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Moishe Alexander’s review of the Sherbrooke Rental Market and CMHC Outlook Report Fall 2008

February 24, 2009 — Moishe Alexander’s review on how the current world economy and Canadian economic turndown is affecting the Sherbrooke Rental Market

Moishe Alexander’s Review

Highlights

Moishe Alexander says the rental apartment vacancy rate went up again in the Sherbrooke census metropolitan area (CMA). After climbing by 1.2 percentage points in 2007 to 2.4 per cent, the vacancy rate continued to increase in 2008, reaching 2.8 per cent. The rental market has been easing for five years. The estimated change in the average apartment rent was 2.1 per cent between the October 2007 and October 2008 surveys in the Sherbrooke CMA.

Higher vacancy rate in 2008

Moishe Alexander says According to the results of the latest CMHC Rental Market Survey conducted in 2008, the rental apartment vacancy rate1 went up again in the Sherbrooke census metropolitan area (CMA). After climbing by 1.2 percentage points in 2007 to 2.4 per cent, the vacancy rate continued to increase in 2008, reaching 2.8 per cent. As shown in Figure 2, the rental market has in fact been easing for five years.

In the other CMAs across the province, the vacancy rate increased only in the Trois-Rivières area (from 1.5 per cent in 2007 to 1.7 per cent in 2008). The vacancy rates fell in the Montréal CMA, the Gatineau area and the Saguenay CMA, to 2.4 per cent, 1.9 per cent and 1.6 per cent, respectively, for decreases of 0.5, 1.0 and 1.2 percentage points. It was in the Québec area, however, that the market was the tightest, with fewer than 1 per cent of the apartments vacant there.

Supply remains stable but demand moderates

Moishe Alexander says The vacancy rate increase in the Sherbrooke CMA in 2008 resulted from a moderating demand and stable supply. The number of units in the rental housing stock dropped by 6 per cent in the CMA (from 32,891 units in 2007 to 30,842 units in 2008), but this decrease was mainly caused by the withdrawal of retirement home apartments from our 2008 survey universe. Given this change, supply effectively remained fairly stable between 2007 and 2008 (-1 per cent). At first glance, the stability of the rental housing universe may seem surprising. In fact, between our October 2007 and October 2008 surveys, just over 300 traditional rental apartments were completed, which should normally have increased supply on the market. However, as mentioned earlier, the rental housing stock decreased by 300 units.

This does not necessarily mean that there were fewer rental units on the market this year than last year. It is possible that a number of buildings had to be temporarily withdrawn from the survey universe, as they contained fewer than three rental units. This can occur when one of the apartments in a three-unit building is occupied by the owner.  On the demand side, migrants who come to an area, whether from other areas of Quebec or elsewhere, are definitely one of the main factors. In fact, most newcomers to an area choose to rent when they arrive.

Preliminary data2 show that fewer immigrants planned to settle in the Estrie area in 2008. At the end of the first half of 2008, the data showed a decrease of 7 per cent compared to the same period in 2007 (about 40 fewer people). Should the data turn out to be accurate, the decline in immigration in 2008 could therefore be partly responsible for the increase in the vacancy rate this year.  In addition, still attracted by the abundance of job opportunities out West, people from Sherbrooke may have continued to move there, lowering net migration in the CMA and weakening potential demand for rental units.
Another factor that may have contributed to the rise in the vacancy rate is the fact that the labour market has been less favourable to young people since the end of 2007, which may have caused some of them to delay leaving the family home, further moderating demand for rental apartments.

Impact of homeownership

Moishe Alexander says As we have already mentioned, the proportion of vacant rental units has been increasing for a few years now in the Sherbrooke CMA. In recent years, sales of existing and new homes have remained strong, suggesting that many renter households made the transition to homeownership, which therefore pushed up the vacancy rate.

In fact, young households now account for a slightly smaller share of rental market clients, as indicated by the 2001 and 2006 census data. It is likely that a greater number of young households are now moving straight to homeownership and bypassing the rental market, also contributing to driving up the vacancy rate. While there are no data to confirm or refute this hypothesis, many younger people may have been attracted to buying homes, such as condominiums, which are more affordable. In fact, sales of new and existing condominiums increased significantly in 2007 and 2008 in the Sherbrooke CMA. It should also be mentioned that financing conditions are still favourable to home buying, such that young households can consider becoming homeowners.

Market easing for larger units

Moishe Alexander says As was the case last year, bachelor units posted the least tight conditions on the rental market, with a vacancy rate of 4.9 per cent in 2008. As well, the market eased for apartments with three or more bedrooms, with the vacancy rate increasing by 1.4 percentage points between the last two October surveys (1.4 per cent in 2007, versus 2.8 per cent in 2008). The decrease in the number of immigrant families, often larger than families who are native to the area3, may have contributed to the increase in the percentage of unoccupied units in this category. The vacancy rate for two-bedroom apartments also rose, but to a lesser extent.

