The new mortgage rules have redirected Toronto’s would-be low-rise home buyers to the condo market, driving up prices and, in the process, deterring condo investors from purchasing units renters desperately rely on.
The B-20 mortgage rule stipulating stringent stress testing, even for insured mortgages, has drastically reduced purchasing power, and house hunters have reasoned affording less house in the form of condos is better than nothing.
But Davelle Morrison, a sales agent with Bosley Real Estate, says the increased demand for condominiums is resulting in bidding wars, and that’s bad news for real estate investors whose units pump supply into a rental market that has a vacancy rate of around 1%.
“The mortgage rules changed on January 1, so someone with a mortgage of over 20% down will have that additional stress and it’s kicked a lot of people out of the housing market and into the condo market,” she said. “The condo market is off the hook right now. For my real estate investor condo clients, it’s a bit of a challenge because the numbers need to work, and for the numbers to work they need a one-bedroom condo for under $500,000, but to stay cash flow-positive they need to put down more than 20%.”
While end-users battle through bidding wars in the condo market, renters are enduring them too because of high demand and low supply. Investor-owned condos were sustaining the rental market, but in having to compete with more buyers for their investment properties they’re charging higher rents.
“That’s one reason rents increased drastically last year, because now renters have to play a game of musical chairs to figure out when they’re going to find a place to rent—and there are so few places to rent—so landlords are increasing the prices on them,” said Morrison. “For my own rental property, I put it up in July charging $1,375 a month and thought I’d increase to $1,400, and I had seven applications within 36 and so I increased the rent to $1,500 because I could.”
Morrison says that may keep existing landlords in the market, but it’s still little solace because their holdings are rent controlled.
“Some landlords have chosen to get out with the new Wynne rules [rent control],” added Morrison. “Landlords have said that if they can’t increase rent as much as they want, they’re putting their condos up for sale, and that means there will be fewer rentals available.”
Zia Abbas, owner and president of Realty Point, says that the condo market is still worthwhile for short-term investors because prices are increasing so quickly. However, he advises investors buy preconstruction units so that the value appreciation in the years leading up to closing provides enough insulation.
Abbas also advises investors to set their sights on the low-rise housing market.
“Since the low-rise market has dropped, investors should be smart enough to pick the best of the best cities and locations,” said Abbas. “For example, Richmond Hill has the biggest hit in terms of prices dropping. Even Mississauga and Oakville are places you can find great deals.”