The majority of investors who took on mortgages in 2022 to pay for new Toronto condos have been losing money every month, a shift that could discourage future building in what is already one of North America’s tightest rental markets.
For the first time, more than half of investors who closed on a new condo unit with a mortgage in the Greater Toronto Area last year were unable to cover their costs when they started renting it out, according to a report Monday from Canadian Imperial Bank of Commerce and research firm Urbanation Inc. That’s because the monthly expenses, including mortgage payments, condo fees, and taxes, outstripped rents for most, forcing those investors to pay the balance out-of-pocket each month, the report found.
It’s a shift that could have far ranging implications in Canada’s largest city, which for years has relied on condo units to serve the booming demand for rental housing. With demand only expected to grow — Canada’s immigration rate is the fastest in the developed world — many mom-and-pop investors were willing to put down deposits on pre-sale units years ago, before the first shovel hit the ground. The thinking was, rents would inevitably outstrip costs by the time they had to pay the bulk of the price. But for those who closed on purchases last year, the economics have changed.
Even though rents in Canada rose by a record amount last year, interest rates rose even faster as the Bank of Canada increased its benchmark to 4.5% from 0.25% to combat surging inflation. That left 52% of leveraged investors closing on new Toronto rental condos stuck with negative monthly cash flow, according to the report.
On average, such investors were facing losses of C$223 ($164) per month, with 11% of the cohort losing C$1,000 or more monthly, the report shows. This dynamic could get worse in years to come as investors who bought pre-sale units before the market’s peak last year are forced to close at today’s higher interest rates, the report’s authors, CIBC Deputy Chief Economist Benjamin Tal and Urbanation President Shaun Hildebrand, warn.
How long investors hold on will depend on the outlook for interest rates, but also condo prices, Tal and Hildebrand argue. As long as the asset’s value is appreciating, investors may be willing to sustain monthly losses, at least for a while. But longer term, such strain may dampen investor enthusiasm to buy into future condo projects. That could potentially limit new builds and put further pressure on Toronto’s rental market, unless construction of traditional apartment buildings picks up the slack.
“If investors aren’t buying, developers won’t be building,” Hildebrand and Tal wrote. “The bigger picture issue is that investors may no longer be able or willing to buy condo presales to the same extent as in the past.”