With Toronto's real estate running away at over 30% appreciation from March 2016 to March 2017, we are no doubt in bubble territory. The rapid increase is seen in the 416 and 905 area code across the GTA.
The rental market is experiencing a similar trend where demand has outpaced supply. Lack of rental housing and strong demand to live close to jobs in the city core have pushed rental rates higher.
Rental units built after November 1991 do not fall under the rent control guidelines set annually by the Province. This means real estate investors who own investment condos can increase rent via N1 form above the set rate which is 1.5% for 2017.
Investment condos built since 1991 have carried the load in providing housing for tenants in the city of Toronto. Purpose built rentals have not been built ever since rent control was introduced in the early 90s.
The media has latched on a handful of cases where tenants' rents have increased in some cases by over 50% and created a frenzy. These are a handful of cases compared to the tens of thousands of rental units where rent is increased according to inflation or government set rate. The reality is rent is set by market demand and supply which for many years has been very stable with the exception of last year where rents have increased by approximately 10% (not 100% in ONE case). Now the provincial government is contemplating introducing rent control for units built after 1991.
Here are 3 reasons why rent control is bad for affordability:
1. Reduced Supply
Developers who have purpose built rentals in the pipeline have threatened to stop the projects. This will result in less new supply of rental units brought the marketplace
2. Tenants Staying Put
A new rent control will result in tenants staying longer in their rental units since rental increases would moderate. Less tenants moving would reduce available rental units
3. Real Estate Investors....Out
With costs increasing above inflation (property taxes, condo fees, water fees charged by the city, etc.) profitability evaporates for investors. If a business generates negative cash flow (not profitable), business owners would shut it down. With the lack of building purpose build rentals in the last 3 decades, individual investors stepped in to provide rental stock to meet market's demand. If investors sell their units, less rental supply would be available
All of the above 3 factors would result in reduced supply and we all know with less supply prices go up. Just look at the low rise (detached, semi-detached) market. The severe shortage in supply has resulted in 30+% price appreciation. Stripping out supply of rental housing would have a similar outcome as the low rise market.
Government's intention might be good but it will result in lack of rental affordability. The real solution is more supply of rental units via developers and individual investors.
Benjamin Tal's, CIBC's Deputy Chief Economist, take on rent control courtesy of BNN.ca (click on image):
With the market pausing to understand the impact of these new housing rules, there will be opportunities to buy investment condos as some buyers will sit on the sidelines.
What Should You Do If You Own An Investment Condo?
Real estate investors who own investment condos can take the following action before new rent control guidelines are announced:
1. Evaluate current market rents for similar investment condos in the building and immediate area
2. Issue N1 form with the appropriate 90 day notice period to bring up rents up to market level
3. Complete a 3-5 years cash flow analysis on the investment condo based on rental increase of 1.5% annually and 3% for expenses increase. This is a stress test to determine if additional capital is required to reduce mortgage amount / payment
To get a copy of our investment condo 5 year cash flow analysis, please contact us.