Canada’s largest condo market is facing its biggest test in decades as the number of investors losing money every month, and the amount they’re losing, has ballooned, says a new report from CIBC and Urbanation.
Rising costs have left 82 percent of investors in newly completed condos who have a mortgage as cash-flow negative in the first half of 2024, said the report, which was released on July 25.
The number is up from 77 percent last year, and up sharply from 2020 when 40 percent of newly completed condos were in the red.
In dollar terms, investors who closed on a condo in 2023 had an average negative monthly cash flow of $597, up from $223 per month for those who closed in 2022, while investors who got their condos in 2021 and 2020 were still on average making monthly profits. Of those who closed last year, about 30 percent are losing more than $1,000 per month, the report said.
The trend, fuelled by previous increases in condo prices and higher interest rates, has put pressure on condo investors. New condo sales have plummeted to a 27-year low, while creating wider risks for the market.
“It is fair to say that given the current environment, the Canadian housing market in general and the GTA market in particular are facing the most significant test since the 1991 recession,” said report authors Benjamin Tal at CIBC and Shaun Hildebrand at Urbanation.
But while condo investors are feeling the strain and inventories are up sharply, it hasn’t led to major pressure on condo prices. Unsold unit prices are down only 2.6 percent in the past year and 4.5 percent over the past two, according to Urbanation.
“I don’t see a mass number of distressed sales or foreclosures because of this,” said Mr. Hildebrand in an interview. “Prices seem to be holding firm, which suggests that investors don’t have a lot of urgency to sell.”
Rather than a big price fallout, the biggest risk could be future home building, said Mr. Hildebrand.
“The biggest long-term (risk) is the lack of housing supply. Investors are the lifeblood of new housing development in the GTA, so if they are in a precarious financial situation, that’s going to reduce their appetite for buying new units, and that’s going to have pretty severe repercussions on housing supply.”
While many investors are losing money, the rental market is still strong and interest rates are starting to go down. On Wednesday, the Bank of Canada lowered its key interest rate by a quarter percentage point to 4.5 percent after cutting it in June as well.
And while the report nods to a comparison to the early 1990s, when condo prices dropped 40 percent from peak to trough, the challenges aren’t quite the same, said Mr. Hildebrand.
“I don’t think that’s the same sort of scenario we’re looking at right now, with rates obviously having peaked and still considerably lower than where they were back then.”
But with condo ownership costs up 21 percent last year, compared with an eight percent rise in rents, the authors say it will take a combination of higher resale prices, rising rents and lower interest rates to turn the market around.
