As Rates Rise, Is This the Time for Condo Investors to Divest?
Rising interest rates aren’t just making homebuyers chary, as evidenced by sales plummeting in the Greater Toronto Area last month — recent Bank of Canada hikes could have implications for the region’s rental market, too.
Investors — who account for the majority of Toronto’s rental stock — are beginning to offload their condo rental properties, says Nasma Ali, Broker and Founder of One Group Real Estate, because they’ve gone bearish on the housing market. Appetite for rental had already started to turn when the City of Toronto implemented a short-term rental bylaw in January 2021, and dipped further when the condo sector proved the slowest market segment to recover from the impact of the pandemic. That’s since been amplified by recent interest rate increases, which have spooked some unit holders, even if they believe there’s still room for price growth.
“It’s just a matter of whether the investor believes there will be a major crash, which has them thinking of selling now, even if they’re not selling at peak price,” Ali said.
“Like religion, you either believe in god or you don’t, and it’s the same thing with investors — either they believe there will be a crash or they believe there won’t be.”
In February, a single condo listing of Ali’s would get 50-100 showings a week that would produce anywhere from five to 20 offers, but by March there were half as many showings and maybe up to five offers.
Before the drop-off towards the end of February, condos priced over $950,000 received less buyer attention, and today the same is true for units that are at least $750,000 — although anything below that is still white-hot among first-time buyers and investors alike.
A Combination of Factors
A rising interest rate environment isn’t the only thing making investors sweat. Inflation and the possibility of a recession have convinced some investors that they should cash out their chips, especially landlords who purchased units in the lead up to the coronavirus crisis and were forced to renegotiate leases with tenants in the immediate aftermath of lockdowns.
In short, it’s been a rocky couple of years for Toronto’s condo landlords, and while conditions appear on the mend, it isn’t inconceivable, especially after going through the pandemic, that they could get blindsided again.
“After what happened during COVID, many investors were somewhat traumatized because a lot of tenants stopped paying rent or they started asking for discounts,” Ali said. “People who bought just before that were no longer cash flow positive, and sometimes if they wanted to sell, their tenants wouldn’t allow showings. A lot of those landlords just wanted out, and while prices are higher enough for them to make money now, they still want to exit. A lot of them will invest in other things like stocks or crypto. Many others have taken money out of Canadian real estate and started investing it in U.S. real estate.”
“The Seasoned Ones” Will Ride it Out
Prospective condominium investors are reticent about jumping into the market today, says real estate broker Nerses Sraidarian, while others who purchased pre-construction units are listing them on the assignment market.
“Most buyers are trigger shy, whether it’s resale or pre-construction,” said the owner and broker of record of Big City Realty Inc., a boutique brokerage that specializes in condo investment and also provides services such as tenant matching. “But the ones who are in the position of having three or four properties — the seasoned ones — they’ve been through this before, so they’re taking advantage of it.”
Panicked sellers, on the other hand, are getting haircuts, Sraidarian added, although those holding out because they understand the intrinsic value of their products are getting close to market value.
“If you have had your portfolio for 20 years, you can weather these changes,” he said. “The seasoned ones aren’t selling. The ones who have been though 2017 [when the Fair Housing Plan was introduced] or 2008 aren’t selling. They learned their lessons. You’re collecting rent and paying down principal, so, long-term, you always win, but are you positioning yourself to hold long term and weather this fluctuation? But if you own too much property that you risk losing your shirt, definitely have someone take a look at your portfolio and look at moving pieces around.”
The Argument for Holding Long
Brett Starke, head of the Starke Realty Team at RARE Real Estate Inc., says now is not the time for landlords to cash out because rental demand is through the roof, and it will only get stronger. In Toronto, particularly in the downtown core and even Mimico, landlords are demanding as much as six months’ rent upfront in addition to stellar credit ratings.
While it is true that city living has become desirable again now that the COVID-19 pandemic is receding, Starke says the other reason for such a competitive pool of renters is homeownership is financially prohibitive for greater swaths of the population, even those with putatively well-remunerated jobs.
“People with combined incomes of $100,000-150,000 haven’t been able to save the down payment or aren’t sure what’s happening with the market and they’re forced back into the rental pool. In other words, people who would have historically been purchasing are now renting and it’s propped up the rental market significantly,” Starke said. “We’re seeing six to eight offers on every rental property in the downtown core right now and they’re going for $100-150 over the asking price. Landlords are cashing in.”
Added Sraidarian, “As interest rates go up and people get out-priced of the market, or they can no longer afford what they need to, they’re going to keep renting which will add to the rental pool.”
Home sales in the GTA plunged by 41.2% year over year in April, as well as by 27% from a month earlier, but the benchmark price of a home still rose by 15% to $1,254,436 over the previous 12 months.
“Landlords are getting very well qualified tenants with amazing credit scores and incomes who, even five years ago, would have been able to purchase their own property,” Starke said. “If interest rates continue going up, and we’re told that they will, and the rental market continues getting hotter, it will make sense again to purchase cash-flowing downtown Toronto condos, which they haven’t been for the last number of years.”