The GTA housing market is showing early signs of stabilization, with a decrease in the average number of days on the market and more bidding wars for opportunities less than $1 million. Buyers are focusing on less expensive homes to counter the impact of higher interest rates. The share of homes selling for over $1 million has dropped by 30% – 40% in some areas, significantly lower than its peak from the previous year. The average mortgage size in the GTA has also decreased by 17% in the past year. While sales in the resale market are approaching pre-pandemic levels, new listings continue to decline to levels not seen since the 1991 recession, resulting in a lack of supply. However, other demographic factors such as interprovincial and intra-provincial migration further impacting the market, with Toronto’s share of resale activity in Ontario remaining below 2019 levels.

The new construction sector is facing challenges, with new housing completions hitting a 20-year record low in 2022. The drop in pre-sales from the second half of 2022 will have an impact on the completion dates for new additional units. The strong population growth in Toronto, including a significant influx of newcomers, is expected to worsen the supply-demand imbalance.

Investors in the Condo Market

The condo market plays a vital role in the GTA’s housing supply, representing the highest share of residential construction in the country. Investor demand is crucial for the supply outlook, as developers rely on investors to drive construction.

The question arises whether this growth in investor demand can continue in the future. For new condo investing to remain economically viable, new condo prices should generally align with resale prices and rents. However, there has been a significant deviation in recent years, with new condo prices being sold significantly higher. These higher-priced new condo units will reach completion at a later date in a higher interest rate environment, leading to larger financial obligations for investors.

The Economics of Condo Investment

An analysis conducted using data from Urbanation and Teranet sheds light on the financial situation of condo rental investors in the GTA. The majority (72%) of investors purchase new condos rather than resale units. Historically, investing in new condos has been advantageous due to the time it takes for development, allowing for resale prices to catch up and rents to cover ownership costs. However, the analysis reveals that for the first time in 2022, less than half (48%) of leveraged condo investors had positive cash flow. Rising mortgage costs outweighed rental income, resulting in negative cash flow. The shift in cash flow has been significant, moving from a positive average of $63 per month in 2020 to a negative average of $223 in 2022. The negative cash flow position worsened in Q1-2023. Concerns arise that this change in cash flow could lead investors to shorten their holding time and consider other investments. Most investors (55%) obtained mortgages from major banks, of which the majority (53%) had positive cash flow. Negative cash flow was more prevalent among investors who financed their units through other types of lenders. The distribution of cash flow positions among newly completed condo rentals shows that a significant proportion of investors experience substantial monthly losses, with some losing $1,000 or more each month. One-bedroom condos were the most common investment choice, with a majority of one-plus-den units experiencing negative cash flow. Two-bedroom units generally had negative cash flow, while three-bedroom units were split between positive and negative cash flow. Studios had the highest share of units with positive cash flow. In comparison, it has traditionally been challenging for investors to achieve positive cash flow with resale condos due to the lack of an extended closing period. In 2022, only 18% of condos bought in the resale market and subsequently rented had positive cash flow, and the cash flow position of resale units worsened considerably.

Investing in condo rentals has been a popular choice in the Greater Toronto Area (GTA) due to its potential for strong returns. However, recent data reveals some noteworthy trends that are shaping the financial landscape for condo investors. In this blog, we’ll delve into key findings that shed light on the cash flow positions of investors, the impact of mortgages, and the challenges faced in the resale market. Understanding these realities will help investors make informed decisions in a rapidly evolving market. Here are some key points:

• Cash Flow Challenges: In 2022, less than half (48%) of leveraged condo investors experienced positive cash flow. This means that for the majority, the rent generated by newly completed units was insufficient to cover mortgage costs, condo fees, and property taxes. The shift in cash flow from a positive monthly position of $63 in 2020 to a negative average position of $223 in 2022 highlights the growing financial strain on investors.
• Mortgage Influence: Most investors (55%) obtained mortgages from major banks, and a majority of them (53%) had positive cash flow. On the other hand, private individual and company lenders, representing 5% of mortgages, had the highest share (75%) of investors with negative cash flow. These findings emphasize the impact of mortgage choices on cash flow stability for condo investors.
• Unit Types and Cash Flow: While one-bedroom units without dens were more likely to have positive cash flow (56%), a majority of one-plus-dens units (57%) experienced negative cash flow. Studios emerged as the unit type with the highest share (57%) of units that had positive cash flow. Understanding the dynamics of different unit types is crucial for investors to optimize their cash flow potential.
• Resale Market Challenges: The resale market presents challenges for investors seeking positive cash flow. In 2022, only 18% of condos purchased in the resale market and subsequently rented yielded positive cash flow. Furthermore, the cash flow position of resale units worsened considerably, averaging a negative monthly amount of $537. This represents a 60% larger deficit compared to resale units bought and leased in 2021.

In conclusion, condo rental investing in the GTA is facing cash flow challenges, as a majority of investors experience negative cash flow. The choice of mortgage lender, unit type, and market segment significantly impact the financial outcomes for investors. These findings highlight the importance of thoroughly evaluating investment opportunities and carefully assessing the potential cash flow of condo rentals. As the market evolves, investors should stay informed and adapt their strategies accordingly to maximize returns and mitigate financial risks.

To learn more about the market, please contact one of our professional consultants at 1 800 980 6668 or explore www.creiland.com for more information.