Canadians are grappling with high rent prices being driven up by interest rates, but experts say renters won’t see meaningful relief until significantly more housing supply is built – regardless of where rates ultimately fall.

“It's a bit of a vicious cycle as interest rates and rents are sort of aggravating each other at the moment,” Shaun Hildebrand, president of real estate data and research firm Urbanation, told in an interview on Wednesday.

Hildebrand made the comments after the Bank of Canada held its key interest rate steady at five per cent for the fourth consecutive decision on Wednesday. The move was in line with unanimous expectations from economists surveyed by Bloomberg.

The central bank signaled that further rate hikes are unlikely for the time being, opening the door to rate cuts down the line.

However, Hildebrand said that even if rates are cut, relief for renters appears to be nowhere in sight as chronic supply shortages plague Canada’s housing market.

“The rental market is and will continue to be severely undersupplied,” Hildebrand said.

Aled ab Iorwerth, the Canada Mortgage and Housing Corporation’s (CMHC) deputy chief economist, echoed that sentiment, telling that the Canadian rental system is “basically full.”

“With these high interest rates people are not moving from rental to ownership,” he said.

“The vacancy rate (for) rentals is extremely low, and there's not enough supply of rental units so there are real pressures in the rental system that are probably being increased by high interest rates.”

Shelter cost inflation

The Bank of Canada said Wednesday that shelter costs, which include rent prices and mortgage interest, continue to be one of the driving factors of inflation, which came in at 3.4 per cent last month – above the central bank’s two per cent target.

Statistics Canada also flagged rental costs as a major factor that drove up inflation in December – and highlighted the role higher interest rates have played in driving up rental costs.

The federal agency said the high-rate environment has increased the cost of home ownership, and put pressure on the rental market as a result, as potential homebuyers stay on the sidelines of the market.

Hildebrand said the relationship between shelter costs and higher rates creates a “complex layer” to the bank’s decision-making going forward, as rates at their current elevated levels will likely push rental prices up even further.

Bank of Canada Governor Tiff Macklem said Wednesday that despite the inflationary pressure that higher rates have put on shelter costs, other factors such as food prices are keeping core inflation "too high” to consider rate cuts just yet.

“I think in order for interest rates and rent inflation to start coming down, we will need to see more easing in some of those other factors like the labour market and population growth,” Hildebrand said.

He added that as the Bank of Canada’s tightening policy slows the economy, higher rates of unemployment will likely follow, adding that he thinks the federal government’s recently announced cap on international students should slow population growth to a degree.

Even with those factors, he said Canadians likely won’t see lower monthly rent bills.

“Ultimately, we're talking about slower rates of rent growth, not rent declines,” Hildebrand added.

Rental housing outlook

Both Hildebrand and ab Iorwerth made the case that the supply issues crippling Canada’s housing market will take many years to fix.

“We’re not building nearly enough purpose-built rentals … the supply situation does not appear to be seeing any meaningful improvement, in fact it’s probably looking worse,” Hildebrand said.

When it comes to the ownership market, ab Iorwerth said that home prices have become so prohibitive that even with lower rates, owning property will likely remain out of reach for many Canadians, keeping them in the rental system indefinitely.

Development barriers

Hildebrand argued that until the construction of rental projects becomes economically feasible, the issues plaguing the system will persist. He added that higher interest rates have made it harder for many developers to secure credit or capital for new builds.

Moves by policy makers to lessen the tax burden on developers have provided some incentive, Hildebrand said, but costs are still high.

“The removal of HST is obviously a good first step, but soaring construction costs, extremely high development charges and property taxes, they all create very large barriers for rental developers to begin construction on new projects,” he said.

“And this is troubling given that, even with rents at record highs, averaging close to $3,000 a month, developers still can't make the numbers work.”