Toronto Investment Property Review & Outlook: May 2020
As our city is slowly opening up again, we are seeing clearer indicators in the real estate market. With better cash flows and higher appreciation potential, the real estate investment opportunities in Toronto are now much better compared to 2019.
"It's a buyer's market right now, with more opportunities for higher cash flows and appreciation potential vs. 2019."
Property Prices May Drop To 5% Below Q1 2019 Levels
Due to lockdown measures, both buyers and sellers are holding off on the real estate market. Because of this, there are big declines in both the number of listings and sales. There will be situations where a seller must sell, so there’s a smaller drop in listings compared sales. As these are typically more motivated sellers, selling prices have dropped 5-10% from the peaks in March 2020 back to the levels seen in Q1 2019.
Here’s a snapshot taken from the latest TRREB MLS Data from April 2020 for the GTA:
As of May 2020, there’s increasing interest from buyers who are ready to enter the market when they see the right deal, especially in our freehold space. Great deals are now being sold within days. On the other hand, there’s no longer a bidder war which is a plus for you as a buyer.
We’re also seeing a lot more properties in the pipeline waiting to be released onto the market. As the city eases lockdown measures, we anticipate a greater short term supply of properties being sold and a strong price support at around 10-15% below the peaks in March 2020, or around 5% below current levels.
Rents Expected To Stabilize At Q1 2019 Levels
Q1 2020 has been an interesting one. With stricter rules in the AirBnB space combined with impacts from COVID-19, there was a lot more long term rental supply this quarter compared to the same time last year. What’s happening is that short term rentals are being converted into long term rentals and renters are downgrading or moving in with friends or family. In the short term in the freehold rental market, we expect rents to drop 5-10% from the highs in March 2020 and stabilize back to levels seen in Q1 2019. Below is a summary from the TRREB Rental Market Report For Q1 2020:
Better Cash Flow And Appreciation Today Vs. 2019
Here is comparison between two similar properties, one purchased in Q1 2019 and another that’s on market today. Rents are expecting to stay at Q1 2019 levels – this means operating incomes remain unchanged in both scenarios. On the other hand, current markets dictate a slightly lower purchase price and a lower mortgage rate compared to Q1 2019. As a result, the year 1 return on investment from rental income for the property purchased in May 2020 (13.8%) is significantly higher than the property purchased in Q1 2019 (9.6%).
Because of discounts in market prices, we also expect a higher 5-year appreciation for the property purchased today (24%) vs. to the property purchased in Q1 2019 (16%). In this example, we assume property prices will revisit peaks by 2022, and then appreciate at a conservative level of 3% per year thereafter.
Note that we’re seeing much higher appreciation of over 8% per year in the past 10 years. If this remains the trend, there will be an even bigger difference in the 5-year appreciation between the two properties.
"Lower prices, similar rents & lower interest rates compared to 2019 mean better returns for those entering the market today."
We Can Help When You Are Ready To Buy
It’s a buyer’s market right now, with more opportunities for higher cash flows and appreciation potential vs. 2019:
- Property prices may see supports at 5% below the Q1 2019 levels
- Rents expected to stabilize at Q1 2019 levels
- Mortgage rates at all time lows around 2.6% now, compared to 3.5% in Q1 2019
- Better cash flows from a lower percentage drop in rents vs. prices combined with lower interest rates
- Higher discounts now means a better appreciation potential
If you are interested in knowing more, please feel free to reach out. We’re happy to learn more about your situation and requirements so that we can recommend the best properties on the market for you.