Remember when the world stood still during COVID, and rents took a nosedive, dropping by a whopping 20%?
Now that we’re in a technical recession based on our latest GDP data, will we experience a rental rollercoaster once again? Let’s find out!
As real estate investors, timing the market is hard and that’s why we often say instead of focusing on price risk, the more important part is to make sure the rental numbers work.
Now that interest rates look like they’re levelling off, you probably want to check how far off your rent projections might be if rents change in the future and one factor that might affect where rents go would be where our economy is headed.
To check this, the Bank of Canada is closely watching GDP data, especially in the third quarter. What we just saw is two quarters of economic construction in Q2 and Q3, and that means Canada is now in a contraction by technical definition.
What happens next is two-fold – we’re likely at peak rates which gives support to home prices but a recession will also typically lead to fewer jobs and possibly lower rents if the renters’ incomes are impacted.
Rent prices often follow track interest rates as landlords pass cost increases to tenants, and we saw this clearly in the past year and a half. So, when interest rates shot up quickly over, rent prices followed suit.
But now, if big banks are expected rates to come down in 2024: how much might rents come down?
Interest Rates, Rents and Cash Flows
Math can tell us part of where it might be headed. If we see interest rates come down by around 1% by end of next year, that could mean rents might follow with an 8% drop to keep landlord cash flows more or less the same assuming prices also stay the same.
But that’s just part of the picture because our rental fundamentals are strongly supporting rents nowadays – which is very different from the pandemic, which allowed rents to come down around 20% pretty quickly.
Supply And Demand Affecting Rents
Here’s the difference.
During the pandemic, we closed off our immigration border and we saw an urban exodus with many renters in Toronto leaving to the suburbs temporarily. Nowadays, immigration is on the rise with huge targets and people are coming back to to cities so the rental demand is much, much stronger.
On the supply side, we’re seeing less interest in real estate investing because of high rates – what this does is create less new rental housing, crushing new supply and both of these will end up giving support to rents even with a recession.
Employment & Rents
Employment is still a very risk for rentals if we hit a recession. We believe renters are still going to stay in the city, and with our diverse economy, there is a lower risk of single sector economies in smaller towns.
But what we should see is a shift to more affordable rents which might end up meaning bigger rent drops in condos and more demand and rent support for multi-family apartments.
What Kind Of Deals Still Make Sense?
All in all, we do think that the real estate market is becoming more predictable.
Change in real estate prices are expected to swing less than before, interest rates are levelling off, there’s strong upward supports for rents even in a recession, so there’s more certainty to help you make clearer math-based real estate investing decisions when you look at rental income and cash flows.
Here’s a deal we’ve been eyeing lately: This is house in prime Toronto that might sell for $800,000! It’s an amazing price just given the location being 10 minutes to downtown, but let’s check if the numbers work.
The house has strong bones, but needs around $100,000 of renos to finish up 3 1 bedroom units. After everything is done, you could hit $6,550, and that translates to $1,500 of monthly cash flows assuming you lock in a 3 year fixed rate of 6%.
The downside price risk is low given the great price and strong cash flows. The interest risk is also minimized with a 3 year fixed rate.
And since each of the 1 beds are renting much lower than condos at $1750 to $2400 a pop, there’s probably lower rental risk in these units too and so this is something that we’d say is a great opportunity today.
How We Can Help
Of course, this specific house might not be the right fit for you – but there’s definitely other great options even if you’re looking for smaller renos or even bigger value add.
If you want to explore different options based on your needs, just reach out to us. We’re not your typical real estate sales brokerage. Our team’s main focus are on cash flowing investment properties in Toronto, and we’re here to help you find the right one for you and help you through renovations too if that’s something you’re looking to do.
To get started with us, just head over to this link below to set up a zoom call with us.