With Toronto currently on track to outpace Chicago with the number of skyscrapers in the city, it's no surprise that people are flocking to the region to invest in the rapidly growing condo market.
However, real estate experts are warning that Toronto's investment scene will experience a "shift" in less than five years according to a new report from the Toronto Star.
According to the report, the shift will come as the growing cost of condos continues to increase at the same time local tenants are showing signs of "hitting a wall" when it comes to being able to actually pay for an apartment.
This causes "significant cash flow implications" for property investors because the rent won't be able to cover the monthly carrying costs of those units, Shaun Hildebrand, president of market research firm Urbanation told The Star.
Hildebrand said rents that rose about 10% a year from 2016 to 2018 will likely increase at a more moderate 5% annually for the foreseeable future, showing that condo investors' returns might not be exactly what they had in mind.
In 2020 alone, Hildebrand says there will be 30,000 condos completed with as many as 10,000 new condos ready for occupancy in the first quarter. Plus, on top of this, there will be 3,579 purpose-built rental completions in 2020, which is more than any one year in the past two decades.
Furthermore, by 2023-2024, when the next round of development becomes ready for occupancy, condo developers will need to have around $4000 a month to carry those units on a 25% down payment and a 3.5% interest rate, said Hildrebrand.
Moving forward, Hildebrand said that while he doesn't expect tenants will pay 60% more than the current average of around $2,500 a month, he does believe there's a "tipping point" and research is showing that we may be close to hitting it as rents barely rose between the second and third quarter of last year.
Hildebrand did say there's been a "big shift" in buyer demands and now micro-units and small studios are the only types of units in the current market that are priced under $2000 a month. Additionally, some buyers are starting to migrate from downtown to 905 neighbourhoods where it's cheaper to buy, and some renters are even turning to older buildings.
In November, the average resale transaction of a condo apartment was $617,658, according to the Toronto Real Estate Board, while new construction or pre-construction units were selling for $866,827 on average the same month.
However, Hildebrand said he doesn't think investors will change their behaviours until they see "red ink" at the end of the month.
“Those investing in new condos today are incredibly optimistic about the future. If you’re buying after a 50 per cent jump in prices over a three-year period you have to be pretty optimistic about the outlook for the market. It’s going to take some change in the economics first before (investor) behaviour starts to shift,” Hildebrand told The Star.
“The condo market is so large now that some investors selling from completions isn’t going to be a major event for prices. It’s going to change the trajectory to some degree but it’s not going to cause a massive flooding of units in the market,” Hildebrand said.