Rate cuts should be good news for tenants, right?

Earlier this month, the Bank of Canada cut interest rates for the first time since March 2020, triggering debates about what will happen to housing markets. The pace of future cuts will impact the finances of homeowners renewing their mortgages and those with variable-rate mortgages. Expectations about future cuts will impact housing sales, prices and construction activity.

- RICARDO TRANJAN

How these factors will interact is difficult to forecast, but despite this uncertainty, one thing is certain: rents will continue to go up.

High interest rates put upward pressure on rents. If we compare historical interest rates with rent inflation measured in the Consumer Price Index (CPI), the pattern is clear: Whenever rates shoot up, rents follow suit. Spikes in rents occur soon after interest rate hikes, often within months. This means these spikes are not the result of interest rates causing slowdowns in construction, an effect that would take longer to be felt.

The most likely explanation is that landlords pass mortgage rate increases on to tenants, which is possible in provinces where rent controls are full of loopholes, like Ontario.

The average market rent for a two-bedroom apartment in Toronto increased by 10 per cent in the last year the highest single-year increase in a long time. Rents in turnover units, where people can move into, are going up by an average of 40 per cent. High interest rates are certainly one of the culprits.