The latest threat to the condo market: apartment buildings rise again

In Canada’s biggest cities, condos were the source of new rental units for a long time. That trend is waning

Row of condos

(Bayne Stanley/CP)

The latest housing market report by CIBC economics research has a warning for the condo markets in Toronto and Vancouver: brace for resales by domestic investors and increased competition with rental properties ahead.

The robustness of the condo markets in Toronto and Vancouver are based on the lack of land availability. The number of single and semi-detached homes being built in Toronto since recession has remained extremely low, while prices of high-end homes kept rising faster than prices in low and mid-range groups. The majority of first time buyers can no longer afford to purchase a single-family home and have turned to condo units instead.

Condos also play a big role in the rental market in Canada’s major cities. The proportion of condos being rented out has steadily increased in recent years: between 2007 and 2014, almost all of the growth in available rental units in Toronto came from condo rentals. Rising house prices made people across all demographics more likely to rent rather than own a home (see chart below), and the incoming immigrant population in major cities helped fuel the strong demand in the years following the recession.

Screen shot 2015-07-07 at 2.19.26 PM

However, CIBC forecasts that the demand for rental units is now slowing, at a time when the supply of rental condo units is estimated to exceed the demand by 2,000 units in 2015 and 2016 in the GTA (see chart below). Condo prices are barely moving up compared to the impressive price tags put on the low-rise segment of the market. CIBC forecasts major resale activity by domestic investors—as there’s little motivation to keep the condo units when resale prices aren’t appreciating and rent prices are flat.

Screen shot 2015-07-07 at 2.17.14 PM

Young families buying or renting condo units might help control the fallout—but condos, for the first time in a long time, are also facing new competition from new-build rental apartments. Some Toronto condo builds have reached the cost threshold of $3 per square foot—a price at which it starts to make more economic sense to run them as rental apartment buildings. CIBC predicts a notable increase in rental supply starting in 2017.