Nearly half of all investors who bought condominiums completed in the Toronto area last year aren\u2019t making enough rent to cover their holding costs, despite chalking up exceptional gains on the value of their properties, a new study finds.<\/p>\n
No less than 44 per cent of investors who took possession of new units in 2017 were in negative cash flow \u2014 that is their rental income fell short of the amount needed to cover their mortgage payments and condominium fees, according to the study by CIBC and Urbanation, a market analysis firm.<\/p>\n
Though 45 per cent of those investors were short by less than $500 per month, another 20 per cent were short between $500 and $1,000 per month. And 34.5 per cent were in the hole for more than $1,000 per month.<\/p>\n
\u201cWe know now that many of them are in negative cash flow, but they also made very nice money on their investment,\u201d said Benjamin Tal, deputy chief economist at CIBC World Markets Inc. \u201cThe question is will they begin to sell?\u201d<\/p>\n
Investors who bought condominiums for the purpose of renting accounted for 48 per cent of all newly completed units in the Greater Toronto Area in 2017. The resale price of those units \u2013 most of which were bought between 2011 and 2013, before the market boomed \u2013 was an average $817 per square foot in 2017, up 51 per cent from their average pre-sale price of $541 per square foot. An average of five years elapsed between when the units were pre-sold \u2014 or purchased from the developer ahead of construction \u2014 and when they were completed.<\/p>\n
Assuming a down payment of 20 per cent or $75,000 \u2014 the average paid out \u2014 these investors realized a return of 155 per cent before closing costs, the study found.<\/p>\n
\u201cThe return is stronger than it has been historically and that\u2019s largely due to the price increases we saw over the last couple of years,\u201d said Shaun Hildebrand, Urbanation’s senior vice-president. \u201cBut when you peel back all the layers you find some weak spots.\u201d<\/p>\n
Indeed, investors also paid higher rates on their mortgages, with 30 per cent of those studied paying an interest rate that is greater than 6 per cent and 16 per cent of investors paying more than 9 per cent.<\/p>\n
\u201cIt is these investors who are up against rising interest rates and now rent controls that create some vulnerabilities for the market,\u201d said Hildebrand. \u201cThe risks seem to be contained at this point but the economics of investing is likely to become more challenging in the coming years.\u201d<\/p>\n
The current boom in condo prices \u2014 driven by tight supply and soaring demand \u2014 won\u2019t last forever, he cautions. Roughly 60,000 new units are currently under construction in the GTA and 20,000 new units are expected to be completed annually between now and 2021.<\/p>\n
\u201cNo doubt there\u2019s going to be more deliveries over the next three to four years than there has been over the previous four to five years,” Hildebrand said. “So in that sense, the market is up against more supply and it\u2019s unlikely the growth in price and rents we\u2019ve seen over the last three to four years is going to repeat itself.\u201d<\/p>\n
To cover carrying costs of units pre-sold this year and scheduled for completion in 2021, investors with a 20 per cent down payment would need to raise the rent by 17 per cent over the next four years if there were no change in mortgage rates, the study finds. If mortgage rates increase by 100 basis points, rents would need to increase by 28 per cent over the period and by 39 per cent if rates increase by 200 basis points.<\/p>\n
But there could be a silver lining, should those in negative cash flow decide to list their properties. If all investors who are falling short by more than $500 a month opted to sell, the number of units entering the resale market would amount to just 3.4 per cent of the annual condominium supply in the city, Tal said.<\/p>\n
“You might have less demand and more supply,” Tal said. \u201cAnd that may only result in a healthy slowdown in the market.”<\/p>\n","protected":false},"excerpt":{"rendered":"
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