Rising land costs are driving up the price ownership in Lower Mainland real estate markets but rents have yet to follow suit.
The dynamic is setting tenants up for a shock in the coming years, not just in the residential market but also for industrial space.
According to CIBC managing director and deputy chief economist Benjamin Tal, the spread between home ownership costs and residential rents is at a record high following the COVID-19 pandemic.
“Home prices went up, rents didn’t,” he told the Vancouver Real Estate Forum on April 12.
For monthly rents to catch up to home ownership costs, Tal said rents would have to increase 53%.
“Rent inflation is in the cards over the next few years. That’s why I’m bullish on multi-residential, because clearly the direction is up,” he said. “We simply don’t have enough rental units and too much demand. In fact, we have more demand than we know.”
The country as a whole is under-counting rental demand by “hundreds of thousands,” said Tal, with the issue being particularly acute in Vancouver.
“Whatever the supply issue we have, it’s worse,” he said.
Taking a look at the Lower Mainland specifically, Central 1 Credit Union chief economist Bryan Yu reiterated the point.
With the benchmark housing price for the Lower Mainland at $1.4 million, Yu says affordability remains a concern. While he expects housing prices to correct in the second half of this year, it will be in a minor shift in the range of 5 to 10 per cent. By contrast, the benchmark price for the Lower Mainland has increased 40% over the past two years.
Since the land base remains constrained, he doesn’t expect any significant correction in long-term pricing. Moreover, immigration to the region is set to hit 60,000 in the coming years.
“We’re going to see more people piling back into the rental market,” he said, advising builders to look beyond short-term pricing fluctuations and keep building. “That’s what the market is going to require as you go forward in Metro Vancouver as we absorb substantial amounts of immigration to the market.”
Meanwhile, all those people need to be supplied with goods, both essentials and luxuries. This is putting pressure on industrial space, with vacancies at record lows and land prices in Richmond above $8.5 million an acre.
During a panel discussion on industrial real estate, Beedie industrial sales director Rowan Hicks said dramatic increases in strata prices – now cresting $750 a square foot in many areas – has made some purchasers think twice. But with lease rates also escalating rapidly, many smaller users are willing to become owners.
“Strata pricing has really outpaced lease rate growth in the past few years,” he said. “That’s definitely impacting decision-making, but we’re still seeing owner-occupiers successfully looking at the long-term with the benefit of ownership being potential property value appreciation.”
Similar to the residential market, delivering more supply will require government to step up and show leadership.
“It’s not getting the attention it deserves,” said John Middleton, senior vice-president, leasing with Onni Group.