The majority of pre-construction condo investors in the Greater Toronto Area (GTA) are experiencing financial losses on their properties, sounding alarms for the rental market as a whole.
As a result of high mortgage rates and property taxes, 52% of investors who bought pre-construction units in 2022 are struggling to make a profit, according to the new report by market research company Urbanation and investment bank CIBC Capital Markets. One third of new condo investors reported a monthly loss of $400 or more in Q1 2023, and 14% reported losing $1,000 per month.
Negative cash flow investment is nothing new in Canada’s rental markets. Investors are often willing to bank on property appreciation making up for the money they lose on the mortgage, especially on pre-construction purchases. Investors may also expect rents to rise over the term of the mortgage, allowing properties to become cashflow-positive over time.
As Avis Devine, an associate professor of real estate finance, points out, that strategy is still working out for many investors – but if mortgage costs continue to grow ahead of rents, the whole market could suffer for it.
The concern is not that condos will completely lose their value as an investment. “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. This raises the risk of reduced new condo demand, new construction activity, deliveries and, ultimately, rental supply,” says the report.
However, condo investors may not exit the rental market completely. 44% of investment properties in the GTA are single-family homes. Condo investors can pivot to the SFR market instead, or they could take their investment dollars into the suburbs, where they could also achieve reliable and higher rental returns from single-family homes.
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