Introduction
Average GTA rents have risen by double digits in the past year! No matter how you look at it, the huge growth is pretty clear. TRREB’s latest rental report shows between a 13 to 25% annual increase in rents, and other sources like torontorentals.com show a similar growth, with the average annual rent increase sitting at 19% as of June 2022.
If you’re a real estate investor in Toronto and you want to understand more about why rents are rising so quickly, watch this video.
Toronto Rental Demand
Rents in Toronto dropped in 2020 and 2021, and it wasn’t until recently that rents had gotten back to pre-pandemic levels. Here’s the thing: Rents and real estate prices typically have an inverse relationship. When property prices are going up quickly, rent growth is usually weak. When property prices start to come down, rents start to gain speed.
So perhaps we can start by taking a look at who’s looking for rental apartments these days. If you ask our leasing team, they’ll tell you that a big majority of renters looking for a place are those who don’t currently live in Torotno right now. We know that throughout the pandemic, a lot of people moved out of Toronto because they didn’t have to work in the city or they didn’t have to go to in-person classes anymore. So when you combine this with the fact that all the fun things to do were also shut down, there’s not much of a reason to stay in the city.
Now that things have reopened, it’s very obvious that people are moving back, and a lot of these people are renters. Because of those returning to Toronto, we also see a lot of new immigrants looking to rent. Here are some stats for your reference.
We’ve already seen a record growth of new immigrants last year to Canada at 405,000 people. But now, we’re expected to beat that record for the next few years with targets of 431,000 this year in 2022; 447,000 next year in 2023; and then 451,000 in 2024. Almost half of the newcomers end up living in Ontario, a good majority specifically go to the GTA, and most end up renting first.
Toronto Rental Supply
Now what’s happening with the rental supply side? The first thing to note is that there are just a lot fewer units available for rent because existing tenants aren’t moving as much because they want to keep their lower rents.
Here’s an example: If someone started renting a basement one-bedroom last year, they might have paid $1,400 per month. Even with a 1.2% rent increase for 2022, they’d still be paying $1,417 this year. A similar unit now on the market rents for $1,600, so if they want to avoid a bigger rent bump, the wise thing to do is to stay put.
The second reason why there’s less rental stock is because fewer renters are turning into homebuyers these days. Take a look at this. When rates were at 1.75%, a couple with a $150K family income was able to afford a home that was around $1M with a 20% downpayment.
Nowadays, because stress tests are getting tougher with rising interest rates, this same couple would only be able to afford a home that’s $787K. So even before considering higher mortgage costs, new homebuyers are forced to rent for longer because they’re getting priced out of even 2-bedroom condos in Toronto, which are typically over $800K these days. Tenants staying put end up contributing to a huge drop in rental listings, and you can see this pretty clearly in TRREB’s latest Q2 report, showing a 30% drop compared to last year.
Existing listings are down, and new rental stock is also dropping. When interest rates fell to rock-bottom levels, we saw a huge increase in real estate investors, who took over the largest buyer market share in Ontario last year. What ended up happening is that these real estate investors created new rental stock, which ended up helping meet the growing rental demand, which slowed down rent price growth.
But now that interest rates have started going up, this has slowed down buying in general, and investors are the first to move to the sidelines. Here are some numbers, just for perspective:
- There were zero new single-family homes sold in June.
- Developers are delaying the construction of 10,000 units because precon sales aren’t going well.
- TRREB sales volume is down at least one third compared to last year.
So, as you can see, it’s pretty clear what’s happening. Demand is increasing, which adds fuel to the fire, but the big change comes from a supply drop like a rock, which is causing rent prices to shoot up at a record pace.
Freehold Real Estate Investments In Toronto Now
The reality is that investor holding power in Toronto is a lot stronger than the media might portray it to be. If you’re thinking about entering the market these days, cash flows aren’t so bad if you can afford freeholds. Yes, freeholds in Toronto do cash flow positive on the market today, even if you use much higher interest rates at 5.5%.
In my last video, I talked about bond yields falling by 100 basis points in the past few weeks, and it’s possible to see fixed rates follow soon. So if your borrowing rates end up being less than what you projected them to be, then you’ll end up with even better cash flows and this might also end up being the turning point that gives the real estate investment market the support it’s looking for. I do dive into this more in that video, so definitely head there if you want to learn more about this.
How We Can Help
As you can probably tell from what I’ve been talking about, we’re big believers in investing in freeholds in Toronto, and we’re a real estate sales brokerage that focuses on just that. So if you want to chat more about this, we’re ready for you!
We can 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.
Want To Get Started With Real Estate Investing In Toronto?
We’d be happy to learn more about your situation and help you find the best investment opportunities for you.
