New Rent Control Rules Could Put Condo Investors in a Negative-Cash-Flow Corner
September 28, 2024
Garry Marr |
April 24, 2017 |
Financial Post
Last Updated: Apr 25 3:23 PM ET
A report out Monday suggests condominium investors in Ontario may turn away from long-term investments in the high-rise sector because of new rent control rules that could force them into a negative cash flow situation.
Urbanation Inc., a Toronto condo research firm, says as it stands now, with a 20 per cent down payment on units completed in 2017, most investors end up with carrying costs that just equal market rents. That formula is based on purchase prices secured a few years ago, prior to construction.
“They are getting their mortgage and principal paid down and having capital appreciation,” said Shaun Hildebrand, senior-vice-president of Urbanation, in an interview. “They are essentially yielding zero per cent, on a net basis.”
Those type of returns were in place even before the province announced Ontario’s Fair Housing Plan on April, 20, which will restrict annual rental increases for buildings constructed after 1991 to the rate of inflation and cap it at 2.5 per cent annually.
“While investors who bought their units several years ago have the cushion of stronger cash flow due to their lower purchase prices and mortgage carrying costs, it’s those who have more recently invested that are at greater risk, and may prematurely decide to sell,” the reports says, describing those people as “mom and pop” type buyers. “This could lead to an outright reduction in the stock of rentals in the Greater Toronto Area and could eventually negatively impact new condo sales volumes, which would have wider reaching consequences for the overall housing market.”
Urbanation says 52 per cent of all new condos in development are sold to domestic investors and assumes all those units will eventually become rentals in the market.
“Because of how high prices have risen over the past year for condos, even incremental increases in costs could easily exceed guideline controlled rent increases. As more investors are put into a negative cash flow scenario, it is reasonable to assume that more will opt to sell,” the report states.
Hildebrand says condo construction has happened in a low-interest environment. When interest costs go up, condo fees and property taxes rise, and that can alter the equation for investors.
“The question is will their behaviour change,” he says. “We are raising the issue that this could have some wider concerns than was initially thought about. If condo investors start selling, that will reduce the supply of rentals in the marketplace. We have been relying heavily on these investors for the rental market.”
Urbanation says in 2016 when construction delays led to a 10 per cent decline in completions, the impact was almost immediate. By the end of the year, prices were up 16 per cent and rents 12 per cent annually.
“The bigger issue is that rent control will eventually cause condo investors to begin to shy away from making new purchases, effectively slowing new development (condos represent 60 per cent of all new home sales in the GTA) and choking off the market’s key source of new rental supply as new purpose-built development levels off or declines,” said the group, in its report.
Financial Post