Toronto Condo owners made large capital gains. Close to 50 per cent of all investors who bought condominiums completed in the Toronto area in 2017 are not making enough rent to cover their carrying costs, despite finding exceptional gains on the value of their properties, a new study reports.
Close to 44 per cent of investors who took possession of new units in 2017 were in negative cash flow — that is their rental income was lower than the amount needed to cover their mortgage payments and condominium fees, according to the study by CIBC and Urbanation, a market analysis firm.
About 45 per cent of those investors had negative cash flow of less than $500 per month, another 20 per cent had negative cash flow between $500 and $1,000 per month. And 34.5 per cent had negative cash flow of more than $1,000 per month.
“Many of the investors are in negative cash flow, but they also enjoyed good capital gains on their investment,” said Benjamin Tal, deputy chief economist at CIBC World Markets Inc. “The question is will they begin to sell?”
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 – most of which were bought between 2011 and 2013, before the market boomed – 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 (5) years elapsed between when the units were pre-sold — or purchased from the developer ahead of construction — and when they were completed.
Assuming a down payment of 20 per cent or $75,000 — the average paid out — these investors realized a return of 155 per cent before closing costs, the study reported.
“The return on investment is stronger than it has been historically and that’s largely due to the significant price increases we found over the last two years,” said Shaun Hildebrand, Urbanation’s senior vice-president. “But when you analyse all the layers you find some weak spots.”
Also, investors paid higher rates on their mortgages, with 30 per cent of those surveyed paying an interest rate that is greater than 6 per cent and 16 per cent of investors paying more than 9 per cent.
“Now these investors are facing up against rising interest rates and rent controls and they create some vulnerabilities for the market,” said Hildebrand. “The risks may be contained to this point but the economics of investing is likely to become more challenging in the coming years.”
The current boom in condo prices — driven by tight supply and soaring demand — will nott 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 2018 and 2021.
“There are going to be more deliveries over the next three (3) to four (4) years than they have been over the previous four (4) to five (5) years,” Hildebrand said. “So the market will get more supply and it is unlikely the growth in price and rents we’ve seen over the last three (3) to four (4) years is going to repeat itself.”
To cover carrying costs of units pre-sold in 2018 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 reports. 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.
As for the Condo apartment listings available for sale, there could be positive news, if those in negative cash flow decide to list their properties. If all investors who are running negative by more than $500 a month decide to sell, the number of units entering the resale market would amount to 3.4 per cent of the annual condominium supply in the city, Tal said.
“You might get a market of less demand and more supply,” Tal said. “And that will only result in a healthy slowdown in the market.”
Source: National Post
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