Ontario still has a housing crisis, but the nature of that crisis is changing. For years, the conversation focused on a shortage of homes, rising prices and the difficulty first-time buyers faced getting into the market. Today, another issue is emerging: Ontario may be building more housing, but an increasing share of that housing is being built as purpose-built rental rather than homes or condominiums intended for individual ownership.

That raises an important question. Are government housing policies solving Ontario’s housing shortage, or are they gradually changing who owns the housing?

In 2022, Ontario’s Housing Affordability Task Force warned that home prices had risen dramatically faster than incomes and that home ownership was moving beyond the reach of many first-time buyers, even those with strong incomes. The task force concluded that Ontario needed to build 1.5 million homes over the following decade to restore some balance between supply and demand.

One of the barriers was the extraordinary cost of constructing new housing. Development charges, permit costs, land costs, financing and taxes all became part of the final price paid by the consumer. In Oshawa today, development charges on a single detached home are approximately $131,000 before the builder has purchased the land, hired trades or constructed the house. Builders do not absorb costs like these out of goodwill. Ultimately, they become part of the sale price.

Ontario’s housing market has changed dramatically

Since the 2022 report, the real estate market has gone through a significant shift. Mortgage rates rose sharply, condominium sales slowed, inventory increased and property values in many communities declined from their pandemic-era highs. At the same time, federal immigration targets were reduced, changing expectations for future housing demand.

The condominium market has been particularly hard hit. Developers rely heavily on presales to finance projects, and when buyers stop purchasing pre-construction units, many proposed developments simply cannot move forward.

Builders, however, have not lost their appetite for development. They have changed what they are building.

Instead of constructing condominium towers that require thousands of individual purchasers, many developers are increasingly looking at purpose-built rental housing. That shift is being strongly supported by both provincial and federal government policy.

Government incentives are making rental construction more attractive

Qualifying purpose-built rental developments can now receive substantial government incentives. These include rebates of the federal GST and Ontario portion of the HST, reduced development charges and access to favourable financing programs through the Canada Mortgage and Housing Corporation.

For developers, these incentives are significant. Taxes and development charges are hard construction costs that directly affect whether a project is financially viable. Reducing those expenses can dramatically alter the economics of a development before the first shovel goes into the ground.

CMHC financing programs can make rental construction even more attractive. Depending on the project and program requirements, developers may gain access to very high levels of financing and amortization periods extending as long as 50 years.

Consider the decision from a developer’s perspective. One option is to construct 200 condominium units that must be sold into a weak real estate market. The other is to build a 200-unit rental apartment building with reduced taxes, discounted development charges and favourable long-term financing, then retain the entire building as an income-producing asset.

It isn’t difficult to understand why the second option is suddenly getting more attention.

What about Ontario rent control?

At first glance, Ontario’s rent control system might appear to limit the attractiveness of rental development. Ontario’s 2026 rent increase guideline is 2.1% for most rent-controlled residential units, a figure that can be lower than increases in operating expenses.

There is, however, a major distinction when it comes to new rental housing. Residential units first occupied after November 15, 2018 are generally exempt from Ontario’s annual rent increase guideline. Landlords must still comply with notice requirements and restrictions on how frequently rent can be increased, but the provincial guideline does not cap the amount of the increase.

There is another important rule. When an existing tenant moves out, the landlord can generally establish a new rent for the next tenant based on current market conditions.

For owners of newly constructed rental buildings, that creates substantial long-term flexibility. The rental income of a new apartment building is not permanently locked to the rents charged when the building first opens.

Purpose-built rental housing may become a long-term investment strategy

For 11 years, I sat on a municipal committee dealing with development applications, building permits and requested variances. During that time, I saw numerous high-rise rental developments designed and constructed to standards that could potentially allow them to be converted into condominiums at some point in the future.

That possibility is worth considering today.

A developer can construct a rental building during a period when condominium sales are weak, operate it as rental housing for years and potentially reconsider the ownership structure if market conditions change in the future.

This does not mean that every rental building constructed today will eventually become a condominium. Far from it. What it does mean is that rental development provides developers with options at a time when building traditional ownership housing has become considerably more difficult.

The bigger question is what happens to home ownership

More rental housing is not inherently a bad thing. Ontario needs more rental supply, particularly in communities where vacancy rates are low and rents have increased significantly.

The more difficult question is what happens if the housing construction system increasingly favours rental development while the supply of homes available for individual purchase declines.

Home ownership has historically been one of the most important ways Canadian households build long-term wealth. Mortgage payments gradually create equity. Property appreciation can increase that equity further. Over decades, a home can become one of the largest financial assets a family owns.

Renting provides shelter, flexibility and freedom from many of the costs associated with property ownership, but rent payments do not create ownership in the underlying asset.

For many households, renting is a deliberate and sensible choice. The concern arises when renting becomes the only realistic option.

Once a household is paying several thousand dollars per month in market rent, accumulating a down payment for a home becomes increasingly difficult. If home prices begin rising again at the same time, the distance between renting and owning can widen quickly.

Could Ontario be creating a generation of permanent renters?

This is where Ontario’s housing policy becomes more complicated.

Governments may succeed in increasing the overall number of housing units while simultaneously reducing the percentage of those units available for individual ownership. If more new housing is held by developers, pension funds, real estate investment trusts and institutional investors, the province could end up with considerably more housing but considerably fewer individual property owners.

That would represent a fundamental change in the Canadian housing model.

Instead of thousands of households gradually building equity through home ownership, a larger percentage of residents could spend decades renting from increasingly concentrated property owners.

The policy may solve one problem while creating another.

Durham Region is already experiencing lower sales volumes and higher housing inventory than we saw during much of the previous decade. If those conditions continue, developers will naturally gravitate toward the projects that make the most financial sense.

At the moment, government incentives are making purpose-built rental construction increasingly attractive.

The question is not whether Ontario needs rental housing. It clearly does.

The question is whether we are maintaining enough opportunity for people who still want to own a home.

If we look back 20 years from now and discover that Ontario successfully built hundreds of thousands of new housing units but a much larger percentage of residents are tenants rather than homeowners, will we consider that a successful housing policy?

Or will we realize that somewhere along the way the housing crisis stopped being simply about how many homes we build and became a much bigger question:

Who gets to own them?

If you are considering a move, either buying or selling I can be reached at lindsay@buyselllove.ca or 905-743-5555