The real estate market in Toronto is going through a total roller coaster ride in the past year or so. The end of last year saw property prices increase to historic highs. This has also had a knock on effect on rental prices across major metropolitan areas. One of the most affected areas is the Greater Toronto Area, which has seen both housing value as well as rental rates increase. With the bear hitting the market, housing value started to drastically since the beginning of this year. This was expected to lead to lower rental prices, especially for condos, but conversely the rental rates have only been heading one way – up. A recent report has suggested that the average rent for a condo in the Greater Toronto Area has increased by 11% compared to the last year.
So what has caused this surge in the condo rental prices in the Greater Toronto Areas?
Here are some of the most important factors:
1) Change in loan eligibility:
This is by far one of the most important factors that has led to the slide in the overall real estate market. It is no secret that average Canadian home buyer heavily depends on mortgage for purchasing a home. In fact many homeowners exhaust the full loan limit that is being offered to them by their banks / financing companies. The new mortgage rules has been in place since the 1st of Jan this year and has brought some significant changes that made sourcing loans harder than before.
The new rules have made it tougher for buyers to qualify for a loan and the quantum of loan that they can source has also come down with this. Moreover stricter rules on mortgage companies have also resulted in a small increase in interest rates. All these have contributed towards lesser people being able to afford a condo, even with a mortgage. It is estimated that there is a 42% increase in the household income required to purchase a condo property in the Greater Toronto Area, compared to the previous year. This has directly reduced the buying power of many households.
Such an impact has naturally made it harder for people to buy homes and they have now resorted to renting condos instead. This has resulted in higher demand for condo and basic economics suggests that rental prices have to go up if demand goes up. So, in the current market condition it is naturally more preferable to rent a condo than owning one. Many reports also suggest that two years ago, the cost of owning and renting a condo were more or less in the same range. Since this has changed the city has seen a lower turnover of residents in condos.
2) Reduction in Supply:
The overall real estate market has hit a roadblock, which has directly resulted in property developers taking a hit on their revenue. This means that they have lesser floating cash lying around to spend on developing new real estate projects, especially condos. This means that there are lesser number of newer projects for people to move into, so the rent market is limited to the same condos that were available last year. The Greater Toronto Area has witnessed a 3.4% reduction in leasing of condos towards the end of 2017. The vacancy rate is also extremely low at only 1%, a new low for 16 years, which means that the number of condos available for selection is reducing every year for renters.
This reduction in supply is expected to remain the same in the coming years as there are no reforms in sight in the upcoming months that may provide a relief and incentives for property developers to build newer condo complexes. So one can expect the rental prices to remain the same, or even go higher for the foreseeable future, unless there is a change in market conditions.
3) Demographic changes and other factors:
Another key aspect that has led to higher demand for homes in the Great Toronto Area has been the overall industrial growth and jobs on offer in this region. This naturally tends to attract a larger population of people towards the city of Toronto. Currently the Greater Toronto Area is experiencing considerable population explosion, mainly from immigration and migration from other cities of the country.
This puts a pressure on the demand for housing market which tends to drive prices up. The condo market is even more specifically affected as those migrating to new cities generally tend to start out on smaller and compact units much like a condo. A condo is ideal for bachelors and even small families, both of which represent the ideal office going population that are likely to migrate into this region. This would in turn have an effect on rental rates.
Condos are also representative of great lifestyle owing to the range of amenities that it houses. Condos highly appeal to a horde of younger population, mostly working young male / female. The younger population are unlikely to have any savings of their own stowed away to buy a condo and instead would initially consider renting one. This is another factor that impacts rental prices in the region.
Lastly another factor must be taken into consideration. Although this may be minimal in its impact, it also contributes to the increase in rental rates. Millennials are extremely wary about an outright purchase of a property considering the colossal increase in price the market has seen over the decade. Many feel that housing is overpriced or in some cases out of their pricing reach. Moreover the typical mind-set of millennials leads them to be commitment phobic and a property represents a long term commitment – one that will last for several years down the lane. So instead they prefer to rent an apartment that turns out to be more cost effective and requires little to no commitment.