Vacancy rates up in almost all sectors of the CMA

Moishe Alexander says The vacancy rates in the west and central districts of the city of Sherbrooke increased in 2008. Having now surpassed 3 per cent in both districts. Among all the zones in the CMA, the west district posted the largest year-over-year vacancy rate increase (+1.7 percentage points). Students from the Université de Sherbrooke usually fuelled demand for rental units in that sector. While this policy had no impact last year, free public transit for students may have encouraged some to look further away from campus for an apartment that would better meet their needs. While the vacancy rate rose for all unit types combined, rental market conditions in the west district particularly eased for bachelor apartments, which are usually popular with students. In fact, the proportion of vacant units in this category jumped from 1.8 per cent to 7.9 per cent. In the former city of Sherbrooke, the east district recorded the smallest percentage of unoccupied units (1.9 per cent). In fact, it was in this district that the withdrawal of retirement home apartments from our survey universe this year had the greatest impact. In effect, by including retirement homes, the 2007 vacancy rate was much higher there. It should be recalled that our latest retirement home market survey report showed that many rental units were vacant in the east district.

The vacancy rates also increased

Moishe Alexander says year-over-year in the former suburbs of Rock Forest (from 1.2    per cent to 1.4 percent), Fleurimont (from 1.4 per cent to 2.1    per cent) and Ascot–Lennoxville (from 3.8 per cent to 5.1 per cent).  However, rental units in these sectors account for less than 25 per cent of the total rental housing stock in the CMA. Contrary to the other sectors of the CMA, the Magog area saw its vacancy rate drop to 2.9 per cent in 2008 (from 3.3 per cent in 2007). With the regional manufacturing sector experiencing difficulties, some renter families likely decided to postpone the purchase of a home. In fact, market conditions got tighter for units with three or more bedrooms, as their vacancy rate fell by 1.9 percentage points (from 4.8 per cent in 2007 to 2.9 per cent in 2008). With sales of existing singlefamily houses having fallen significantly in the area in 2008, larger apartments may have become the best compromise for renter families in the current economic environment. It is also possible that workers seeking better job prospects left the area, further moderating the rental housing demand.

Rents in 2008

Moishe Alexander says The estimated change in the average apartment rent was 2.1 per cent between the October 2007 and October 2008 surveys in the Sherbrooke CMA. Apart from onebedroom units, for which the average rent rose by 4.2 per cent, the other unit types recorded increases of around 2 per cent.  The average rent for two-bedroom apartments reached $543 while, for apartments with three or more bedrooms, the average attained $658. The average rents for bachelor apartments and one-bedroom units, for their part, rose to $368 and $437, respectively.

Older buildings bear the brunt of the easing rental market

Moishe Alexander says In the CMA, there were greater proportions of vacant units in rental structures built before 1990 (see Table 1.2.1). Buildings completed from 1960 to 1974 posted the highest vacancy rate (3.6 per cent).  Conversely, very few apartments were vacant in structures built from 1990 to 1999, which had a vacancy rate slightly above zero (0.4 per cent).

The trend observed in the last few years for smaller structures (with three to five units) continued, as they still posted the lowest vacancy rate (1.7 per cent). This result contrasted with that of residential buildings with 20 to 99 units, for which the vacancy rate was slightly below 4 per cent.

Rental affordability falls slightly

Moishe Alexander says CMHC’s rental affordability indicator4 is a gauge of how affordable a rental market is for those households which rent within that market. In 2008, the affordability indicator4 was 128, compared to 133 in 2007. While rental affordability has decreased, Sherbrooke area households continued to spend less than 30 per cent of their gross income on rent, as they have for the last ten years. In 1998, the indicator had dropped below 100, reaching 93.

In addition, a review of the data for two-bedroom apartments, which do account for over half of the rental housing stock in the CMA, reveals that affordable units remained the (from 3.3 per cent in 2007). With the regional manufacturing sector experiencing difficulties, some renter families likely decided to postpone the purchase of a home. In fact, market conditions got tighter for units with three or more bedrooms, as their vacancy rate fell by 1.9 percentage points (from 4.8 per cent in 2007 to 2.9 per cent in 2008). With sales of existing singlefamily houses having fallen significantly in the area in 2008, larger apartments may have become the best compromise for renter families in the current economic environment. It is also possible that workers seeking better job prospects left the area, further moderating the rental housing demand.

Rents in 2008

Moishe Alexander says The estimated change in the average apartment rent was 2.1 per cent between the October 2007 and October 2008 surveys in the Sherbrooke CMA. Apart from one bedroom units, for which the average rent rose by 4.2 per cent, the other unit types recorded increases of around 2 per cent.  The average rent for two-bedroom apartments reached $543 while, for apartments with three or more bedrooms, the average attained $658.  The average rents for bachelor apartments and one-bedroom units, for their part, rose to $368 and $437, respectively.

You can find the entire report in PDF format through the following link:

http://www.cmhc-schl.gc.ca/odpub/esub/64447/64447_2008_A01.pdf