Last Updated on July 18, 2024 by CREW Editorial
A June 2024 Edge Realty Analytics report has highlighted some notable shifts in Canadian building permit and construction trends.
In a surprising turn of events, Canada saw a significant increase in building permits issued in April 2024. Permits surged by 20.5% month-over-month and soared 81% year-over-year. This sharp rise was driven primarily by a record-setting number of multi-family housing permits, which include both rental apartments and condominiums.
Source: Edge Realty Analytics
Divergence Between Multi-Family and Single-Family Housing
This increase highlights a notable split in the housing market: while permits for multi-family units have hit unprecedented levels, single-family housing permits remain at 40-year lows. The Edge Realty Analytics report suggests that the vast majority of these multi-family permits are likely for rental properties, although specific granular data on this is not available.
Source: Edge Realty Analytics
Historical Context
Over the past decade, Canada has seen a dramatic shift towards rental construction. Rental units, which accounted for less than 10% of housing starts ten years ago, now comprise nearly 40%. The number of rental units under construction has ballooned from 20,000 to 140,000 during this period.
Source: Edge Realty Analytics
Source: Edge Realty Analytics
A significant factor behind this growth has been the Canada Mortgage and Housing Corporation’s (CMHC) MLI Select program. This initiative provides developers with highly favourable financing terms, including low insurance premiums, up to 95% loan-to-cost financing, and extended 50-year amortization periods for projects that meet specific criteria related to energy efficiency, rental affordability, and accessibility.
In regions like Ontario and British Columbia, where building codes already exceed the Canadian standards set by CMHC, developers could meet the MLI Select program’s criteria simply by adhering to existing codes. This enabled many projects to qualify for the most advantageous terms without additional effort, so these provinces saw a disproportionate boom in rental construction.
New Rules for MLI Select Program
However, CMHC recently announced changes to the MLI Select program to increase the focus on affordability. The new rules cap the points developers can earn from energy efficiency at 50, making it necessary to meet the other criteria, including providing affordable rentals, to qualify for the best financing terms. This means developers now need to commit to offering at least a third of their units at affordable rents, defined as costing no more than 30% of the median household income in each area.
Anticipating these changes, developers rushed to push projects through before the June 18 deadline. This contributed significantly to the spike in building permits and housing starts seen in April and May 2024. In May, housing starts also exceeded expectations, rising 10% month-over-month to reach 265,000 units on an annualized basis, with rental units again leading the way, with the second-highest monthly numbers on record and accounting for a significant 43% of all starts last month.
Source: Edge Realty Analytics
Expected Slowdown in Rental Construction
Looking ahead with these new CMHC rules, the report suggests the pace of rental construction, particularly in Ontario and British Columbia, is likely to slow down. Many developers in these provinces relied heavily on the previously easier access to MLI Select funding. As these changes take effect, some development activity may shift to other regions, such as the Prairies, where market rents are still above the CMHC’s affordability threshold. However, on balance, a net decrease in activity is anticipated.
In the long term, the anticipated reduction in new housing starts across all types—single-family homes, condos, and rentals—suggests that Canada could face greater supply issues in the future. For single-family homes, the effects of reduced construction activity will likely become evident in the next 18 to 24 months. For condominiums, the lag between pre-sales and starts means that a drop in completions could be expected by 2028.
