Over 50% of GTA Condo Investors Losing Money on Rentals

© Reuters.

By Ketki Saxena

Investing.com -- The Greater Toronto Area's (GTA) new construction condominium market is reaching a critical point due to rising interest rates, as revealed by a recent collaborative study from Urbanation and CIBC (TSX:CM) Capital Markets. The report highlights that over half of investors who purchased pre-construction condos for rental purposes experienced financial losses last year.

This situation could potentially threaten the demand for new units and worsen the region's housing crisis. According to the study, three-quarters of condo investors have mortgages on their properties.

In 2020, these investors enjoyed an average monthly profit of $63; however, this turned into an average loss of $223 in just one year.

The circumstances have continued to deteriorate this year with an estimated average loss of $400 per month during Q1. Furthermore, 14% of investors are losing over $1000 each month while a third face losses amounting to at least $400.

In their 2023 GTA Condo Investment Report, Shaun Hildebrand (Urbanation President) and Benjamin Tal (Deputy Chief Economist at CIBC World Markets) warn that conditions may worsen further as peak-priced units sold in late 2021 and early 2022 will be completed amid higher interest rate environments than when they were initially purchased.

“The glory days of easy returns and cash flow are likely over,” said Hildebrand. “On the one hand less investor activity means less upward price pressures to a degree. But I think more importantly, it’s going to reduce supply, which is very problematic given the large deficit of rental housing that we’re staring at.”

The report emphasizes how almost four out-of-ten condos within the GTA are owned by investors who rent them out – including nearly six out of ten units constructed last year.

The reliance on individual investors to drive rental supply has created a significant gap in availability, especially when considering the increasing need for rental housing. While condo investors are often criticized, they play an essential role in providing much-needed rental supply since traditional development remains insufficient.

"The capital position of those units is just going to get worse,” said Hildebrand. “If investors aren’t buying today, obviously construction starts are going to begin to fall soon and those deliveries will begin to fade dramatically in a few years time. What’s happening today with the investment dynamics for new construction units is going to ultimately affect housing supply in the years to come.”

The authors however, identify several factors that could potentially soften the impact of reduced condo demand and discourage new housing development. These include potential decreases in interest rates, larger down payments by investors, and increased immigration driving up rent prices due to limited supply.

A recent Statistics Canada article revealed that most real estate investors reside in Ontario and have an average income of $110,000. Immigrants comprise a higher share of these investors relative to their population numbers.

Hildebrand also notes a shift among investors towards smaller condos or suburban areas with lower prices and better cash flow prospects. One-bedroom condos made up 55% of investor-owned properties this year; however, one-bedroom-plus-den properties were more commonly owned but experienced monthly losses for most owners.

Although studio condos represented only 4% investor units, 57% of them were cash flow positive.