Will condos continue to reign supreme?

Heavy is the head that wears the investment crown in Toronto’s shifting market

A whopping 36 per cent of Toronto condos are owned by investors, according to the latest data, many of whom rent them out. And while experts say we may be in a ‘moment of reckoning’ for the city’s condo sector as savvy buyers lose money, they’re not jumping ship just yet

For at least a decade, a glittering glass box in the sky has been one of the hottest tickets in town.

The Toronto condo investment has become a staple of the city and produced windfall profits, at least for those who bought at the right time.

But a string of recent reports on property investments has raised some eyebrows. Most notably, one from market research firm Urbanation and CIBC Capital Markets found that for the first time, more than half of investors who bought pre-construction condo units in the GTA were losing money. Another, this time from Royal LePage, concluded younger investors were turning their sights on single-family homes.

They’ve led some to wonder: is this a moment of truth for the investment condo?

The Star spoke to experts, from researchers to real estate professionals, and though some believed the industry may be at a turning point, most agreed that despite recent turbulence, condo investment will continue to shape the rental market for years to come.

‘More stress in the system’

“The whole condo investment future isn’t as solid a bet as it used to be,” said Cherise Burda, executive director of city building at Toronto Metropolitan University.

Some projects are being paused due to factors such as high interest rates and cost of construction, and that’s leading to a drop in demand. “What I hear out there is, it’s harder to get investors,” Burda said.

More than a third of condos in Toronto are owned by investors, according to 2020 data, the most up-to-date figures from Statistics Canada’s Canadian Housing Statistics Program (CHSP), at 36 per cent (145,015). That’s slightly below the Ontario figure of 42 per cent of all condos (233,860), according to the data published in February.

But they are a relatively new vehicle for investors, said University of Toronto PhD candidate and housing policy researcher Jeremy Withers.

“It’s really over the past decade that as housing prices have shot up, many homeowners,

typically older and higher-income owners, became increasingly empowered and inclined to leverage their existing housing wealth and their typically higher incomes to bid up and buy out a fast-growing share of the GTA’s housing stock,” he said.

That’s paid off for many, but as interest rates climb and projects stall, there are signs of strain.

Another recent report from land and commercial registry company Teranet found there’s been a notable increase in homeowners selling within one year of buying a property, particularly for condos, since interest rate hikes began last year.

Pauline Lierman, vice-president of market research at Zonda Urban (formerly Urban Analytics), a housing data platform, said while she’s definitely noticed “more stress in the system,” the breaking point hasn’t been hit just yet.

Though recent interest rate hikes from pandemic historic lows may have rattled some investors, many are holding on.

Mortgage broker Victor Tran of Rates dotca said he sees the condo investor trend as “stable” based on the lack of change he’s seeing with his clients. That’s despite the fact some may be facing higher mortgage payments due to variable-rate mortgages, which are popular with investors because they allow more flexibility.

He said the investors he sees already own their own homes and are leveraging equity to buy another property, typically a condo.

That’s backed up by Statistics Canada data released in May that found the majority of investors in the province were 55 and older, an age bracket that’s usually more financially well-footed than younger counterparts and were able to get into investing in properties earlier.

“It’s just regular people just like you, and that I guess you could say got lucky by purchasing a property years ago, got to ride the wave with property appreciation,” he said.

Burda added that investors who own units built after 2018 that aren’t subject to rent controls are also able to download the costs of higher mortgages onto their tenants, which can help keep landlords from going into the red.

That doesn’t mean changes aren’t happening.

Lierman is seeing more of the market “heavily oriented toward outside the core,” including investors who are purchasing singlefamily homes, semis and towns in cheaper spots in Ontario such as Kitchener-Waterloo, Hamilton, or even in smaller places such as Paris or Cambridge.

Another recent report, a survey from Royal LePage, found that single-family homes were an attractive option for investors surveyed in the GTA, with 44 per cent reporting single-family homes as investment properties compared to 39 per cent for condos.

While he does have clients looking as far out as Kitchener-Waterloo, Tran said the Toronto condo remains an attractive option, even if some clients are not making money every month.

“It’s just way too expensive to get into a single-family home, especially for an investment property, let’s say a detached home for example, at least a million dollars if not more in certain parts of the city,” he said.

“A lot of times it doesn’t really make sense for an investor to buy a single-family home to rent out, so a lot of it is just condos. Those are more easily manageable.”

Even if they are losing money now, many investors are looking at growth over the long term, and “hedging” to see if prices will go up over time, Lierman added.

Withers estimates based on existing Stat Can data that if current trends continue, two-thirds of all Toronto condo apartment units will be investment properties in 10 years.

However, as interest rates and construction costs rise, the city may see a drop in projects — which will mean even less supply for renters.

“This may be a moment of reckoning for our city as the current model of condo investor-driven supply is sputtering,” Withers said.

He noted it’s a shift that “many people in the city will feel like is long overdue,” as many first-time home buyers are already being outbid by investors.

Burda noted condos have become the de facto rental supply in the city, but “just because it’s the kind of rental we’re getting doesn’t mean it’s the right kind of rental.”

These units are on average smaller, and tenants are more precarious than those in purpose-built rentals, subject to the whims of landlords who wants to sell or move in, she said.

All levels of government need to work together on building more affordable rental supply, but instead it’s like a “hot potato” they’re all passing around.

“This really is kind of a wake-up moment, where it’s like, come on governments, get your act together,” she said. “We have to, we are in a crisis.”

Withers is heartened that the idea of building on public land and the need for “publicly built, break-even (profit-wise), mixed-income, rentcontrolled housing,” which he sees as key to expanding rental supply, has already come up in the current Toronto mayoral election.

However, Lierman doesn’t see a shift away from condos any time soon.

“I don’t think that model is going to change very much in the next couple of years, unless there is some sort of cataclysmic legislation on the part of the federal, the provincial government to push (purpose-built) rental as the other side of it,” she said.

‘‘ The whole condo investment future isn’t as solid a bet as it used to be.

CHERISE BURDA, EXECUTIVE DIRECTOR OF CITY BUILDING AT TORONTO METROPOLITAN UNIVERSITY

‘‘ I don’t think that model is going to change very much in the next couple of years, unless there is some sort of cataclysmic legislation on the part of the federal, the provincial government to push (purpose-built) rental as the other side of it.

PAULINE LIERMAN VICE-PRESIDENT OF MARKET RESEARCH AT ZONDA URBAN