Condos no longer considered "a good investment"

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Investors concerned as carrying costs now vastly outstrip earning potential

Those considering purchasing a condo for investment purposes may want to think twice, or at least, wait until the market recovers.

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One condo owner, who asked not to be identified, said he’s lost $140,000 when calculating all carrying costs including maintenance and lawyer fees and mortgages costs.

The owner had purchased a one-bedroom-plus-den condo in Scarborough for $489,000 six years ago when the market was at its peak.

“The few renters I could find weren’t willing to pay what I needed to carry the mortgage,” he says, adding he could not keep the investment going any longer because carrying costs vastly outstrip earning potential.

Indications are things stand to get worse. Condo sales, including resale, new and pre-construction units, had fallen 75% in Toronto as of the first quarter of this year after beginning to decline in 2022, according to the Canada Mortgage and Housing Corporation (CMHC),

“Condo sales will continue to decline, Rents are coming down too which affects condo values,” says Victor Tran, Rates.ca mortgage and real estate expert. Rates.ca recently published a report stating 30 per cent of Canadians no longer believe condos are a good investment.

Tran says “the majority of condo buyers right now are end users, but with rents coming down, renters unhappy with their living arrangements are finding better leases.”

“The majority of pre-construction condos purchased over the past five years were purchased by mom-and-pop investors — many of whom already have a principal residence — for the purpose of renting out as an investment or as a second home,” he adds. “They don’t necessarily have a large financial cushion to fill the gap in monthly payments between today’s current rental rates and what they owe on the mortgage.”

Those that purchased pre-construction condos that are now coming due may also be squeezed financially, says Tran.

Ron Butler, owner of Butler Mortgage, noted immigration has considerably decelerated amid an expected 40,000-50,000 Ontario-wide condo completions — well above the historical average — over the next 18 months.

“We end up with more rentals coming to market, sterile population growth and a significant number of condos coming on stream,” Butler said. “Developers feel like there won’t be any material improvements in their ability to build new high-rise condos until around 2030.”

At the same time, more and more purpose-built rentals completions — largely driven by deep-pocketed institutional investors seeking long-term income producing assets —  are coming to market..

Butler maintains that “the majority of condos sold from late 2020 through 2022 were over $1,150 per square foot, which makes the mortgage math very hard, because at those prices, all expenses including property taxes and maintenance fees make carrying a mortgage that much harder.

But that isn’t necessarily a bad thing, according to John Pasalis, president of Realosophy Realty, who reminds that housing isn’t supposed to be speculative. “Falling prices and rents should be a sign of success. Instead… they’re being framed as a crisis,” says Pasalis.

“The truth is we haven’t built a housing system designed for affordability. We’ve built one designed to preserve rising housing prices — at all costs.”