Rental and Ownership in Toronto’s Downtown Core

It has been a huge year for Toronto’s condo market, with significant growth in Q3 2017 in overall inventory as well as costs. In this commentary, DBRS examines the condo scene in Toronto and concludes that condo ownership will remain unattainable for most Canadians because of the lack of supply, which is driving up costs, Toronto’s soaring population and new home-buying regulations (see also The Toronto Condo Market Goes Suburban in the same multifamily series). This commentary also looks at some of the new non-luxury developments slated to be constructed in the former City of Toronto1 area and provides industry perspective on projected-development over the next few years.

Inventory issues remain, despite industry studies predicting a strong increase in condo and apartment developments well into 2018. One of these studies, Bedrooms in the Sky: Is Toronto Building the Right Condo Supply?, drafted by a joint initiative of the Ryerson City Building Institute and Urbanation, recently asserted that while condo development has never been as high as it was in mid2017, it is still not enough to address Toronto’s booming population. In the Winter 2017 Canadian Real Estate Forum, the Altus Group reported that the rate of total population growth in the former City of Toronto (which is generally considered as central or downtown Toronto within the current boundary of the city) has escalated in the past decade.

As stated in the publication, from 2011 to 2016, the former City of Toronto’s population jumped by 67,000. This is likely related to a spike in immigration and growth of new families, increasing demand for housing and rental accommodations and ultimately resulting in rising home prices and rental rates. According to the Ryerson/Urbanation study, there are 105,000 condo units currently in development, which is higher than any other year. However, these properties are also quickly disappearing from the market with a presale rate of 94.0%. Moreover, a growing population has increased demand for condos and is kicking up the affordability gap exponentially, with the price gap between single-detached houses and condo apartments tripling since 2007, to $600,000 from $200,000, according to the study.

The high average cost of buying a home is leading residents to explore rental options; however, potential renters are finding themselves in similar financial straits as buyers because apartment rates are also starkly on the rise. According to the Canadian Mortgage Housing Corporation (CMHC), the average rental rate of a two-bedroom apartment in Toronto (Zones 1–17) rose to $1,426 a month in 2017 from $1,341 in 2016. This increase is the result of competition stemming from a 1.0% vacancy rate — the lowest on record in 16 years. Toronto’s rental rates are among the highest in Canada, coming second only to Vancouver, which averages $1,552. The lowest rental rate in Canada for a two-bedroom apartment is Trois-Rivières, Québec, at $594. Like the Ryerson/Urbanation report, CMHC also asserts that condo apartments will be the driving force in new home construction.

Per the following table, which shows new non-luxury condo developments across the Great Toronto Area (GTA), the average starting price for condos is calculated to be approximately $312,500. Bidding wars hike this price up further, as more people compete for property ownership in the downtown core. This hefty price tag puts home ownership starkly out of reach for most first-time home buyers looking to own property within the City of Toronto, as explained further below.

Source: GTA Homes

Changes to mortgage lending rules in Ontario and the Bank of Canada’s recent interest rate hike are putting further pressures on Torontonians looking to enter the market — first-time buyers especially. The Bank of Canada raised interest rates to 1.25% from 0.25% in January 2018, and Canada’s Big Six banks increased their five-year mortgage rates to 5.14% (an increase of 15 basis points) as a result. Ontario’s new mortgage stress test evaluates how home buyers who place a down payment of less than 20.0% would fare if interest rates were to increase. Depending on the test’s outcome, potential buyers may not qualify for a mortgage for their preferred property. In other words, failing the stress test would disqualify the applicant for mortgage approval on the property he or she was aiming for. Higher interest rates and more stringent stress testing will likely work in tandem to make home ownership in 2018 much less attainable for would-be city dwellers.

Despite the mitigating factors across Canada (particularly in the GTA), there is some promising news for 2019. CMHC forecasts that while national home prices will continue increasing in the foreseeable future, they will not increase as quickly as they have in recent years: “The [national] average price should lie between $493,900 and $511,300 in 2017 and between $499,400 and $524,500 by 2019.” CMHC also predicts an inventory decline in overall units in the market, with the number of units in 2019 being significantly lower than the estimated range of 206,300 to 214,900 units for 2017. In the fourth quarter Condo Market Report, the Toronto Real Estate Board reported that sales volumes have cooled with a 15.4% decrease from the end of 2016 to the last three months of 2017 (5,773 sales). Though there is a calming market, the average sale price was higher in 2017 ($515,816) than in 2016 ($437,412).

So, where does all of this leave hopeful homeowners? According to Karen Gu, Senior Vice President of DBRS’s North American CMBS group, the developing inventory will likely still fall behind demand: “It is an issue of inventory, but it is difficult to develop more supply with a lack of available land. The solution would be to build up or move out into the suburban spaces.”

It appears that in 2018, home ownership will remain unattainable for most Canadians looking to move to Toronto. A lack of available land for developing and the complexity of repurposing other building types into residential spaces are driving down available inventory. With a rapidly rising population, this will make the former City of Toronto a much more competitive market. Though the average cost of a move-in ready unit in Toronto’s downtown core is calculated to be approximately $311,765, the “condo wars” trend seen in high-demand markets will further drive up the price. First-time homeowners are particularly susceptible to this issue, especially with recent interest rate hikes and other regulations.

This piece is available on the on the DBRS website or by reaching out to info@dbrs.com.

Follow Stephanie Hughes on Twitter @StephHughes95.

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