https://www.huffingtonpost.ca/2018/04/07/toronto-real-estate-new-reality_a_23405449/
BUSINESS
04/07/201810:40 EDT | Updated 04/07/2018 13:45EDT
Toronto Real Estate’s Harsh New Reality: Buyer Beware
Half ofToronto’s recently-delivered condos were bought by investors, and nearly halfof them are losing money.
Mark Blinch /Reuters
Condominiumsare seen under construction in Toronto, July 10, 2011.
Until recently, GreaterToronto’s housing market had been something of a fairy tale. Years and years ofprice growth convinced many that buying into the market — at any price — wouldpay off. In essence, a house in Toronto had become a miracle investment: nomatter what happened, you made money.
But now, with home sales in themetro area down nearly 40 per cent over the past year, and prices down 14 percent in that time, the market is doing something it hasn’t done in a goodthree decades: It’s creating losers.
Watch: Bank seeingevidence of speculation in Toronto housing market
The Toronto Star reported recentlyon a group of buyers of pre-sale homes in Oakville, who made down payments inFebruary 2017 (just before the peak of Toronto’s house prices) and who are nowstuck with the bill for homes they can no longer afford.
Their current homes can’t besold for the amount they expected last year. With new government-mandatedmortgage stress tests in place, and lenders re-assessing the value of GTAproperties, they can’t get mortgages to cover the full amount. They fear theymay get sued by the developer, Mattamy Homes, if they don’t close on theirdeals.
Rick Madonik via Getty Images The MattamyHomes Preserve development in Oakville, Ont., where a number of buyers areunder financial pressure following a decline in house prices in the area.
They are not the only ones toface financial pressure from a slowing market. According to a report from CIBCand real estate consultancy Urbanation, released Friday, many of the city’scondo investors are now losing money.
The study found that nearly halfof the condos delivered in 2017 — 48 per cent — were bought by investors. Andof those, nearly half — 44 per cent — have "negative cash flow,"meaning rental income isn’t covering the costs of ownership, such as mortgageand condo fees. (Some 80 per cent of investors have a mortgage, so leavingunits empty isn’t a good option for most.) And more than a third of thoselosing money are losing more than $1,000 a month.
So is it time to panic? No. Or,well, not yet. For those who bought well before last year’s peak, the mathstill adds up nicely. Most homeowners would not be underwater on theirmortgages if they sold today. Most condo investors have made large gains in theresale value of their properties over the past several years, even if for manyrent isn’t covering costs.
And even if all the investorswho are losing more than $500 a month bailed on the market, they would increasehousing supply by only 3.4 per cent of the total, the CIBC/Urbanation reportestimated — hardly enough to flood the market and tank prices.
CIBC/Urbanation
But the lesson here is thatthings have changed, and the housing market going forward won’t be like thehousing market of recent years. Rapid house price growth is unlikely, if for noother reason than governments are now actively fighting to stop it.
For some investors, that couldbe bad news. The CIBC/Urbanation study estimates that an investor who buys atypical condo today will need to see 17 per cent growth in rental rates to makemoney off that condo when they take possession in 2021. If mortgage rates riseby a single percentage point, they’ll need 28 per cent rental growth. It’spossible to get that, but it’s by no means guaranteed.
And for those who buy pre-salehomes, it means scaling back your ambitions. You can’t be sure that your homewill sell tomorrow for as much as it would sell today, as those buyers inOakville have learned. Nor can you be sure that you’ll get a mortgage tomorrowthat’s as large as the one being offered today, because mortgage rates are onthe rise, and regulators could tighten rules again.
So in essence, it means we nowhave to take to heart an old adage that has been long forgotten in Toronto’sreal estate market: Buyer beware.