From boom to gloom 

Condo investors in Canada

The majority of investors and immigrants who took on mortgages in 2021 and 2022 to pay for new Toronto condos have been losing money every month, due to the sharp rise in monthly mortgage payments.

For the first time, more than half of investors who closed on a new condo unit with a mortgage in the Greater Toronto Area last year were unable to cover their costs when they started renting it out, according to a CIBC report.  That’s because the monthly expenses, including mortgage payments, condo fees, and taxes, outstripped rents for most, forcing those investors to pay the balance out-of-pocket each month.

It’s a shift that could have far-ranging implications in Canada’s largest city, which for years has relied on condo units to serve the booming demand for rental housing. With demand only expected to grow — Canada’s immigration rate is the fastest in the developed world — many mom-and-pop investors were willing to put down deposits on pre-construction units years ago. The thinking was, rents would inevitably outstrip costs by the time they had to pay the bulk of the price. But for those who closed on purchases last year, the economics have changed.

Even though rents in Canada rose by a record amount last year, interest rates rose even faster as the Bank of Canada increased its benchmark to 4.5% from 0.25% to combat surging inflation. That left 52% of leveraged investors closing on new Toronto rental condos stuck with negative monthly cash flow.

Most investors are facing monthly losses from $220 to over $1000. This dynamic could get worse in years to come as investors who bought pre-sale units before the market’s peak last year are forced to close at today’s higher interest rates. Vancouver, Montreal and Toronto GTA are worst hit by this condo market bubble.

How long investors hold on will depend on the outlook for interest rates, but also condo prices.  As long as the asset’s value is appreciating, investors may be willing to sustain monthly losses, at least for a while. But longer term, such strain may dampen investor enthusiasm to buy into future condo projects. That could potentially limit new builds and put further pressure on Toronto’s rental market unless construction of traditional apartment buildings picks up the slack.

“If investors aren’t buying, developers won’t be building,” Hildebrand and Tal wrote. “The bigger picture issue is that investors may no longer be able or willing to buy condo presales to the same extent as in the past.”



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