A recent study titled, "Window Into the World of Condo Investors" by Shaun Hildebrand, senior vice-president of rental research firm Urbanation, and Benjamin Tal, senior economist with CIBC Capital Market, sheds a light into who these investors are in the GTA and how they might impact the condo market in the future.
What's interesting is that investors who grab the best units at developer pre-sales account for nearly half of the rental housing inventory in the region. And while many are foreign investors, it’s the domestic investors who may hold the key to the future of the real estate market.
According to the report, only about 10% of condo investors are international buyers and are more likely to be local immigrants aged 40 to 60. The reasons are many -- a retirement investment or to help their children, for example.
Most investors use a minimum down payment of 20% on a pre-sale unit. Since it may take four to five years to build a condo, the value increases each year until the unit is leased at market rent, which should cover costs and pay down principal.
However, the future may not look as bright as it once did. While current market conditions have elevated demand, the slow turnover, higher prices for move-up buyers and the mortgage rule changes have reduced turnover, with fewer units available.
A Snapshot of Condo Investors
Some hard data:
- In 2017, just over 20% of condo investors purchased the units with no mortgage.
- The Big "5" Banks provided two-thirds of the credit
- Credit unions provided 20% of the credit
- Private lending accounted for 5% in dollar amount but 10% in number of transactions
- Approx. 30% have an interest rate of more than 6%
- 16% have interest rates higher than 9%
- On average, investors provided the 20% down payment; non-investors, of course, can provide lower down payments.
- 44% of investors with a mortgage are in a negative cash flow position
- Investors with positive cash flow have an average monthly income of $360
- The average resale price was 51% higher than the average pre-sale price
The last few years have been challenging for investors and it’s going to be difficult to get that healthy return. Forty-four per cent of investors who took possession of their units in 2017 are seeing their rental income fall short of mortgage payments and building maintenance fees.
Here's a scenario: The authors of the study estimate that new units that were pre-sold over the past year and scheduled for completion in 2021, rents would have to rise by 17% over the next four years, if there were no changes in interest rates, by 28% if rates increased by 100 basis points, and by 39% if rates rose by 200 basis points.
The condo market is the last bastion of affordability, but it’s going to be more important than ever for investors, and non-investors, to make sure they do their homework and get the information they need to make the best decisions.