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A recent study conducted by the Canadian Imperial Bank of Commerce and real estate research firm Urbanation revealed that only 48% of condo investors who had purchased pre-construction units with the intention of renting them out had a positive cash flow in 2022. It was observed that for the first time, over 50% of investors in newly built condominiums in the Greater Toronto Area experienced financial losses on their rental properties. Experts believe this trend is likely to continue.
The rent earned from newly constructed units was insufficient to cover mortgage expenses, condominium fees, and property taxes for most investors. CIBC’s Benjamin Tal and Urbanation’s Shaun Hildebrand, in their report published, describe this as a significant change that could potentially indicate an upcoming shift in investor conduct. They anticipate that this transition towards negative cash flow will intensify in the coming years due to the completion of increasingly expensive new condos that were pre-sold to investors in recent years.
They explain that while a decrease in interest rates and an increase in rents may alleviate the impact on investors in the future, it will not be sufficient to prevent their financial situations from deteriorating. However, they emphasize that the outlook for prices and the credit environment plays a significant role.
In the event that investors can secure financing and property prices are rising, they may be inclined to retain their investments in the rental market, even if they experience negative cash flow. The authors believe that investors have refrained from selling their properties due to limited housing supply, which is not expected to improve significantly.
According to the research, developers in the Greater Toronto Area have the capability to deliver only around 20,000 units annually. This represents minimal growth for a condominium inventory in the GTA, which is nearing half a million units. Tal and Hildebrand state that any investor who decides to sell will find a tight resale market awaiting them.
However, if investors become unwilling to invest in pre-construction properties, the demand for new condos will decline, leading to a reduction in new construction, deliveries, and ultimately a decrease in rental supply
Tal and Hildebrand’s findings follow a study by Rentals.ca, which unveiled that the average rental rates advertised in April had increased by 20% compared to the lows experienced during the pandemic in April 2021.
Across Canada, the average rental prices rose by 9.6% in comparison to April 2022. In Vancouver, the average rent for a one-bedroom home reached as high as $2,787, while in Regina, it was as low as $1,091. The national average stood at $1,811.
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