Analysts say that condo investments are less desirable because of high interest rates and rising costs
As Metro Vancouver rents continue to skyrocketSome housing experts say that a key part of the rental market is likely to get worse because of things that affect it.
The Canadian Mortgage and Housing Corporation says that about 40% of all market-rate apartment rentals in Metro Vancouver are condos that are owned and rented out by private investors.
But some experts say that the combination of higher interest rates, real estate prices, and maintenance costs is making condos less appealing to people who want to get a good return on their money.
“For sure, people are less interested in buying condos to rent out than they would have been if interest rates had stayed lower,” said Tom Davidoff, an associate professor at UBC’s Sauder School of Business.
“Those capital gains, growth, and rents are still there, but the high interest rates make it hard to pay the bills.”
Crunching the number
A recent report found that last year was the first time in the Greater Toronto Area that more than half of investors in newly-built condos werelosing money on their rental properties.
Even ever-increasing rental charges aren’t enough to cover mortgages now that interest rates have risen, Davidoff says — and condo owners are bound by what the market will bear.
According to the B.C. Real Estate Association, the average cost of a condo in Metro Vancouver is now $830,000.
Even with a 20 per cent down payment of $166,000 paid out over 25 years, a 4.99 per cent interest rate would result in monthly payments of $3,858.
No business cas
David Hutniak, CEO of Landlord B.C., says that payment doesn’t include skyrocketing strata fees and other increasing 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,” Hutniak said in an email.
“I suspect more and more of them are saying there’s no business case to do it. The risks are too high, and the returns are simply not there.”
Hutniak says legislation that limits rent increases in the province means a lot of current owners who bought a condo on a variable rate mortgage are struggling to keep up.
Less supply, increasing pressur
Both Davidoff and Hutniak warn that a housing market with fewer investors, combined with higher interest rates, means a lot of new condo and rental apartment building projects are being put on pause until conditions are more favourable.
They say the decrease in supply will likely put even more pressure on the region’s tight rental market over the next few years and raise rents even higher.
Eric Bond, a senior specialist in market analysis with CMHC in Vancouver, says the condo rental market, sometimes called the secondary rental market, plays an important role in Vancouver.
In the past few years, Bond says, the number of new condos for rent has doubled compared to the number of purpose-built rentals added to the rental market.
“It’s growing importance in terms of providing new rental supply to the region,” Bond said.
The secondary rental market now accounts for 30.5 per cent of all apartments in Metro Vancouver, according to CMHC.
And that doesn’t include secondary suites like laneway homes and basement suites. Bond says that data is more difficult to capture, but estimates show they rival the number of condos for rent.
CMHC’s data shows that people are increasingly investing in condos for rent. But Bond admits that data only goes to 2022 when the resale market was weaker, and investors may have chosen to hold on to their properties instead of selling them.
Condos still a good investment: BCRE
Brendon Ogmundson, chief economist for the B.C. Real Estate Association, says condos continue to be a good investment and show no sign of abating.
Pre-sales for buildings under construction have gone soft, Ogmundson says, but overall sales for condos continue to grow — although the association’s numbers don’t break down whether those sales are intended for owner-occupiers or investors.
“I would guess we’re not going to see much of a decline in investor activity,” Ogmundson said.
Ogmundson says the high price appreciation for condos in major markets like Metro Vancouver, combined with increasing rent, means a lot of investors are willing to take a loss until they cash in on their properties.