Is now a good time to invest in condo rentals?

Is this the right time to invest in condo rentals in the GTA? Here’s what you need to know:

The rental market in the Toronto Census Metropolitan Area (CMA) remains very strong. According to Canada Mortgage and Housing Corp. (CMHC) data, the apartment vacancy rate fell to 1.3 per cent in October 2016, the lowest annual reading since 2001. The average rental rate increased by 2.6 per cent in 2016, compared to the average rise of three per cent over the past five years. However, inventory in the CMA has increased by just 1,455 units since 2012 (307,773 to 309,228).

With the strength of the rental market, why aren’t there more rental apartments being built? The main reason is that condo rentals have essentially replaced purpose-built rental apartments. CMHC data shows that about 64,000 condo rentals were being leased in the Toronto CMA in 2012, a figure that has nearly doubled since (116,685 in October 2016). Private landlords continue to purchase pre-construction condo units to rent out based on favourable rental market data.

The vacancy rate for condo rentals in the Toronto CMA of one per cent in 2016 was the lowest since 2009 (per CMHC), and rental rates jumped 8.1 per cent last year, boosted by more renters chasing the same number of new units. Higher resale house price growth has forced more buyers into rental, this has been acerbated by new mortgage insurance rules that have made it more difficult for first-time buyers to qualify for a mortgage. The share of condominium apartments that are rented out by their owners has increased from 23 per cent in 2012 to 33 per cent in 2016.

Urbanation, a condominium market research firm, tracks condo rentals leased through the Toronto Real Estate Board (TREB). In the GTA, just over 10,000 condo units were being leased through TREB’s Multiple Listing Service on an annual basis in 2011. Over the past 12 months (Q2-2016 to Q1-2017), 26,650 condominium apartment units leased, as the investor market has increased dramatically. Despite this additional supply, rental rates have continued to rise, with the average unit in the GTA rising from $2.24 per sq. ft. at the start of 2012 to $2.75 per sq. ft. in the first quarter of 2017. Rents are up 8.3 per cent annually.

As the real estate market has heated up, all levels of government are being pressured to “cool” the housing market in the GTA. Ontario’s recently announced 16-point Fair Housing Plan could result in a decline in investor-held units. A further decrease in the supply will most likely result in even higher growth in monthly rental rates.

However, you can’t bank on eight per cent appreciation every year, so make sure you hire a realtor to run the rental numbers for you before you make that pre-construction condo purchase.

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