As Metro Vancouver's rental market continues to experience soaring prices, experts are warning that a decline in condo investments could exacerbate the situation. Currently, condos owned by private investors make up approximately 40% of all market-rate apartment rentals in the region, according to data from the Canadian Mortgage and Housing Corporation. However, the combination of rising interest rates, real estate prices, and maintenance costs is diminishing the allure of condos as a profitable investment opportunity.
"For sure, people are less interested in buying condos to rent out than they would have been had interest rates stayed lower," explained Tom Davidoff, an associate professor at UBC's Sauder School of Business. While the potential for capital gains and rental growth still exists, higher interest rates pose a significant burden in terms of affordability.
Crunching the Numbers
A recent report focusing on the Greater Toronto Area revealed that over half of investors in newly-completed condos experienced financial losses on their rental properties. Surprisingly, even with escalating rental charges, the rising interest rates have rendered it challenging for condo owners to cover their mortgages. Their rental income is limited by what the market can bear. In Metro Vancouver, the average cost of a condo has now reached $830,000, as reported by the B.C. Real Estate Association. With a 20% down payment of $166,000 paid over 25 years, monthly payments at a 4.99% interest rate would amount to a staggering $3,858.
No Business Case
David Hutniak, the CEO of Landlord B.C., emphasized that this financial strain does not include the surging strata fees and other maintenance costs. "Real estate investors who provide rental housing, whether in the primary or secondary market, are having to take a very hard look at the financial viability of their current investments and an even harder look at new acquisitions/development," said Hutniak. He also pointed out that a significant number of investors are now questioning the feasibility of continuing with condo investments due to the high risks and insufficient returns. Additionally, legislation that limits rent increases in the province has left condo owners who have variable-rate mortgages struggling to keep up.
Less Supply, Increasing Pressure
Both Davidoff and Hutniak cautioned that a housing market with fewer investors, combined with higher interest rates, is prompting an increasing number of condo and rental apartment building projects to be put on hold. This decrease in supply is anticipated to intensify the pressure on Metro Vancouver's already tight rental market, leading to further increases in rent. According to Eric Bond, a senior specialist in market analysis at CMHC in Vancouver, the condo rental market, often referred to as the secondary rental market, plays a crucial role in the city. In recent years, the number of new condos available for rent has doubled in comparison to purpose-built rentals. "It's growing in importance in terms of providing new rental supply to the region," Bond stated. CMHC's data indicates that the secondary rental market currently accounts for 30.5% of all apartments in Metro Vancouver, excluding secondary suites like laneway homes and basement suites.
Condos Still a Sound Investment, says BCREA
Despite the challenges faced by condo investors, the B.C. Real Estate Association maintains that condos remain a solid investment option with no signs of diminishing appeal. Brendon Ogmundson, the association's chief economist, highlighted that while pre-sales for buildings under construction have slowed, overall condo sales continue to increase. However, the association's data does not differentiate between owner-occupiers and investors. "I would guess we're not going to see much of a decline in investor activity," Ogmundson stated. He emphasized that the significant price appreciation of condos in major markets like Metro Vancouver, combined with rising rent, has incentivized many investors to endure temporary losses with the expectation of profiting in the long run.
CMHC says condo rentals account for about 40 per cent of market-rate apartment rentals in Metro Vancouver. Analysts worry that fewer condo investments will slow down building construction, resulting in less housing supply.
In conclusion, the decline in condo investments in Metro Vancouver poses challenges for both renters and the housing market as a whole. The combination of rising interest rates and maintenance costs, along with limited rental income potential, is making condos less attractive to investors seeking healthy returns. This shift could lead to a decrease in housing supply, further exacerbating the region's tight rental market. However, despite the current challenges, condos are still considered a sound long-term investment option by industry experts.