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As interest rates climbed, more investors haven’t been able to fully cover their mortgage carrying costs with rent, leading the market to become flooded with inventory.Ìý

At the same time, investors in the presale market, where they make up 70 per cent of the buyer pool, are unable to buy units and developers can’t drop prices due to exorbitant costs.

As a result, new condo sales — the primary driver of new home construction in Canada’s largest market — have “dove off a cliff to their lowest level since the late 1990s,” the report says.

“Investors are the lifeblood of condos, and when investors pullback it dramatically slows down the supply pipeline and there are severe repercussions for rental units in particular,” said Shaun Hildebrand, president of Urbanation and report co-author.

“Most of the rent supply that the GTA gets is from condo investors, as there aren’t many purpose-built rental apartments. Condo investors are in more precarious financial position, slowing down their appetite for buying more units with new condo sales hitting a 27-year low.”Ìý

The math doesn’t add up for investors

New condo prices have only dropped 5 per cent from their high in the third quarter of 2022, while resale condo prices have corrected 12 per cent and are at risk of further decline, the report says.

While rents have increased by 30 per cent since the pandemic low, it’s still not enough for investors to maintain a neutral or positive cash flow, which means they’re losing money every month.

The majority — 77 per cent — of newly completed GTA condos with a mortgage in 2023 were cash-flow negative, an increase from 52 per cent in 2022. And the situation is worsening in the first half of 2024, with 81 per cent of leveraged investors in a cash-flow negative position, the report says.Ìý

Since 2020, ownership costs have soared by nearly 60 per cent, more than doubling the increase in rents over the same period.

“Investors need significantly higher rent for them to be cash-flow positive or neutral,” Hildebrand said.

“Some investors are OK with negative cash flow if the unit is appreciating. But for those that aren’t appreciating they want to exit the market, which is why we’ve seen such a spike in listings in the resale market to a record-high of active listings.”Ìý

Bigger unit, worse cash flow

There’s a reason why studios and one-bedroom units are built more than two- and three-bedroom units, and it’s all about cash flow: the bigger the unit, the larger the negative cash-flow position, the report said.

Studio units were cash-flow neutral on average for condos completed in 2023, compared to negative cash flow averaging $523 for one-bedroom units, $734 for two-bedroom units, and $866 for three-bedroom units.ÌýOnly three per cent of condos completed last year for rent were three-bedroom units.

“This provides some insight as to why investors favour smaller units,” the report said. “And the scarcity of rental options in the market for larger units.”Ìý 

Low presales hurt housing pipeline

The percentage of pre-construction condos that are pre-sold is at a more than 20-year low of less than 50 per cent, the report said. Without at least 70 per cent of presales, a condo project can’t begin construction, so the reduction in sales is dramatically slowing down the supply pipeline.

A “sharp pullback” in completions and a “stagnating housing stock in the coming years” will make affordability worse, the report added.Ìý 

“Construction starts are trending less than 10,000 and we need around 30,000 to 40,000 a year to satisfy population growth,” Hildebrand said.

“We have a massive drop-off in completions, and condos are the most affordable housing type for those entering the market. This will also result in a decline of rental properties in the coming years.”

Looking ahead

To ensure investors aren’t the main source of housing supply, it’s vital that purpose-built rentals are being brought to market in greater numbers, the report said.

In the meantime, the Bank of Canada has begun the interest rate cut cycle meaning that mortgage-borrowing costs will decline and offer relief for developers.Ìý

“We expect the Bank to take the overnight rate to around 2.75 per cent by the end of 2025, which will work along with reduced construction costs to help condo developers eventually bring prices closer in line with market demand,” the report said.ÌýThe current overnight rate is 4.5 per cent.Ìý

The real estate market goes through cycles, Hildebrand said, and the condo market experienced 15 to 20 years of substantial growth and is now in a correction. It will take time for investors to re-enter the market, he added.Ìý

“The correction was overdue, but the market will work through it and recalibrate.”Ìý