The Impact of Declining Interest Rates on Canada’s Rental Market

As Canada faces declining interest rates, the country’s rental market is on the cusp of change once again. For property owners, investors, and rental professionals, understanding these shifts is essential to navigating an evolving landscape and seizing new opportunities.

Max Steinman, CEO of Rentsync and Rentals.ca, shares his insights on how declining rates are expected to impact the rental market, influencing development, investment, and strategic decision-making.

The Role of Declining Rates in Renewing Rental Developments

For several years, high interest rates have placed a significant financial burden on rental developments, particularly for projects requiring substantial upfront investment. As rates drop, Steinman anticipates a resurgence in purpose-built rental projects that previously faced financial feasibility constraints. 

He explains, “There's obviously been significant challenges on the supply side in rental housing in Canada and meeting the incredible demand for rental housing that exists currently in the country, that is going to continue to persist. One of the main challenges, especially in major cities across the country, is making new rental housing workable from a financial and policy standpoint. As those interest rates come down, there are going to be a lot of projects that go from unfeasible to feasible and so it should help from the supply side.”

This anticipated increase in supply could help alleviate some of the pressure on Canada’s rental market, where demand consistently outstrips supply. According to Steinman, while declining rates "won’t be a singular magic formula that will fix everything,” they will provide a much-needed boost to the feasibility of new projects.

Moreover, recent government incentives, like the federal waiver of GST on new rental builds, will complement the effects of falling rates, making it easier for developers to secure financing. This could translate to new developments across the country, especially in regions where rental supply has struggled to keep pace with demand.

However, property developers and managers need to consider the long-term sustainability of these projects. While lower rates facilitate initial financing, they should also plan for potential rate increases in the future, as the economy remains somewhat volatile. Strategic planning, combined with incentives, can ensure that new developments break ground and remain viable over the years.

Secondary Markets as Stable Investment Opportunities

Steinman sees declining rates as a catalyst for investment in secondary markets, which may offer greater stability, compared to Canada’s primary urban centers at the moment. 

“In certain markets, we’re starting to see rental rates actually deflate year over year,” says Steinman. This trend may make more expensive markets like Toronto and Vancouver less appealing to investors looking for steady returns. 

When thinking about the best-positioned opportunity for investors and developers, Steinman notes, “I think the answer lies in secondary markets and more affordable primary markets. So, if you think of Edmonton, Montreal and Ottawa and then secondary markets, like London, Ontario or Quebec City.”

The city examples Steinman mentions present an attractive alternative, with rental markets that are less prone to volatility and have offered more predictable growth patterns historically. These secondary markets provide a more secure investment landscape due to lower land acquisition costs and steady demand. This shift is not only driven by declining rates but also by a broader recognition of the growth potential outside the more traditionally invested-in urban centres,  which is being fuelled by changing consumer preferences.

For investors, the key to capitalizing on secondary markets lies in detailed market analysis. Steinman advises against relying on outdated assumptions, saying, “Projects that have been researched for years and years by potential purpose-built rental developers look more attractive and could quickly become green-lit as interest rates come down. But they're likely working off potential models and assumptions that were from three or four years ago. There's been some major changes in consumer preferences and nobody should be operating with assumptions that are a couple of years old at this point.”

Many are already aware that shifting consumer preferences have significantly altered the rental landscape in recent years. The trends toward remote work and work-from-home arrangements have expanded renters' options, allowing them to consider locations outside traditional urban centres or their existing hometowns. Additionally, affordability has become a primary concern for many renters, often outweighing other factors such as proximity to city centres. As these trends continue to evolve, understanding the changing priorities of renters will be essential for investors looking to succeed in secondary markets.

For housing industry professionals, this means staying informed about regional trends and aligning strategies with localized demand to maximize returns.
 

Affordability Remains Out of Reach for Many Prospective Home Buyers

Despite the optimism that lower interest rates often bring, Steinman cautions against assuming they will automatically improve homeownership affordability. 

“Just because interest rates come down doesn’t mean affordability will actually improve in the housing market,” says Steinman. “In fact, as interest rates come down that generally means there's going to be built-in appreciation in the price of real estate in Canada, and so you'll probably see prices increase, ultimately getting those home buyer prospects back to the same place that they find themselves now, which for many individuals is in the rental market pool.” 

