More than 80 per cent of new condo investors in the Toronto region are bleeding cash as the rental income from their units is not covering the increasing mortgage and costs of owning the property, according to a new report issued on Thursday.
The losses are dissuading investors from buying new condo units, also known as preconstruction condos because they have not been built yet, the report said, contributing to the lowest sales in 27 years in the first half of this year.
The preconstruction condo market is “clearly in recessionary territory with conditions deteriorating to levels not seen in decades,” said the report authored by condo research firm Urbanation Inc. president Shaun Hildebrand and Canadian Imperial Bank of Commerce deputy chief economist Benjamin Tal.
The report found that average monthly ownership costs for new condos in the Toronto and Hamilton region have climbed to $3,250 due to the higher cost of the newly built properties, borrowing and other expenses. That is 21 per cent higher than in 2022 and 54 per cent above 2021.
At the same time, the average monthly rental rates for a new condo in the region hit a record $2,700. But that was not enough to cover the new condo investor’s expenses.
Many more investors are paying out of pocket to cover the costs – a situation known as being “cash flow negative.”
According to the report, 81 per cent of investors who took out a mortgage to buy newly completed condos this year were cash flow negative and were losing an average of $605 a month.
That is up from last year, when 77 per cent of leveraged investors were cash flow negative and burning about $597 a month.
In 2022, just over half of the leveraged investors had negative cash flow and were paying about $223 out of pocket. In 2020 and 2021, the majority of new condo investors were able to cover their monthly expenses with the rent.
The price of a preconstruction condo has spiked as developer expenses have increased. Residential construction costs have nearly doubled over the past five years.
Historically, developers have been able to pass on the higher costs to buyers in Toronto’s hot condo market. But now investors are balking at the higher prices, especially given the flood of cheaper, already-built condos that are listed for sale.
Today, the average price per square foot for a preconstruction condo in the city is $1,529 and $1,153 in the surrounding regions. That puts the price of a 550-square foot preconstruction condo at about $841,000 in Toronto and $634,150 in the suburbs.
By comparison, a condo on the resale market had an average selling price of $746,298 in the city and $649,000 in the suburbs, according to the most recent data from the Toronto Regional Real Estate Board.
If preconstruction condo investors are unable to cover the shortfall in rental income, they may be forced to sell. That would increase the number of condos for sale and further reduce prices.
Mr. Tal said investors who own multiple preconstruction units are the most vulnerable. “The main correcting mechanism will be to sell,” he said, adding that this would put further downward pressure on resale prices and widen the gap between preconstruction and already-built units.
This year, a near-record number of newly built condos are expected to be completed and occupied. Although the city is suffering from a shortage of affordable housing options, new condo rental prices are too expensive for many residents.
However, the new condos do create more housing and rental units. They account for 35.5 per cent of the rental stock in the city, according to the most recent data from the federal housing agency.
There is a growing consensus that preconstruction condos are an important part of the country’s rental stock. If investors are dissuaded from buying them, fewer housing units will be built.
Urbanation has estimated that over the past year, developers have postponed launching 76 projects amounting to 24,335 condo units in the Toronto and Hamilton area.