As condo sales in downtown Toronto slowly creep lower as a result of the COVID-19 pandemic, would-be investors might be thinking that now's the time to make their move on the market.
But a deeper look at what's actually going on in both the resale and rental spheres of downtown's condo scene should encourage potential buyers to pause, and consider the setbacks they may face from jumping into the game right now.
"When we talk about whether it's a good time to invest, we need to look at both current resale prices -- that's the prices investors would be buying at -- and, of course, the current rental market," says John Pasalis, President at Realosophy Realty.
Pasalis notes that resale prices are indeed on the decline, but only by "a little bit." Rents, on the other hand, have decreased by the double-digits; nearly 20% in some cases.
"Certainly, if you're a savvy investor, you might find some value," he says. "There's no rule necessarily, but it doesn't seem right to be paying peak prices -- 2020 prices -- for rents that are at 2018 levels."
And it's not just Pasalis' words of caution that should make prospective investors take pause. Recently-released by TRREB, data from the Q3-2020 condominium market and rental market reports revealed the number of condo apartments listed for rent at some point during Q3-2020 was up a massive 113.9% year-over-year. The influx was reportedly a result of many investors and Airbnb owners turning to the longterm rental market in an effort to cover ongoing costs.
Toronto Regional Real Estate Board President Lisa Patel says demand for condo rentals was “very strong” in the Q3, with a record number of quarterly transactions reported. But strength is defined by more than the transaction count, particularly as average rent prices continue to fall, dropping a startling 16% in September year-over-year.
Indeed, Patel did also note the number of listed units more than doubled compared to 2019.
"Many investor-owners took their units out of the short-term rental market, due to stricter regulations and the COVID-19-related tourism downturn, and made them available in the traditional rental marketplace. The result was more choice and more negotiating power for renters.”
And it's not just rental condo units that aren't leaving the market. The resale sphere is seeing changes, too. According to early-autumn data from the Toronto Regional Real Estate Board (TRREB), 11,083 existing homes were sold in the Toronto-area in September. Of these, specifically in the 416-region, 1,984 sold properties were ground-oriented (detached, semi-detached, or townhomes), while 1,549 were condos. At first glance, the numbers seem comparable — but when last year’s data is brought to the table fluctuations appear more dramatic.
Year-over-year, detached homes saw ac September sales increase of 28.1%; during the same period, semi-detached sales increased 48.8%, and townhome sales went up 21.5%. Condos, however, saw an increase in sales of 'just' 7%.
So what's an eager -- albeit fiscally-responsible -- wannabe investor to do?
"If you want to be somewhat conservative, you're either going to wait for further softening in prices -- if you think that's going to happen -- or you at least wait for the rental market to start recovering a little bit, because if you're buying now, as an investor, not only is your rent significantly lower, but your vacancy is higher. It might take you two to three months to rent out your unit," says Pasalis.
When that wait time could come to an end, however, is still up in the air. In September, the Province of Ontario introduced a legislation that could freeze rent for “most rent-controlled and non-rent-controlled residential units” in 2021. But, when probed on the subject, Pasalis said that legislation -- if passed -- won't make much of a difference where investors are concerned.
"The rent freeze doesn't really matter, because prices are going down. [To freeze rents] basically means a landlord can't increase their tenant's rent, which most landlords aren't doing right now anyway. Say the average one-bedroom condo now is renting for $1,700 per month. And, six months from now, for whatever reason -- the pandemic is a little bit behind us, there's more confidence, people start coming back to Toronto and want rentals -- it doesn't matter that there have been a ton of [units] that have rented for $1,700 because, if based on the current demand and current inventory, units are now leasing for $1,800 or $,1850, that's the market rent."
Pasalis explains that, when this transition comes around, landlords or owners will be able to charge whatever they choose for a unit that's vacant -- Provincial rent control won't impact that.
"So, what people are renting for today does not mean that rent prices can't go up $200 per month in six months, if things completely turn around."
But, he says, he thinks it's unlikely that a big shift will occur anytime soon. As the pandemic continues, the city moves into new stages of lockdown, and restaurants, offices, and many other facets of the downtown core are still closed, there's no true recovery in sight at the top of 2021.
"Rents are not going to recover until the downtown core recovers. [At that time,] people are going back to offices, there's a reason to be living downtown because you walk to the office, the office is nearby, the restaurants are nearby. So, until there's some return to a normal downtown lifestyle, downtown rents aren't likely to recover anytime soon. So most investors are just sitting tight and expecting this might go on for another year or so."
The impacts of the COVID-19 pandemic are widespread and varied. But you already know that.
Where condo owners and landlords are challenged, renters gain a theoretical upper hand... but many are left wondering what they're actually paying rent for. Long-justified by access to restaurants, bars, museums and transit just outside their (building's) front door, the cost for downtown condo living might just not be cutting it anymore -- even with rent prices down.
For investors, that means that despite lesser sales, now is not the time to strike. It's more likely the time to watch and wait.
Which seems to be the case for most everything, for most all of us, these days.
With files from Ainsley Smith.