52% of Condo Investors Losing Cash and Renters Will Fill the Gap
Yesterday, the Bank of Canada surprisingly hiked the overnight rate by 25 basis points (one basis point is one-hundredth of a percentage point) to 4.75%. Any time that happens, you can rest assured the Canadian banks will increase their prime rate for customers the same day.
We expect renters living in condos (not subject to rent control) to be hurt the most.
For years, condo investors have bought a property, rented it out, and watched its value grow. That was in a low interest rate environment. With rates now higher, rental revenue isn’t covering the cost of the investor’s mortgage, condo fees, and property taxes like it was before.
According to a new study by Urbanation and CIBC, 52% of condo investors that bought in 2022 pre-construction for rental purposes with a mortgage are now losing cash flow each month. That’s the majority of investors. After all, 75% use a mortgage to purchase an investment property. In 2021, 44% were losing cash flow while in 2020, it was 40%.
In dollars, a condo investor made an average monthly cash flow of +$63 in 2020. In 2021, that fell to +$26. Last year, it turned into a -$223 monthly loss. This year, estimates show that monthly loss has expanded to -$400 (and 14% are losing over -$1000).
Negative cash flow will lead to one of two things. Less demand for investment property or higher rents for tenants.
The housing shortage is well known and condo investors are a major source of new housing supply. Investors buy 70% of all new condos and rent them out. In fact, 39% of the condos in the GTA are being rented out by investors. If monthly cash flow is negative, new investment will be discouraged unless the equilibrium price of rent increases.
Higher rents would contribute to more inflation, which the Bank of Canada is looking to end. This new report should be closely examined before hiking rates further.
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