A recent report from CIBC and Urbanation paints a challenging future for new condo investors and the prospects for condo construction in the GTA.
According to their analysis, nearly three-quarters (72%) of condo rental investors tend to buy new units as opposed to resale, with an average gap of five years between the purchase and completion of the unit. New condos reaching completion have appreciated in value; however, the key issue is the cash flow performance of these units.
According to the report, only 25% of these units did not have a mortgage. Of the levered units, just over half (51%) were not cash flow positive – rents were less than the combined cost of mortgage payments, condo fees and property taxes. This compares to 44% in 2021 and 40% in 2020. For resale units, the economics are even less appealing. In 2022, only 18% of condos bought in the resale market and subsequently rented were cash flow positive.
Negative cash flow has been a challenge for the Toronto condo rental market for some time. The capital appreciation of these units has been the payoff that has kept investors in this market. However, continuing to rely on potential capital gains makes this a less compelling investment.
If investors are less willing to participate in the market, this could slow housing development in the GTA. While completions are currently at a record high, a sharp drop in presales will eventually slow them down. Developers rely on the presale market to arrange bank financing for projects. If presales fall, projects will get pushed out into the future. With immigration driving population growth, this could lead to greater supply/demand imbalances.
Condos represent the majority of new home development and new rental supply. What outcomes are possible?:
- A slight reduction in mortgage rates and further growth in rents will improve future rental economics. Whether these changes occur in time to support the presale market – or at all – is an open question.
- Toronto reverses its increase in development charges. (In 2022, Toronto increased the development charge for building a bachelor or one-bedroom apartment from $35,910 to $52,367.) We believe there is no chance of this happening.
- Investors look to lower priced markets where positive cash flow is more attainable. This will likely be projects in the 905 or the areas surrounding the GTA. We could also see Ontario investors looking at other markets. Calgary’s condo market is seeing an influx of Ontario investors.
Without ongoing demand from investors for presales, condo development in the GTA could slow. This raises the potential for further pressure to the rental market and housing affordability in the GTA.
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