While Toronto's low-rise housing segment has been performing on all cylinders amid the pandemic, the condo space has renewed strength following months of declines, with investors being an integral part of this.
To put it simply, as the price of detached homes continues to skyrocket, condos are now being viewed as the more affordable option in Canada's largest city.
To get a better understanding of this market, CIBC Economics and Urbanation teamed up to provide a closer look at condo investors in the GTA through the lens of quantitative research, using thousands of recent transactions as an input.
According to the findings, while demand for homes in the GTA remains strong, purpose-built rental developments have been rising in recent years from depressed levels, with condominiums representing just under 90% of the net gain in rental apartment units in the GTA over the last decade.
READ: Oshawa is Now the Hottest Condo Market in the GTA
Last year, investors closed on a record of nearly 9,000 condo rentals in the GTA -- which doesn’t include owner-occupiers converting their units to rental. What's more, roughly one-third of all newly registered condos bought by pre-sale purchasers were rented last year through MLS, in addition to approximately 10% of resale purchasers who bought units as rental investments.
With the bulk of condo rental supply growth coming from new developments, the report revealed that investors who purchased presale condos that were ready for possession in 2020 have already experienced more than 40% market appreciation in their units.
What's more, relatively low presale prices secured several years ago and record low-interest rates have resulted in the average investor of a newly completed condo last year being cash flow positive by $63 per month.
At 63%, the share of investors that were cash flow positive in 2020 was higher than the 56% share calculated three years ago for 2017 newly registered investment units.
Urbanation says investors of presale units were in a much better cash flow position than investors who bought resale units and subsequently rented them out last year, finding that a majority share (80%) of these resale investors were cash-flow negative.
Among investors with positive cash flow, the average monthly net income was nearly $400, which was higher than in 2017 when positive cash flow investors averaged just over $360. As for the cash flow negative investors, the approximately $5,900 annual net loss (not factoring in principal repayment) in year one can be offset by just a 1% increase in market prices.
The report said investing in condos is often used as a retirement funding strategy (the average age of an investor is 47), with most investors concerned with long-term equity accumulation as opposed to cash flow.
So what exactly does all of this mean for the market and investors moving forward? Urbanation says the divergent paths for condo prices and rents that have been arising lately will mean the share of cash flow negative investors will likely rise in the future. Though, this could change if they are prepared to invest a much higher down payment through savings.
"Condo investors are an integral component of the rental supply equation in the GTA, but the condo market shouldn’t be the rental market," reads the report.
While purpose-built rental housing developments must be part of the solution and it is beginning to expand, Urbanation says we are still a long way from closing the supply gap.
