What a flat rental market means for pre-construction condos
By Newinhomes on Nov 15, 2019
If the rental market in Toronto stays as flat as it is right now, then there’s a good chance that the pre-construction condo market may be in trouble in the near future.
The October 2019 report from Rentals.ca and Ben Myers of Bullpen Research and Consulting Inc. found that the average condo apartment rental in Toronto was $2,668 a month. Purpose-built rental apartments averaged $2,283.
Ontario is recording rapid population growth, and apartment completions for the first three quarters of the year came in at 17,915 units, which is the lowest figure since the first nine months of 2014. Demand is strong and supply is low, yet the year-over-year average rent barely budged.
A recent report from Urbanation found that purpose-built rental rates hovered around the $2,500 mark in the GTA, and they suggested that perhaps rent has peaked because rent growth was slow and the vacancy rate hardly changed.
There are a couple factors at play, according to Rentals.ca and Myers. First of all, the mortgage stress test may be preventing people from leaving the rental market and stepping onto the property ladder. Secondly, expanded rent control from April 2017 have people staying in rental units for longer periods of time.
Ontario had the highest rental rate in the country, averaging $2,334 a month, which is 9% higher than a year ago. Most of the condo listings are in Toronto (60%), and the other 40% are in other GTA markets, like North York, Etobicoke, Mississauga, and Vaughan. But will this be the case if investors start to shy away from the pre-construction market?
According to the Building Industry and Land Development Association and Altus Group, the average price of a new condo unit in the GTA in September 2019 was $841,159, which is 6.5% higher than the same month a year prior. Investors make up a large chunk of pre-construction sales, which help developments get financing and progress to the construction phase. Investors also add rental units to the market upon building completion.
But it has to be worth it. Investors have to charge high enough rent to make the investment profitable. If rent in the GTA has hit a ceiling, then pre-construction condo prices may have hit a ceiling, too.
We are definitely eager to see how the next couple quarters play out in the new condo and condo rental markets! Rentals.ca and Myers expect rental rates to keep climbing through 2020, but by how much?
