CIBC, Urbanation research shows high risk for these real estate investors
Investing in newly built condos in the Greater Toronto Area has proved costly for investors and the impact may further deplete supply in the region, according to a new report.
The research by Shaun Hildebrand from industry analysts Urbanation and CIBC’s Benjamin Tal reveals that the market is “facing the most significant test since the 1991 recession,” amid a two-part market where the low-rise homes segment is faring reasonably well, well the high-rise segment faces conditions not seen in decades.
Investors typically make up at least 70% of buyers of condos in the region but with both this significant cohort of buyers unwilling to take the risk, while developers unable to lower costs due to inflation-fuelled materials costs, the market is in “economic lockdown” the authors state, at least until interest rates fall significantly as expected during 2025.
Still, for investors to be confident in the market, the report says that resale prices and rents will need to rise faster.
“The current price gap between new and resale condo prices remains near a record high at roughly 60% and a full 20 percentage points above its long-run average. Meanwhile, rental yields are only slightly up from their record lows during COVID-19, and effectively below the risk-free rate offered by Government Bonds,” the report’s authors note.
Losing money
The share of newly completed condos in the GTA last year that were used as rentals reached a record high of 34%, although there has been a sharp drop to 25% in the first half of 2024.
For investors who bought a GTA condo in 2023 with a mortgage, 58% were cash-flow negative and 18% were cash-flow positive once costs including mortgage, condo fees, and property taxes were deducted from rental income.
Rents were up by an average 8% but costs of ownership surged 21% - they have outpaced rents in recent years having increased almost 60% since 2020 - and the average deficit was $597, more than double the $223 of negative cash flow in 2022. In 2020/21 investors enjoyed positive cash flow. The larger the unit, the larger the negative cash flow.
The report’s authors warn that, with more investors choosing to put their rental properties up for sale, while fewer want to risk entering the market, supply of rental condos in the GTA is under pressure which sounds the alarm for an increase in purpose-built rental units in the region.
