The End is Nigh…

April 30th, 2015 · 4 Comments · Rental Property

Dead End City - Dark Urban Dead End (215, 211, 43) - AdultI read this complete farce of an article from the Financial Post. Non-Permanent Residents Might Be The Secret Ingredient in The Canadian Housing Market As I discovered a month or so ago, Benjamin Tal will pretty much say anything to support the fallacy that the Canadian Real Estate Lottery is still on steady ground. Last month he denied CMHC’s own Condo Owner’s Survey and suggested that I replace the term vacancy rate with the Landlord Failure To Rent Rate. This time his musing are even further reaching. “It is fair to assume that non-permanent residents play an important role in demand for rental units in both provinces – a factor that contributed to the recent boom in the condo market in centres such as Toronto and Vancouver.”

I’m sorry this is not correct, first of all there is no such large significant “demand”. The vacancy rate for condos was already at 6.9% overall in the GTA and Vancouver in 2013 before the record number of building completions in 2014.  CMHC is using a nonsensical calculation to calculate condo vacancy and actually thinks that there are only 1200 vacant condo units in the Toronto area according to what they said to Macleans’ Jason Kirby, I just don’t believe any of their figures.

I don’t even want to think about what is going to happen with the additional buildings completing this year.

One thing is clear. Non Permanent Residents have close to nil impact on anything but the affordable housing market. By definition they have no status and are non permanent. They cannot get a mortgage or even a credit card. Why would they even consider buying a condo? Will they rent a few apartments ? Sure, but like most younger people they are likely to find a few fellows and share a spot.

In my activities renting downtown, I very rarely see this demographic and I do not think they are driving the “condo rental market”. Of the bunch of apartments I manage I think I have one occupied by this demographic. So less than 1%. I rented to more economic migrants from Quebec last month than I have Non Permanent Residents in my entire portfolio and rented over a period of years. If this was a significant demographic I would know it.

Young people who are just starting out are the occupants of these condos. They cannot afford to buy and they don’t want to rent old sad apartments and so they rent condos. They make good money and have good credit.

And frankly I just want to strangle the people who genuinely believe that grandma and grandpa are going to move out of their large spacious paid off homes, selling all their furniture, moving away from their friends to go live in a sterile, rule happy, maintenance fee charging condo. I would like for it to happen, but it just isn’t. Back when condo developers still built condos for the end user/buyer this idea had a chance. Current developers are selling to investors, with promises of great wealth and lucre. Unfortunately the condo’s primary purpose is housing, not investment. The person who will end up living in this “product” is nowhere in sight. The developer doesn’t care because he has his money. One thing is for sure, Grandma will not like it, she will not rent it and she will not live in it.

There are real cracks showing in the condo market and still we keep building like crazy crazy canadian beavers. Let’s kick the can down the road, there’s nothing to look at here.

The landlord’s core business revenue is rental income. In Toronto that rental income is not sufficient to cover the expenses of the condo. Landlords are losing money. The condo rental business is not sustainable and now that the vacancy rate is rising precipitously and raising more with every completion, it’s only a matter a matter of time before the talk at the water cooler turns grim.

Notice how all the talk is of “houses” raising in price… but what about condos? Not so much. But are we building more houses? No. What are we building thousands and thousands of? Condos.

I’m pretty sure I’m not the crazy one.

 

 

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4 Comments so far ↓

  • Joe Strul

    Hello Rachel

    I am sure from your recent experience with your particular inventory/landlords your obdervations are correct. Certainly, there is lots of new condo inventory in the GTA. In a perfect world new condo inventory would become available at the same pace as demand. In a free market however, the natural course is reversion to a balance between supply and demand. Over the shorter term, both oversupply and shortages are quite normal. Currently the GTA may be experiencing an oversupply. Free markets tend to even out over the medium and longer term (3 – 5 years on the average). It is my belief that Toronto is quickly running out of condo build space, new construction will gear down, oversupply will be absorbed and a tightening of available rentals will occur, resulting in higher rents and even higher resale prices. For most younger first time renters/buyers condos are the only affordable choice. Family homes are in short supply, are unaffordable and will continue to remain unaffordable even in the longer term as development costs and high taxes continue to rise unabated. The GTA population will continue to grow as it is the major source of jobs for young people. If and when interest rates begin to rise, the rental market will begin to experience rising rental rates as fewer people will be able to afford higher mortgage costs. Condo owners will then be able to charge higher rents and have positive returns. At the moment, low interest rates encourage renters to purchase instead of renting. The trends will eventually reverse. Real estate in the Toronto area will never be available at bargain prices due to high densities, high costs of development and ever increasing taxes. Take a look at New York city today and that is what Toronto is headed for.

    • Rachelle

      Hi Joe,

      Thanks for your well thought out comment. You are correct that we do as a market experience inventory issues, but right now there are an additional 485 buildings in the pipeline to add additional supply. That’s an awful lot of units. I don’t see Ontario’s population growing enough to absorb all these condos either. This year I have seen condos sell for 10% under asking. I think that the building will stop, but not because we have run out of room for condos, but because there is a bubble busting hurtling towards us at breakneck speed. Add the pension funds being misled by CMHC into thinking vacancy is tight and building even more rental buildings to add more supply in the high end market and you have a recipe for disaster.

      I want to be wrong, so so much but I have never seen this type of vacancy problem in all my years of renting.

  • Thelma Evans

    Hi Rachel,

    Thank you for sharing your blog.

    I wanted to point out that CMHC does promote mortgages for non permanent residents: https://www.cmhc-schl.gc.ca/en/hoficlincl/moloin/hopr/upload/CMHC_Newcomer.pdf

    I am sure the banks do see newcomers (permanent or non) as a very viable market source given CMHC insurance.

    Nonetheless, I agree that vacancy statistics do not seem to correlate with on-the-ground experiences.

    Have A Great Day!

    • Rachelle

      Great just when I thought that some people cannot get mortgages I am wrong, everyone including visitors to the country get approved. How lovely.