Good news for condo investors

It was announced in mid-November that new apartment buildings, either condominium or rental, occupied after Nov. 15, 2018 would no longer be subject to rent control legislation. This is good news for condo investors.

Rent control sounds like a good idea. The problem is the government typically sets the maximum amount that a landlord can raise rental rates at a percentage that is typically below the rate that rents are actually growing. Some might ask why this is a problem. Let me explain.

The costs for maintaining a building and/or a unit are often going up: Labour costs and maintenance for a rental apartment building owner, condo fees and interest rates for a private condo investor. If an owner can’t recover those costs and isn’t being sufficiently compensated for the risks inherent in owning real estate, they’ll often stop doing the needed maintenance, renovations or upgrades, or stop providing the proper service to their tenants. If a landlord knows they can reset the rental rate to the much higher market level when the tenant moves out, they may discriminate when choosing their tenants, electing to go with students or young singles that are more likely to move in a year or two, as opposed to a single mother or widow looking to put down permanent roots in the community.

In the case of condo investors, if they are not getting enough rental income to offset increases in property taxes or mortgage costs, they are likely to sell, lowering the supply of rental housing or alternatively, they may decide to list the unit on Airbnb instead ­— which causes a whole new set of headaches.

Many people don’t care for condo investors, but before they showed up in droves, the GTA condo market was building 10,000 units per year in maximum 20-storey towers, and now the development industry is delivering over 20,000 units in towers as high as 80-storeys. At least half of these units are leased out, significantly adding to the rental stock. In a market where only 1,000 to 2,000 rental apartment units are built every year, investors are directly responsible for most of the new rental supply in the GTA over the last 20 years.

For investors to continue to buy condos and add much-needed units to the stock of rentals, they need to expect future price appreciation and future rental growth. Placing a cap on how quickly they can raise rents is a disincentive to purchasing. When a new building is completed and there are hundreds of suites for rent, an investor may need to accept a slightly lower rental rate initially due to competition in the first year, but they want to have the option to raise rents three to four per cent the next year if the tenant stays to cover the significant monthly carrying costs. With the average unsold new condominium in the GTA approaching $800,000, investors and end-users are being asked to make a significant investment and take a chance on Toronto’s housing market in the future. They may stop taking that risk if they don’t think they can get the rent they want from their investment units. Rent control has noble intentions, but it reduces rental supply in the long run, and in a market with historically low vacancy rates, we need all the supply we can get.