March 1, 2018

Why Toronto Condo Rental Rates Are on the Rise

The Toronto Real Estate market was relatively mixed throughout 2017, with the first six months experiencing skyrocketing year-over-year price increases of 30 per cent – prior to the Fair Housing Plan (FHP), implemented by the Ontario Government in April, as an attempt to cool down the red hot Toronto real estate market.

Prices immediately softened after the government regulation was introduced; detached homes took the biggest hit, with values falling 5.3 per cent from April to May. Toronto’s real estate market finished the year of relatively flat, with average prices rising 0.7 per cent from Q4 2016 to Q4 2017.

However, the city’s condo market wasn’t deterred, outpacing price growth of all other home types, rising 14.1 per cent to $532,700 by the end of 2017.

It’s More Expensive to be a Landlord

Demand continues to heat up for condos, with multiple offers becoming the norm – something previously mostly seen in the detached resale market. However, as condo ownership becomes more popular, it’s becoming more expensive to purchase them and rent them out; in the last quarter of 2017, a total of 9,184 condominium apartments were leased, down 3.4 per cent from the same period in 2016.

That’s reflected in an aggressive increase for unit rents – average one- and two-bedroom units now go for $1,970, and $2,627 Q4 2017, increases of 10.9 and 8.8 per cents, respectively.

The average rent for three-bedroom condos rose 7.4 per cent year over year to an average of $3,524, despite the number of these leases increasing by 22 per cent. (It’s important to keep in mind that three-bedroom units make up only 2.6 per cent of the Toronto condo market. In other words, the minimal supply of this unit type is a contributing factor to the price increase.)

Bachelor units saw the second largest price increase, with average rents rising 10.5 per cent to $1,670. This condo type makes up approximately 3.5 per cent of the Toronto condo rental market.

One- and two-bedroom condos tend to be a better indicator of the strength of the Toronto condo rental market; combined, these two condo types made up 58 per cent of the market in the last quarter of 2017.

The Factors Behind Rising Toronto Condo Rental Rates

The main contributing factors towards the strong rental market is population growth, booming economy, and limited supply of rental units, according to Tim Syrianos, president of the Toronto Real Estate Board.

“As the population in the GTA continues to grow, so too does the demand for rental accommodation. The problem is that rental supply has not kept up with the increase in demand in recent years. The result has been low vacancy rates and intense competition between renters for available units. This competition has underpinned very strong growth in average rents,” he stated in the board’s January release.

The number of condominiums leased in Q4 2017 declined 3.4 per cent from the same time the previous year. This suggests the market is experiencing ‘landlord market’ conditions. In other words, the vacancy rate is less than one per cent for condominium apartments in fall 2017. A decrease in availability translates to less lease agreements signed, and higher rental prices.

Some experts blame the FHP, indicating that it has curbed developers from creating more rental apartments. However, even prior to the plan, there hasn’t been much incentives to build rental apartments, mostly because of the regulations introduced in the 90s. Condos have historically been more lucrative and profitable to developers.

Less Rental Supply Expected in 2018

It would be a red flag should the number of condominium apartments available for rent increases while the number of signed lease agreements declines (this would be equated to weakening demand, thus potentially leading to price decreases).

Jason Mercer, TREB’s director of market analysis, says that last year’s stellar condo price gains, coupled with the new rental regulations, may encourage current unit owners to cash in, further reducing rental supply.

“Looking forward, we continue to have concerns that rent control legislation announced in conjunction with the Ontario Fair Housing Plan will preclude additional rental supply coming on stream, both in the purpose-built and investor-held condominium apartment segments. Going further, it is possible that current owners of condominium apartments could choose to list their units for sale to take advantage of recent price gains rather than rent their units to tenants under the new rent control regime,” he stated.

However, it’s very likely for condos to continue showing strong momentum throughout 2018, as buyers appear to be shifting their expectations, and moving their demand towards condos.

No Slowdown in Sight

As condos will continue to outpace other forms of housing, such as detached homes, semi-detached homes, and townhomes, from a price perspective, this uptick will continue to be passed onto rental prices.

The most affordable way to get into the condo market is through pre-construction condos – where you purchase the condo at a fixed price, and take advantage of the price gains during the construction period. Keep in mind, you’d be taking advantage of the price gains while having no cash outflow (i.e. mortgage payments, maintenance fees).

However, those who are looking for immediate cash flow can always look into resale condos in bustling areas with lower vacancy rates, and strong demand.