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If you think the rental housing shortage is bad now, just wait a few years.

A new report from RBC Economics predicts Canada could see its rental housing shortage quadruple by 2026 if there isn't a significant ramp-up in rental construction.

"Without a significant boost in rental stock, Canada's rental housing gap could exceed 120,000 (units) by 2026—quadrupling the current deficit," said Robert Hogue, assistant chief economist and lead author of the RBC report, which was released Wednesday.

"This will tip the housing market into a greater state of imbalance and drive the optimal vacancy rate of 3% even further out of reach."

We don’t see Canada returning to that optimal 3% vacancy rate without a significant acceleration in supply.RBC Economics

If Canada wants to reach a three per cent vacancy rate, which is considered healthy and balanced in a rental market, RBC says 332,000 new units need to be constructed between now and 2026.

The national vacancy rate for purpose-built rentals dropped to 1.9 per cent last year, from 3.1 per cent in 2021, according to data from the Canada Mortgage and Housing Corporation (CMHC).

A ramp-up in immigration and would-be homebuyers being sidelined for longer because of eroding affordability have led to a hot rental market.

CMHC says the average monthly price for a two-bedroom unit in a purpose-built rental building rose 5.6 per cent to $1,258 last year. For contrast, the average two-bedroom price of a rental condo jumped nine per cent to $1,930, but is higher in larger cities such as Toronto and Vancouver.

Purpose-built rentals hold the key

Canada's purpose-built rental housing supply grew 2.4 per cent last year, the fastest pace since 2014, but it appears the growth is outside of the cities that desperately need it the most.

The report says cities like Calgary and Ottawa saw the biggest increases in purpose-built rentals, while Toronto and Montreal severely lagged.

"The latter urban centres are among the most popular destinations for newcomers, welcoming an estimated 32% and 10% of international immigrants respectively last year. The slow growth in rentals in these cities will be especially problematic as demand for rented accommodation continues to outgrow supply," the report said.

It also says that while turning condo units into rentals, converting commercial buildings (such as underutilized office towers) into rental housing or having homeowners add rental suites to their homes would help increase supply, it's not enough to move the needle.

The real key to improving affordability and stability in the rental market, RBC argues, is to "considerably grow the supply of purpose-built rentals."

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.