Roughly half of new condo investors who have a mortgage in the Greater Toronto Area (GTA) are losing money every month, a new report by CIBC Economics and market research firm Urbanation suggests.
The joint analysis, released on Monday, showed 51 per cent of newly completed condos in GTA were cash-flow negative last year, compared to 44 per cent in 2021 and 40 per cent in 2020.
The changing dynamics are a result of rising interest rates pushing home ownership costs higher, outpacing rent prices. The report says 75 per cent of new condo investors last year in the GTA had a mortgage.
If investors aren’t buying, developers aren’t buildingJoint report by CIBC Economics and Urbanation
“While the rental market recovered and rents reached new highs in 2022, that growth was more than offset by rising mortgage costs as interest rates soared, resulting in the average investor experiencing negative cash flow,” the report said.
“This marks a meaningful shift that may potentially signal that a change in investor behaviour is on the horizon.”
On average, new condo investors were losing $223 per month in 2022, whereas in 2020, new condo investors on average were cash-flow positive to the tune of $63.
However, the degree of negative cash flow varies widely.
“The distribution of newly completed condo rentals by cash flow position shows that the highest concentration (14%) of investors was losing $1,000 or more each month, with a one-third share of investors experiencing negative cash flow of $400 or more,” the report said.
“By comparison, a 26% share of investors were able to achieve monthly cash flow of $400 or more.”
Investors prefer new condos
In general, the majority of condo investors (72 per cent) prefer new builds over resale units because of the time it takes to bring a condo tower to market.
“The main advantage of investing in rental units through new condos is the time it takes for development to occur — the average time between presale launch and completion is approximately five years — which has historically been sufficient time for rents to rise to a level that can cover ownership costs,” the report said.
With presale condos, mortgage payments begin only once the building has been completed.
Investors play key role in condo projects
Investors play a crucial role in condo projects since they make up a significant portion of the buyer pool and builders typically won’t move ahead with a project until a certain number of units are sold.
“If investors aren’t buying, developers aren’t building,” the report said.
It should also be noted the condo market does “all the heavy lifting” in providing housing supply to the GTA, according to the report.
“The question is how will this affect the financial position of condo investors, and to what extent will this change behaviour of investors, who are arguably the single most important market segment for housing supply?” the report said.
“Bigger picture issue is that investors may no longer be willing to buy presales to the same extent as in the past. This reduces new condo demand, new construction, deliveries and, ultimately, rental supply. Therefore, we need a solution to encourage more purposebuilt rental development.”
Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.
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