Toronto Star-Landlords hit by double whammy
September 28, 2024
Landlords hit by double whammy
New reports predict the boom may be ending, but there’s a lot of life left in the market yet
Tracy Hanes
Special to the Star
Toronto’s red-hot condominium market continues to smoke past last year’s brisk sales, with an estimated 8,000 units already sold and little sign of cooling.
But with 2002 sales expected to top 13,000 — a significant increase over last year’s 10,687 and more than double the 6,213 units sold in 1997 — industry watchers are asking if the market is in danger of burning out.
Two current reports raise concerns that the boom may be almost over and that could spell bad news for those who buy condos as investment properties. But another report backs local industry experts who say there’s no need for panic: While sales are likely at their peak, the condo market will stabilize and remain strong for several more years.
Last week, a Royal Bank of Canada report warned that condos are a risky bet for investors because of the large number of units coming onto the Toronto market. Assistant chief economist Derek Holt, the report’s author, said the large remaining stock of unsold condominiums on the market will likely slow sales this year and next, as will an expected rise in interest rates. The report says proposed condo projects in Toronto have the potential to add 120,000 units over the next few years, with 70,000 concentrated in the central area.
As well, the vacancy rate for rentals in the city has doubled since last fall, from 0.9 per cent in October to the current 2 per cent, according to a report of the Fair Rental Policy Organization. The increasing vacancies, coupled with decreasing rents, could give pause to the large number of investors who buy condos as rental properties, according to the organization’s president, Vince Brescia.
Bryan Levman, president of Guidelines Advertising Ltd., a marketing company specializing in the housing industry, says the condo market is experiencing a normal hiatus because of recent price increases and the usual seasonal slowdown. As well, developers and builders are testing new pricing levels of $300 per square foot and more, the highest they’ve been in 14 years. In the fall of 1988, during the last boom, Levman says some condos went as high as $500 per square foot, but “I’m not suggesting we’re going to get up to that level.”
He says that while sales likely have hit a peak and some stabilization will occur, “it’s my own feeling that we have a long way to go before a crash.”
Condo designer and developer Harry Stinson says one has to take bank reports with a grain of salt, because they’ve historically missed the cycles and have a conflict of interest with their own investment products.
“But on one hand, I semi-agree. The hysteria about the endless boom is misleading. It’s not an endless boom — there will be stabilization — but is a crash imminent? I don’t think so. The type of housing being provided is exactly what’s in demand.”
Stinson says this boom has not been characterized by the wild price increases and bidding wars of the late ’80s. Consumers are more educated and taking time to research their choices before making a purchase, he adds.
“There are areas like Leaside, the Beaches and Bloor West Village where, when a good house comes up, there will always be competition for it,” says Stinson.
“But at most sites, sales are stable, not wild and crazy. At a point, we’re going to see stabilization of the market. And unusual products in specific locations will carry on.”
A new Merrill Lynch report says while the market is experiencing boom-like conditions, consumers shouldn’t fear an ’80s-style bust.
There are significant differences between the hot market now and that of the late 1980s, including a lack of widespread overbuilding, interest rates well below double digits, fewer over-leveraged buyers and a lessening of overt speculative behaviour.
The report points out that current prices are not over-inflated as they were 14 years ago, but have crept back to 1990 levels. While the report does say there is evidence of overbuilding in some segments of the condo market, it would take huge increases in the low interest rates to cause concern.
Plus, the report says housing cycles typically last five years and the current one is barely past the halfway mark.
Oversupply can also mean problems for the real estate market. An early sign of a potential oversupply can be found when the listings-to-sales ratio goes out of balance. Once unsold inventory jumps to the same figure as the total number of homes sold in the preceding six months, it could spell trouble.
Right now for the entire Toronto housing market, that number is equal to just over two months’ supply of sales, a comfortable ratio. But what does all this mean to the investors who buy a substantial portion of Toronto’s new condos?
Levman says he estimates 50 to 75 per cent of centrally located high-rise condo projects are bought by investors, many of them Asian, Indian and Iranian.
Ronnie Mandowsky, a principle in Pelican Woodcliff Inc., which provides project cost consulting and monitoring, says the investor condominium market is assumed to be about 30 per cent in Toronto, with some projects much higher.
Most want to invest in projects along the subway, close to downtown and at key intersections, while there is little investor interest in condos outside Metro boundaries.
Gerry diLeo, a partner in the Rental Lifestyle Group, which tracks what’s happening in the rental market and manages condo suites and residential properties for independent owners and investors, says rents are going down and there’s more competition for tenants.
“We’re detecting panic in the voices of people new to investing in real estate who expect to have immediate results once they put their (rental) property on the market,” he says.
“We’re in a very, very competitive situation and many landlords haven’t seen vacancies like this in years.”
He says a “double whammy” has hit landlords with interest rates dropping so much that many tenants are buying, coupled with a lot of new rentals suddenly coming on stream at once.
He estimates condo rental vacancy rates could be in the double digits by the end of the year, but predicts the situation will improve in a year or two as the market absorbs the newer units.
“It is a tough market and it’s going to get tougher (for investor buyers), but I see it as a great area to invest, especially in core areas where demand is great and there is so much vibrancy being created,” says diLeo.
“For those feeling the blues, the best thing (to do) is to know your existing building; know what is around you and know what comparable suites are leasing for. The best thing an owner can be is educated on what the real market is.”
He says once absorption of the current units has occurred in another year to two years, the rental market will be buoyant again.
Housing market consultant Will Dunning says because rents are softening, some investors will be disappointed, but there are some significant capital gains to be made. For instance, the first phase of CityPlace, which sold for $180 to $185 per square foot, is now valued at $250 per square foot.
“The investor buyer has to get used to a whole new rental game,” says Levman.
“Toronto will always sustain a rental market. Investors can continue to buy. Toronto’s real estate is ultimately based on demographics: We’ve had a million new people move to the Greater Toronto Area over the last decade and there’s still a huge shortfall of housing.”
“There are so many factors in the decision making of the investor, it’s hard to predict beyond a year or two,” Mandowsky adds.
“But with interest rates low, the unemployment rate low and the volatility of the stock markets, the return on a (condo) investment is still reasonable.”
He says many investors are not looking at returns of greater than 7 per cent, but that’s reasonable and real estate historically appreciates over time.
Even the current vacancy rate increase to 2 per cent is no cause for alarm, he says, adding the investor who will be hurt the most by the situation is the one who doesn’t have a large stock of properties.
Stinson says many people buying for investment purposes are unsophisticated investors, “who thought they could assemble a portfolio of 25 condos with $500 down on each.
“Far too many people were jumping into it, because the stock market wasn’t a great bet and they were looking for alternative investments.”
Stinson says while real estate still remains a solid investment, anyone looking for dramatic margins and quick flips as in the late ’80s will be disappointed.
“It’s still a valid investment, but not for the short term.”