For many Canadians, this reality solidifies renting as a more feasible option than purchasing. Steinman points out, “There's going to continue to be a huge demand for renting, probably even a growing demand over time. There is a trend line here that's now quite clear over the last decade or so in Canada, which is that the homeownership rate is dropping. I expect that the homeownership rate will continue to drop for the foreseeable future because housing affordability is not in line with rental affordability. Even though rental affordability seems really bad, it's not as bad as homeownership affordability.”

For property managers and owners, the takeaway is clear: rental demand, in general, will remain strong, even as rates decline. 
 

Challenges within Refinancing Strategies

While declining interest rates might create refinancing opportunities, Steinman emphasizes that this approach is generally more applicable to portfolio expansion or necessary major capital improvements rather than routine unit upgrades. He explains that property owners are already engaging in regular, smaller-scale updates as units turn over, particularly in popular markets like Toronto and Vancouver. These incremental improvements, such as new countertops or other modernized unit amenities, are often funded directly from operating cash and are less likely to be influenced by interest rate changes.

For property owners considering refinancing to fund major property improvements, Steinman highlights a well-known challenge, often tied to provincial rent control policies. While upgrades can enhance building value and justify higher rents on unit turnover, he points out that low turnover rates—exacerbated by rent control—may limit these opportunities. “If turnover rates stay super low, doing major capital improvements in buildings probably won’t have the same impact on your overall rent roll long term,” he explains.  

On the current, record-low tenant turnover rates, Steinman doesn’t have a positive outlook for the short-term. “I think it will take years and years to solve the turnover issue, where wage growth would have to outpace general inflation and rent inflation before we can return to a market where people are moving freely again at the sort of turnover rates that we're used to, which was 20 to 30%,” says Steinman, “In addition, provinces will need to reassess current rent control measures or avoid it altogether in order to avoid recreating a rental environment like this in the future.”

The concern is that, with fewer units turning over, many buildings may not undergo necessary renovations, potentially affecting the quality of Canada’s rental housing stock over time.
 

The Importance of Real-Time Data in a Rapidly Evolving Market

As market conditions shift, staying informed with accessible market data is more important than ever. 

“You need to understand rental data in real-time from a supply-demand perspective,” Steinman emphasizes. He continues, “Of course we have a new product called our Market Insight Reports, that we're really proud of, which gets average market rates, market comparison and market trends across the country into the hands of investors, property owners and managers and helps them uncover the trends that are occurring from a supply-demand perspective. This data comes in, in real-time, versus having to wait a month for a rent report or six months for CMHC data.”

This access to real-time data is crucial in today’s competitive rental environment. Steinman observes that securing tenants has become more challenging as renters have more options and conduct more inquiries.

“The competition around securing each renter has become a significant challenge. Instead of filling out two or three inquiries and touring a couple buildings, prospects are now filling out six or seven and maybe touring four or five,” he says, adding that tools like CRM systems and lead-to-lease solutions can help streamline the tenant acquisition process. By leveraging these technologies, property managers can reduce vacancy rates and improve efficiency.

He concludes, “I see those as being really good technology solutions and responses to what is an ever-changing market. We believe technology and innovation is crucial to competing, but I think it's in particular in those two areas- leasing and real-time data for decision making.”

For property managers and investors, the ability to make data-driven decisions provides a strategic advantage. Understanding where demand is highest, the rental rates that are trending, and how regional markets are performing enables professionals to respond quickly to changes and optimize strategies.
 

Final Thoughts

“I'm very confident that interest rates will continue to drop,” says Steinman, “But when you look at the overall state of the Canadian economy and some of just the key productivity measures, we’re not seeing many positive signs that the Canadian economy is becoming stronger, which is not good. It means that in order to incentivize productivity and further investment the Bank of Canada will need to continue to lower its rate. And that's ultimately, to solve what is probably at the root cause of everything, which isn't a housing affordability crisis, but it's a country that has a productivity crisis.”

As Canada’s rental market adapts to declining interest rates, property owners, investors, and managers must remain vigilant. While lower rates offer opportunities for development, refinancing, and exploring new markets, they also require strategic planning and a proactive approach. Steinman’s insights emphasize the importance of leveraging real-time data, understanding regional market trends, and making informed investment decisions to navigate this changing landscape. 

For Canadian rental professionals who are wondering what they can do today, to create success long-term amidst a shifting rental environment, Steinman offers his advice.

“Folks in the rental industry need to stay very locked in from a data perspective,” he says, “I think data is incredibly important. You can't create any predictability without access to really strong data and we are in a time when things are changing very quickly. You need great data; but not just great data, real-time data is best. And challenge your assumptions. Don't assume anything that can’t be validated without recent data; that would be my advice.”