Tara Perkins – The Globe and Mail

Urbanation Inc., which researches Toronto’s condo market, released its latest rental findings last week. The number of condos rented over the Multiple Listing Service in the Toronto area hit an all-time high of 6,708 during the second quarter, up 26% from a year earlier. But the number of new listings rose by an even greater degree, and so – when measured per square foot – annual rents ticked up by just 0.7% from a year earlier, to an average of $2.37 per square foot.

It marked the second quarter in a row that rents grew by less than 1% on a year-over-year basis, after an average growth rate of 4% during 2013. And the average monthly rent, which can be impacted by the size of condos that renters are moving into, actually fell by 3.2% from a year earlier, to $1,787, as the average size of units being rented shrunk again, by 3.8%, to 755 square feet.

Comment: Which is good, rents were getting out of hand! I just helped a client into a little 1+1 in Yorkville for $1,900 a month!

I asked Urbanation senior vice-president Shaun Hildebrand for more details about what he thinks is taking place in the condo rental market in Canada’s most populous city. It’s a pocket of the country’s real estate market that economists are watching closely as they try to determine whether too many condos are being built. Mr. Hildebrand, who used to be a senior market analyst at Canada Mortgage and Housing Corp., talks here about deficiencies in the data, and why he doesn’t think condo rents in Toronto will drop materially.

Q. Both rentals and rental listings are up by more than 25% from a year ago. Do you think that’s in line with demographics, or are we seeing a bit of a shift away from ownership toward renting? Where is the rental demand coming from?

A. Growth rates for condo rentals and listings are far stronger than overall growth in condos and population growth. But it’s important to recognize that we can only monitor condo rentals through what occurs on the MLS system, and this is a mechanism that has grown itself in popularity in recent years. So some of the growth being reported is due to a better capture of the data.

Comment: More investors are buying condos and thus using agents to rent them out. I would suggest that MLS rentals are a lot more likely to have non-resident owners. Landlords who live nearby are more likely to rent it themselves on Kijiji.

But still, the upward trend in rental demand is clearly visible, otherwise all the newly completed units listed for rent wouldn’t be absorbed. To some extent it reflects a shift away from owning, as resale volumes have remained below previous highs following the latest round of mortgage tightening in mid-2012.

Comment: But condo sales are still rising. Resale and new. In fact, they are starting to set records again. But that is likely due to a lot of investor action. And now you have couples buying 2-bed condos to have a child in, they are becoming family homes.

I think a lot of the demand is demographic driven as a wave of baby boomer children are finishing school and moving out on their own. This has been helped by improving job opportunities, which were scarce for younger adults for several years following the recession. The census data also reveals a general movement of people towards higher density locations, which could reflect a lot of factors, including commuting times and costs. We also can’t forget the lack of purpose-built rental construction (apartments) driving renters to the condo market.

Comment: Which thus creates demand for the condos to rent.

Q. Rents have grown by less than 1% for two quarters in a row. Do you think this is the start of a trend?

A. I do. Even though demand is strong, it isn’t quite able to keep up with supply growth. With completions expected to remain high through to 2016, I would say supply continues to have more upside than demand. That said, I don’t think we’ll see conditions so unbalanced that rents noticeably fall. Some of the units in the current stock will be sold to first-time buyers – not all investors have long-term intentions. A new building typically has a much higher share of units used as rental at occupancy than it does a few years down the road.

Comment: Well said.

Q. If rental growth continues to be lower than it has been historically, would you expect to see some investor-owners sell their condos?

A. I think we’ll begin to see more investors sell than in recent years, but still not a lot. For units that came to completion so far in 2014, there was no cash flow based on a 25% down payment [that’s on average: some have a few hundred dollars each month, others are negative] – but cash flow has been thin for some time now. I can’t imagine a huge shift in investor behaviour so long as interest rates remain low.

Comment: They are not necessarily into for cash every month. It is more of a hold and prosper scenario. Hold onto the condo(s) for 10 or 15 or 20 years and then have them paid for. Then they have completely positive cash flow each month, plus the paid-off asset. Rents increasing only 1% is not going to cause many investors sleepless nights.

With prices growing slowly for some time, I don’t think investors have distorted expectations. The resale market is now in a better position to absorb more listings than it has been over the past few years, so any repercussions for price would be limited. The problem with trying to predict how many will sell versus hold is that we don’t have any information on investors that purchased units currently under construction. CMHC recently released a survey of investors that showed that almost two-thirds have down payments of more than 20% and almost 60% planned to hold for more than five years – but the sample largely missed those that bought pre-construction units in recent years that have yet to complete.

Comment: It does not matter who owns what. No matter how many investors own condos, you cannot get into their heads. You have no idea what any of them are thinking, or why. And we can assume that the CMHC survey would have similar results now, why would the data change significantly? Still new condo investor buyers.

Q. We hear a lot about the Toronto condo market these days. In your opinion, are there any mistaken impressions or myths you think need to be corrected?

A. A lot of talk surrounds the foreign component. However, I do not have anything other than informal survey results to add to the discussion. We polled the [condo] industry late last year and asked what percentage of new condo buyers they believe are foreign (results were anonymous), and the highest number of votes was for between 5% and 9%, a close second was between 10% and 19%. Few believed it was 20% or more.

Comment: But who cares? Why does it matter if a condo buyer is from Toronto or Hong Kong? Or Israel or Russia? How does that impact anything? The question I am curious about is how many are owned by investors. Regardless of where they are from, how many are not owner-occupied.

I also think there is a fear that all of the units currently under construction will be finished at once, flooding the market. We monitor construction starts, construction progress and completion timelines very closely. Completions can be expected to average about 20,000 a year over the next three years, which are record levels but aren’t high enough to alone create an over-supply of units. We’ve completed over 19,000 over the past 12 months, and other than slower rent growth, the market has been unaffected so far.

Comment: Come on, this guy should know better! He knows that most units are sold before the crane goes up. He also knows that 80-90% of condos are sold by the time the building is complete. Of those 19,000 completions, 15,770-17,100 would already be sold. Another 1,235-2,565 wll be sold by registration. Really, in a worst case scenario, you might see 269 condos for sale each month for the past 12 months. More likely it would be 665 over the course of the 12 months. That is how many would “hit the market”. It is so stupid and dangerous and outright deceitful to imply that ALL completed condos in a given period would suddenly be put up for sale on MLS. That is just not how the new condo market works.

—————————————————————————————————–
Contact Laurin Jeffrey for more information – 416-388-1960

Laurin Jeffrey is a Toronto real estate agent with Century 21 Regal Realty.
He did not write these articles, he just reproduces them here for people who
are interested in Toronto real estate. He does not work for any builders.
—————————————————————————————————–