Findings from Canada Mortgage and Housing Corporation’s (CMHC’s) annual Canadian Rental Housing Construction Survey show the current financial environment is playing havoc with the construction of rental housing units.

As the construction industry strives to meet the federal government’s target of adding 3.5 million new housing units across the country by 2030, economic headwinds are slowing progress.

The findings from the CMHC report, some of which were collected early last year, suggest that higher interest rates, escalating construction costs and rising development fees are testing the financial feasibility of numerous planned rental projects. It adds that these more restrictive financial conditions have limited the flow of private investments into new purpose-built rental housing, resulting in a decrease of planned projects and further fueling the affordability crisis.

As a result, CMHC says, developers are either reducing the potential future supply of rental housing or adapting their strategies to move along new construction projects.

For example, most developers, especially smaller developers with larger financial indebtedness (typically between 60% to 70% of debt loans on average) were more likely to pause their new projects or reduce the number of future projects. Approximately 40% said they would reduce the number of future projects while over 30% indicated they would put their new projects on the back burner.

Most of Canada’s recent, purpose-built rental housing stock is owned and developed by the private sector. In order to launch the construction of new rental development projects, return expectations by investors need to be met. As a result, larger-scale developers with the deepest pools of capital and a greater ability to source upfront equity have been playing a significant role in the development of new rental housing.

For most rental projects planned in 2022, limited return premiums have motivated the decisions to pause or cancel projects. Other developers who decided to move along projects saw the need to raise rents to offset increasing borrowing, construction and development costs.

Most developers access private capital and traditional lending to fund their investment. That said, the recent economic environment has hindered the availability of conventional credit, reflecting a diminished risk appetite by traditional lenders. In fact, developers perceived an important shift in the financial availability and the cost of financing to develop new residential construction projects.

In response to this increasingly restrictive financial context, the federal government has recently introduced new legislation and policy changes to stimulate the construction of new rental housing.

• The enhancement of the Canadian Mortgage Bond (CMB) program: the government has announced $20 billion in low-cost financing for multi-unit rental construction, which should result in building 30,000 more apartments per year.
• The removal of the Goods and Services Tax on new purpose-built rental housing aims to incentivize the construction of rental, student and senior housing. For instance, for a two-bedroom rental apartment valued at $500,000, the full GST rebate now available for rental housing would provide a tax-relief of $25,000.

Data on the effectiveness of these programs will be evaluated in future editions of the Rental Housing Construction Survey, CMHC says.