Did Doug Ford just save the Toronto new-condo market?

This headline sounds a bit crazy, but stay with me, there is good reasoning behind it. The primary objective of many, if not most new condo investors in the Greater Toronto Area is capital appreciation — they’re buying because they expect the value of their unit to appreciate in the future. However, that doesn’t mean that the majority of investors are totally ignoring the rental rates they’ll be collecting when their unit is built and ready for occupancy.

The highrise new-condo market in the GTA recorded a solid year with over 20,000 sales. The long-term trend line suggests a stable level of demand for new condominium sales activity is between 20,000 and 25,000 transactions annually.

The continued sales success in 2018 is even more impressive when you consider how quickly prices have risen over the past two years. According to data from Altus Group, the average asking price for new condos increased by over 40 per cent in 2017 and another 12 per cent in 2018. Most of the major downtown new condo projects came to market at over $1,000 per-sq.-ft. (psf) last year.

For new condos purchased for over $1,000 psf, it is likely that pre-construction investors will need to lease their units at over $5.00 psf per month to break even on their investment on a monthly basis (assuming a 20 per cent down payment), that’s $3,500 a month for 700 sq. ft. - WOW! Recent reporting suggests many investors were satisfied with their properties being cash-flow negative for one or two years after closing, as rapidly rising rental rates allowed them to increase their tenant’s rent aggressively and make-up for the shortfall in the subsequent years. Commentary from brokers that specialize in pre-construction investor sales have indicated that the expansion of rent control by the Liberal government in April 2017 nullified their client’s “aggressive rent increase” plans, and some investors chose to sell their units last year.

Expanded rent control was a tremendous boon for tenants, but a blow to landlords. But keep in mind that many of these landlords are condo investors that support the upfront sales in these mega-towers that you see in downtown Toronto. Without these investors supporting these projects, less towers would get built, fewer units would get built, and fewer homes would be available to tenants. If rent control prevents investors from charging the rent they need to cover their expenses, they’ll choose not to buy, or put their investment capital in other asset classes.

Data from Canada Mortgage and Housing Corporation (CMHC) on the number of investor-held condominium apartment units shows some investors are choosing to sell off their existing units. In 2018, CMHC estimated that about 130,000 condominium apartments were leased in the Toronto CMA, a net increase of 5,692 units over 2017, the lowest absolute annual gain since 2012, and the lowest percentage gain since 2010. The share of units leased (33.2 per cent) was unchanged year-over-year — the last time the share didn’t increase was 2010. This suggests a record number of investors sold their rental units last year.

However, the investor sell-off may have been premature, as the Conservative government got rid of rent control on buildings that complete after November 16, 2018. This change gives investors much more confidence that they can increase rents in the future to cover their costs, and encourages them to continue to purchase new condos. Additionally, just as important was the change that wasn’t made: keeping rent control on existing units results in less turnover, more misallocation of units, and ultimately higher rents on vacated units. Higher rents on vacant units is another incentive encouraging investors to buy pre-construction units.

Doug Ford may not know it, but the changes his government made may have just saved the new condo market from a slow and steady decline from the record activity over the past three years. The elimination of rent control on new buildings will hurt some tenants, but be an overall benefit to the entire marketplace long term, as it will result in more housing supply, and more homes for end-users and tenants in the GTA.