While condo investors can get a bad rap in a pricey and supply-strapped market, the reality is that they’re not exactly sitting back and profiting from Greater Toronto Area's real estate. In fact, these days, most are losing money each month. A new report from Shaun Hildebrand of Urbanation and Benjamin Tal of CIBC Economics highlights this reality, driving home the fact that the GTA is “facing the most significant test since the 1991 recession,” and that condo investors are feeling it hard.
RELATED: More Than 75 Condo Projects On Hold In GTHA Amid “Dislocated” Market
As the report highlights, price appreciation, rental cash flow, and market confidence are the main ingredients of condo investment. Currently, however, the GTA condo market is in “recessionary territory, with conditions deteriorating to levels not seen in decades.” As such, it says, the majority of investors are cash flow negative.
Why It Matters
In a city of rampant homelessness and relentless poverty, it may seem difficult for some to sympathize with investors. However, the reality remains that the embattled condo market has widespread ramifications. Most notably, it means fewer condo launches. According to Urbanation, condo investors make up 70% of the condo pre-sale market. Furthermore, without at least 70% in presales, projects can’t begin construction, so a lack of supply only hurts housing affordability for everyone – from renters to (would-be) homebuyers.
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"Economic Lockdown"
According to Urbanation, the GTA condo market is in a state of “economic lockdown,” as current conditions have rendered the condo market to a standstill. The math simply doesn’t make sense, according to the report. “Prices are too high for investors to buy relative to resale prices, rents, and interest rates, while developers can’t lower prices due to high development costs,” it reads. Adding injury to insult, developer fees have increased substantially as of late in the GTA. Currently, new condo sales are at their lowest level since the late 1990s, marking a very different time on the home construction front in the region. According to the report, the percentage of GTA pre-construction condos that are pre-sold is at a 20-year low.
According to the report, new condo prices have dipped by 5% from their high, while resale prices have corrected by 12% and will likely drop further thanks to a notable uptick in listings. “Quite simply, new condo investment doesn’t work at the current market average price of close to $1400 per square foot,” the report says. Notably, the current resale gap between new and resale condos is at a near record high of 60%.
The report highlights how the new condo rental supply in the GTA has decreased to 25, following a recent high of 34% in 2023, and that's a change that coincides with sky-high mortgage rates. At the same time, there’s also been a decline in investment activity in the resale market. Here, the share of units purchased and then rented out dropped to a three-year low of 10% before dropping to just 2% in the first half of the year. According to the report, the inflow of condo rental units is concentrated in new projects – accounting for more than three-quarters of condo rental units added to the market last year and almost all condo rental units so far in 2024.
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The Numbers
It appears that the “golden days” for condo investors are over for now. On average, GTA condo investors haven’t experienced a positive cash flow from their income property since 2021-2022.
As the report highlights, of the pool of newly completed rentals in 2023, 58% had a mortgage and were cash flow negative. This means that their rental income flow didn’t cover things like mortgage costs, condo fees, and property taxes. Only 18% had a mortgage and were cash flow positive. When zeroing in on leveraged investors, a shocking 77% were cash flow negative in 2023, marking a huge jump from 2022. Then, 52% of Toronto condos were cash flow negative overall, marking the first time that the majority of investors are cash flow negative. As for 2024, after the first half of the year, a dismal 81% of investors are cash flow negative.
On average, condo investors that closed their newly completed units in 2023 experienced an average negative cash flow of $597 per month – over twice as much as this figure in 2022, when this amount was -$223. Rising rents are still no match for increasing ownership costs. Rents of newly completed condos rose 8% to a record high average of $2700, while average monthly ownership costs rose 21% to reach nearly $3250. Since 2020, ownership costs have increased by over 60%, more than doubling the increase in rents over the same period.
The stats reveal that 30% of investors in new condos completed in 2023 were cash flow negative by $1000 or more in 2023, and that figure is more than double the 14% recorded in 2022.
When it comes to rental profit, size matters. According to the report, the bigger the unit, the larger the negative cash flow position. It reveals that, of condos completed in 2023, studio units were effectively cash flow neutral. Meanwhile, one-bedroom units had a negative cash flow of $523, two-bedroom units had a negative cash flow of $734, and three-bedroom units saw a negative cash flow of $866. Understanding this, GTA condo investors are opting for smaller units, with only 3% of condo rental units completed in 2023 three-bedroom. But let's be clear: by doing so, they aren't speaking to demand.
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Moving Forward
Looking forward, once construction costs begin to soften and interest rates drop (the authors predict that the overnight lending rate will hit 2.75% by the end of 2025), this will help developers eventually bring prices closer to the market demand. The report also highlights the role of population growth on the housing market, something that the authors say will be notably slower in 2025 and 2026 due to measures to cap on international students and temporary residents. This, combined with upcoming condo completions, will both ease some of the pressure on the rental market and create “further headwinds” for investment demand.
As the report highlights, for condo investment to regain its appeal, resale and rents will have to rise faster and interest rates will have to drop more significantly. “At least for now, we doubt these forces will enable developers to lower prices to a level that will attract developers back into the market,” write the authors. “Still elevated interest rates and ever-increasing municipal development charges mean new condo prices will remain sticky.” For now, the GTA is currently experiencing a record-high number of condos on the market. So, the good news for those looking, is that you have options.
