Last week, we talked about the challenging condo market in Toronto.
Pre-construction sales are at a 27 year low.
Resale listings are not moving.
Yet, we keep talking about a significant supply shortage coming along in 2 to 3 years.
Do we really have the demand?
As promised, we are going to deep dive into the rental market data this week.
Which area has the most condo supply?
Of course, downtown Toronto.
In fact, over 75% of condo rental supply in the entire GTA comes from the City of Toronto.
In the first half of 2023, there were around 28,500 condo units listed for rent.
2024 has been a record year of new condo completions, especially in downtown Toronto.
In just the first half of 2024, there were over 44,000 condo units listed for rent, a whopping 55% increase compared to the first half of 2023.
How did the market react to this sudden surge in rental supply?
At the beginning of the year, the government announced a cap on international students to reduce rental demand.
You have heard that it is taking longer to find a tenant and rents are dropping because there are so many inventories on the market.
So how many units actually got rented out during the first half of the year?
During the first half of 2023, around 18,200 condo units were rented.
The first half of this year?
22,500 units were rented, a 23% increase compared to the same period last year.
That’s a very significant increase.
Newcomers to the country continue to be the main driver of demand in the rental market.
There are also people who decided to shift from the sales market to the rental market for now because of the high interest rates.
We just don’t feel the power of the rental demand because it is masked out by the sudden surge in rental supply.
Let’s break down the leased units by unit type.
The number of leased studio units increased by 24%.
1 bedroom units increased by 21%.
2 bedroom units increased by 24%.
3 bedroom units increased by 56%.
You can see that 1 bedroom units are the most popular in the rental market.
3 bedroom units are gaining popularity and you will see why when I show you the rent.
Even though the rental demand increased by 23%, the number of units available for rent increased by 55%.
There are a lot more choices on the market, creating downward pressure on rent.
Even existing landlords suffer from this too. Tenants would ask for no rent increase or even rent reduction when they renew their lease.
The average rent for a studio is around $2,000, which is a 4% drop compared to the first half of 2023.
Average rent for a 1 bedroom unit is slightly below $2,500.
2 bedroom, around $3,250.
3 bedroom, around $4,050.
You see, if 3 people share a 3 bedroom unit, each person gets their own room and pays only $1,350, that’s significantly cheaper than renting a studio or 1 bedroom unit.
Now that we have entered the second half of 2024, the number of new condo completions are slowing down.
The number of completions will continue to decline as we get into 2025.
On the other hand, demand is not going to decrease in the foreseeable future.
In fact, the immigration target is going to increase to 500,000 next year from 485,000 this year.
So the rental market conditions are going to get tighter as the supply and demand gap shrinks.
Here’s the thing.
I would really start to worry about the Toronto market if there’s no demand for housing units and units are sitting vacant.
But that’s definitely not the case right now.
There are obviously demands on housing units, they are just all concentrated on the rental market.
This is also one of the reasons why condo prices are still holding on even though there are very few buyers.
The majority of sellers right now are investors who don’t have an immediate urgency to sell.
They just prefer to offload.
But when they can’t sell at the price they want, they often just turn to the rental market.
When we get to a point where rents start to increase again, interest rates would have decreased to a certain point, some investors will decide to hold on to their units for a few more years.
And some end users are going to move from the rental market back into the sales market again.
Like I always say, things go in cycles, as long as the demand is here, the condo market is going to recover.
Next week, we are going to analyze the July market watch report and I’m always going to share my front end observations on the market after the second rate cut.
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