Hamilton's rental apartments are filling up fast.

A new report from the Canada Mortgage and Housing Corporation finds the area has one of the lowest vacancy rates in the country as new residents migrate into the city and young people find their first jobs.

The fall version of the agency's twice-yearly rental market survey, released Tuesday, says vacancy rates have fallen by almost half among two-bedroom units and up to two-thirds in three-bedroom suites.

Overall, the October vacancy rate for the Hamilton-Burlington-Grimsby area's 42,431 apartments was 2.2 per cent, down sharply from 3.4 per cent a year earlier. The stock of apartment units this year is essentially unchanged from 42,643 reported in October last year.

At the same time, rents in the area continue to rise at more than twice the provincial guideline, but the rate of increase is slowing.

CMHC market analyst Abdul Kargbo said changes in the local market are being driven by a changing population pushing up demand for a stagnant supply of units.

Specifically, he cited strong full-time employment gains among young workers and stable migration into the city as driving the demand for apartments.

"In hard times young people stay in their parents' homes but when they get full-time jobs they increase the demand for rental housing," he said.

"What these figures show is that the rental market is healthy but the supply of units is flat," Kargbo added. "Clearly the demand is there, but is the potential return enough to convince developers to build?"

Tougher mortgage rules have also kept some first-time home buyers out of the real estate market, he said.

The CMHC research shows the average rent for a two-bedroom suite in the Hamilton area rose to $959 a month in October from $932 for the same month last year. That's an increase of almost 2.9 per cent when the provincial rent control guideline is 0.8 per cent.

Vacancy rates across the province were 2.3 per cent, down from 2.6 per cent for the same month a year ago.

Rent increases, Kargbo said, are being driven by provincial policies that allow turnover units to be rented at market rates.

David Horwood, vice-president of Hamilton's Effort Trust, one of the largest apartment management firms in the province, said his company's vacancy rates aren't as tight as the CMHC survey found, but he agreed with the general trend in the market.

"Our experience isn't as sharp as the survey found, we aren't as well absorbed as that," he said. "There's no question though that supply is tight because the rental stock in Ontario hasn't changed in 40 years, since the introduction of rent controls stopped apartment construction."

Rent controls, he said, have kept apartment owners from increasing rents to match increases in costs, all but eliminating new construction.

"The guideline increase this year was a ridiculous calculation based on the CPI (Consumer Price Index) that had no bearing at all on the actual cost of supplying rental housing," Horwood said. "The average tax increase last year was twice what the guideline allowed."

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Despite its tight supply, Hamilton continues to draw tenants from other cities looking for more apartment for their money here.

"Rents in Hamilton are at deep discount rates now," he said. "We have fire sale rents here compared to other communities."