor population and included the concept of Secondary Dwelling Units (SDU), whereby a home in a zone designated solely for single family homes (e.g. R1 zoning) could have a legal secondary suite added to it inexpensively, effectively turning that home into a legal duplex. No rezoning was required, and the development charges were much cheaper than the cost of creating a unit in an R2 zoned duplex. There have been further advances whereby the province introduced Bill 108, which contains provisions such as the requirement for cities to adjust their next turn of their Official Plan (OP) to allow for both an SDU and a coach home within their zoning by-laws. What that effectively means is that a zone designated for a single–family home can now have up to 3 units!
In 2017, CMHC published an analysis of who owns the rental housing in Canada. And while most would assume that the majority of apartments are owned by the large brands, the graph below illustrates that 49.3% of all rental accommodation is owned by “Individual Investors”, whereas “Private Corporations” own 39.7% and REITs 7.9%. Individual investors are, by definition, unincorporated and are typically the small mom and pop investors. Now, if we consider that most investor training encourages the formation of corporations to hold real estate (primarily to limit liability), then we can imply that at least some of the Private Corporation segment is still made up of small mom and pop investors. As an aside, it is also worth noting that the average rent offered by Individual Investors is lower than that of corporate investors.
Source: CMHC Rental Market Survey 2016
Figure 3: Rental Ownership is Dominated by Individual Investors and Private Corporations
As discussed in the first article, policy changed developer priorities and created incentives for smaller individual investors. With all the incentives for individual investors, why do we still have such a low vacancy rate in the city of Ottawa and in fact, most of the province?
To answer that question, we need to consider two things:
- Why are corporations not building more purpose-built rental housing as is evidenced in the anemic growth of primary rental housing stock.
- What is holding back Individual Investors from creating even more rental housing stock?
These questions will be addressed in the next two sections where we first focus on the corporate investor and then subsequently on the individual investor.
- Since 1981, Ottawa has grown in population by 83%
- Primary rental housing stock (3+ unit buildings) only grew by 19%
- This class of asset is dominated more by corporations
- Smaller individual investors picked up the slack due to favourable housing incentives and now make up at least 49.3% of the rental housing across Canada.
- Even with the growth of individual investors, we are still seeing issues with housing availability and affordability even though individual investors tend to have less expensive rent on average.
CMHC Housing Market Insights, July 2017, Rental Ownership Structure in Canada