Investors don't need to unload their properties because of the positive cash flows from their investment properties. Moreover, most investors are wealthier than the young first time home buyers, so they have the better abilities to borrow the mortgages or hold their units. However, there are many first time home buyers have to turn to the rental market and to help these investors paying back their mortgage thanks to the strict mortgage rules!
hmmm, who's opinion should i give more credence to ... yours or Joe Vaccaro, president of BILD and Brian Johnston, president of Monarch Corp., or Urbanation, etc:
"Mr. Vaccaro said rental rates have been “mostly flat” but he says the real test will come when all the towers now under construction hit the market. “We will have to see what impact that has in terms of the rental market,” he says."
Brian Johnston, president of Monarch Corp., says he always wonders what type of rental rates investors are expecting. “It’s not apparent to me there is a great return,” he says. “I think it’s mostly capital appreciation. The fallback position seems to be if they can’t sell it or the market is soft, I’ll just rent it.”
http://business.financialpost.com/2012/03/20/toronto-condos-lose-investment-lustre/
It’s just one month, but a new set of numbers from Toronto builders showing condo prices climbing just 2% on a year-over-year basis could make investors think twice.
The condominium market in the city, the biggest of its kind in North America for that class of housing, is largely based on a capital appreciation.
Most investors finance their units knowing that they will be unable to carry them on a cash-flow positive basis based on present rental rates.
“If you are negative cash flow and the thing is not going up in price, you are out of there,” said certified financial planner Ted Rechtshaffen, noting at these rates, the condo owner has more reason to worry.
The 2% rate — a return you could get from an online bank — would be in stark contrast to the 7% to 9% annual increase condo research firm Urbanation Inc. says has been the norm for the last five years.
But the past February to February, the Building Industry and Land Development Association (BILD) says that new condominium purchases across the Greater Toronto Area were an average of $532 per square foot in February, up from $520 per square foot a year earlier.
“I guess what I would say is the 2% reflects two things,” Joe Vaccaro, president of BILD, adding at that price developers have been able to keep condo prices in check. “The reality is units have shrunk in square footage overall; they’ve gone down by 100 square foot over the last five years on average. You are getting a smaller unit, but to remain affordable, they have turned to more innovative designs.”
At the same time as prices gains are slowing, Mr. Vaccaro said rental rates have been “mostly flat” but he says the real test will come when all the towers now under construction hit the market. “We will have to see what impact that has in terms of the rental market,” he says.
BILD says it’s still early, but so far, high-rise sales for the first two months of the year are down 51.2% compared to a year earlier. The group points out 2011 was a record-breaking year.
The numbers could represent just a short blip because Urbanation says its latest statistics, which were based on the fourth-quarter of 2011, showed prices up 8% from a year earlier. The group says the average sale price was $509 per square foot in the fourth quarter, up from $471 square foot a year earlier.
Ben Myers, vice-president of Urbanation, agrees that many investors in the GTA are not cash-flow positive on those properties, taking the loss because they’ll make money on the underlying condominium.
“It’s hard to say what is cash-flow positive. In the downtown core, at $650 to $700 per square foot with a minimum [20%] down payment, definitely not but a 905 project likely will because they only cost $400 to $450 per square foot,” says Mr. Myers.
The average size of a new condominium in the GTA is 650 square feet per year, meaning based on average price, it will cost you $330,000. With rental rates on average $2.21 per square foot, you could expect close to $1,450 per month in rent.
But will that rent cover your costs? If you put 20% down, a $264,000 mortgage at even 3% amortized over 25 years, your principal and interest costs would be close to $1,250. Monthly condo fees are about 50¢ per square foot per month on average and property taxes are about 1% of home value. Add in heat and hydro and you are easily under water.
But the condominium game continues to be about capital appreciation and a 2% the return would shrink the pool of investors. “Investors would be leery at 2% and may look elsewhere to put money,” says Mr. Myers, adding a key consideration is many investors put significant cash into a deal, not burdened with a large mortgage payment and looking for a safe long-term investment.
Brian Johnston, president of Monarch Corp., says he always wonders what type of rental rates investors are expecting. “It’s not apparent to me there is a great return,” he says. “I think it’s mostly capital appreciation. The fallback position seems to be if they can’t sell it or the market is soft, I’ll just rent it.”
Prices are still going up in Toronto’s condominium sector and maybe the 2% bump is a blip but if prices start to fall, or worse yet flatten out, you have to believe condo investors will be checking out in the future.
