Toronto Rents Rise: What Does This Mean For Toronto Real Estate Investors?
Introduction
One factor that can soften the impact of interest rate hikes are rent increases. But you might think, rents are already so high. Is there actually room to raise them?
So in this video, let’s take a look to see what actually drives rents and what factors might bring the best rent growth moving forward.
Seasonality & Rents
Let’s start with the short term rent trends first. Yes, there are times of the year when people move more than usual. In Zumper’s April Canadian rent report, they talk about this and say that demand for rentals usually goes up as the weather gets warmer.
That makes sense; more students move in and out in the summer, and it’s just generating nicer and easier to move without all the slush and snow. Take a look at this. Here are the rent changes from month to month for one-bedroom apartments in Toronto over the past five years.
If you ignore 2020 during the first year with COVID, you can see that rents tend to go up more in the third quarter of each year, which really confirms what Zumper was saying. So, if this happens again, we should see the rent increases pick up over the coming few months.
Rents & Interest Rates
Next, let’s look at medium term trends, and the first thing I’ll show you is the relationship between interest rates and rents which is clear in this chart.
When interest rates come down, more renters get into home ownership so that ends up dropping the renter pool. The same low interest rate environment also attracts more real estate investors to buy, and that adds more supply to the rental market. And basically, as supply increases and demand drops, we end up seeing rent growth slow down when interest rates are low.
Once interest rates start to rose, those effects reverse. People end up renting for longer periods of time. Less rental stock gets added. So, rental supply and demand tighten, which drives up rental competition and rents.
This is the general trend, but we can dive a little bit deeper to see how this change is depending on where the rental property is. Housing prices are more stable in Toronto compared to the suburbs, but when it comes to rents, it’s actually the other way around.
When interest rates are low, rents are more similar and you can see that the rent gap between the two is compressed. When interest rates start to rise, that gap gets much bigger.
If you want to make sense of this, you have to look to see which market end up getting more renters turned homeowners. Toronto rentals cost more, so the people who rent in Toronto tend to make more money. And so, it would be Toronto renters who become more capable to buy a home and that’s why the Toronto rental market ends up being more susceptible to interest rate movements.
We’ve gone through the period where interest rates are low and Toronto rents dropped more than the suburbs, and now we are entering a period where we expect faster rent growth in Toronto compared to the suburbs in the next couple of years.
Rents & COVID
Now you might be thinking that COVID probably played a role in dropping rents in Toronto too. And you’re right. GTA rentals didn’t budge much over the past two years but it was definitely another case in Toronto.
Rents seem high at the moment but the reality is that we still haven’t fully recovered back to pre-pandemic levels in Toronto. Right now, Toronto three bedroom rentals are just getting back to early 2020 prices and one bedroom rentals are also coming back up to peak prices, but it’s still only halfway there.
In our opinion, as more people go back to the offices for work and more universities start in person classes, we’re going to continue to see more COVID unwinding. Basically, the types of rentals that saw the biggest rent drops in the last two years (i.e. small Toronto units) will probably end up seeing the biggest recoveries from now on
Long Term Factors Impacting Toronto Rentals
The last thing I wanted to talk about more long-term renter preference changes, especially in the affordable rentals market.
Most people would choose bigger units if they can afford it but it really does come down to budget. Those who rent condos typically have better incomes and can afford the shift towards bigger units throughout the pandemic, and this is why we did see bigger average units being rented in condos over the last two years.
But renters with lower incomes usually have tighter price constraints and possibly also don’t get the same luxury of working from home. So, on the affordable rental side, the average rental apartment size continued to shrink throughout COVID.
If this trend happened throughout the pandemic, we suspect that this trend should continue to happen in the long run. As the rent per square foot continues to increase, we will end up seeing a shift from fewer bigger units two more smaller affordable rentals especially closer to the core.
How We Can Help
We’ve talked about how this summer might be the time to get a great investment property deal before. But you might end up getting more than just price discounts if you end up catching another big rent bump.
Think about this. If you get good discounts in the summer, and then rents adjust higher by your closing date which is probably in the early fall, you end up seeing much better than typical rent yields because you managed to get the best of both prices and rents.
If you are exploring whether to buy Toronto real estate soon, we’d be happy to talk more about this! And once you’re ready, we’ll look at your requirements and preferences and then match you up with the best investment property that fits your needs.
After we help you buy it, our team also provides renovation guidance, leasing and property management if you need it. Just connect with us if you want to learn more about our services!
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