Canada’s real estate slump is hitting the rental market. Rentals.ca data shows average rent fell in December, now at the lowest level since mid-2023. High-priced cities accounted for virtually the whole drop, while affordable cities led growth. The divergence has cut the gap between the most and least expensive cities in half. Are expensive markets now looking cheap—or did “affordable” cities become overpriced?
Canadian Rental Prices See Biggest Annual Drop In 4 Years
The national asking rent slipped further last month. The monthly average fell 0.7% (-$14) to $2,060 in December, bringing prices to the lowest since June 2023. It was the fourth consecutive drop, leaving monthly prices 2.3% (-$48) lower than last year. It was the largest annual drop since 2021, but it may not feel like much relief after a 32% surge from April 2021 to May 2024.
Demand Is Cooling—It’s Not Just About More Supply
Falling national prices aren’t just due to rising supply, cooling demand also helped. On the supply side, the low-rate-fueled investment boom is now seeing completions. On the demand side, the recent immigration caps have moderated pressure. The combination is pushing vacancy rates higher, reducing upward pressure on prices.
Virtually all relief is in expensive, investor-driven core cities. Without a sharp correction, the speculative mindset remains. This is likely a major contributor to the regional divergence we’re about to get into.
Canada’s Most Expensive Cities See Rents Drop, Cheap Cities Climb
Not all cities are equal, but when it comes to rents, they’re converging. The national average rental price has dropped, driven by the most expensive markets. Annual declines were sharpest in Vancouver (-7.9%), Toronto (-5.1%), and Calgary (-5.0%).
In contrast, the most affordable markets logged significant growth in recent years. The fastest price growth in the past 3 years is seen in Edmonton (+17.4%) and Montreal (+7.5%). The price floor is rising, while the ceiling is moving lower. This suggests demand is saturated at the higher end, but remains viable at the bottom—for now.
The narrowing rent gap is one of the major and overlooked trends in the market. Three years ago, Vancouver’s average asking rent was 138% (~$1,800) higher than Edmonton, the most affordable of the six major cities. By last month, that spread narrowed to 74.8% (~$1,136), shrinking ~63 points in just three years.
This resembles real estate price contagion: exuberance in major hubs drives people to chase affordability. When this happens, prices aren’t driven by fundamentals like jobs and amenities. Instead, prices rise based on the relative discount to expensive cities. Sure, it’s expensive—but it’s cheaper than Vancouver, right?
The Bank of Canada suggested this dynamic was at play with home sales a few years ago. Probably not a coincidence that the cities that led home price growth are now leading for rent growth.
For investors, this presents a new risk. If a market’s appeal is a discount to an exuberant city, and that premium corrects, does the spread remain? As the affordability gap narrows, the relative value disappears—along with the demand.
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