Canada’s Condo Markets Face Perfect Storm As Rental Rates Tank, Costs Jump

Add yet another to the many imbalances in Canada’s pandemic economy: Renters are catching big breaks as rental rates drop, while condo owners ― particularly investors ― are looking at potentially rough times ahead.

In fact, for condo owners, just about everything that could go wrong ― from bad construction and rising insurance costs, to rental rates that can’t cover mortgage payments ― is going wrong.

Rents are falling in most Canadian major cities, pulling down the average asking rent by 8.1 per cent from a year ago, according to the latest data from Rentals.ca. Much of the decline came in the spring and summer, with the average price more or less stable in the past few months.

Toronto led the decline, with one-bedroom apartments down 17.3 per cent in a year, to an average of $1,922. Two-bedroom apartments fell by 14 per cent, to $2,531.

Winners and Losers: What a Biden presidency will mean for Canada’s economy. Story continues below.

 

Rent rates are now down from a year ago in most major cities, including Vancouver, Calgary, Edmonton and Ottawa. Bucking the trend are Montreal, Quebec City and a number of Ontario cities that appear to be benefiting from an exodus out of Toronto, including Kitchener, London and Oshawa. (See chart below.)

“We continue to see an increase in listings nationally, which tells us that supply is outpacing demand,” said Matt Danison, CEO of Rentals.ca, in a statement. “This market imbalance suggests soft rental market conditions will continue for the rest of the year.”

And those who are still renting seem to be changing their priorities.

“Since March, when pandemic fears accelerated, tenants have shown a greater interest in being close to grocery stores, a desire to be in a quiet neighbourhood ― which makes sense when working from home ― and being in proximity to parks, which is much needed when many activities are shut down due to COVID-19,” Rentals.ca said in its latest rent report.

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Amid the pandemic, fewer people than normal are looking for apartments. There has been a sharp decline in immigration to Canada, and a jump in college and university students learning from home. 

Add to that the many apartments for sale and rental markets when Airbnb busted out, and record high numbers of new condos headed for the Toronto and Vancouver markets in the next few years, and you have a recipe for falling condo prices ― something real estate agency Re/Max warned is headed for Toronto.

That piles on the bad news for condo owners. Many, especially in more expensive cities like Toronto and Vancouver, weren’t able to break even renting out their condos even before the pandemic, and falling rental rates will make matters worse.

Insurance costs rising

At the same time, condo insurance costs are on the rise in some parts of the market, particularly in Western Canada. Premiums were up 16 per cent in Alberta and British Columbia in the third quarter of this year, compared to a year earlier, according to an index from LowestRates.ca.

“The industry expects prices are only going to get more expensive as insurance companies deal with rising building costs, increased weather events and more claims,” the rate comparison site’s CEO, Justin Thouin, said in a statement.

Insurance rates rose a more modest 3 per cent in Ontario, but “industry watchers believe rates in that province could spike for the same reasons as in Alberta and B.C.,” LowestRates said in a report.

Many condos “have been built quickly to keep up with record demand. Brokers we speak to have mentioned that there has been a growth in claims arising from workmanship issues, and part of this may be due to many of these projects working on shorter timelines to meet demand,” the report added.

Sudden shift

The condo market looked fairly healthy over the summer as sales soared from “pent-up demand” following the end of the spring lockdowns. But as the pandemic wore on, homebuyers’ attention started changing focus.

“The shift in the condo market occurred around June,” said Deb Burgoyne, president of the Ottawa Real Estate Board, in a report last week.

“There has been a lot of speculation about changing buyer behaviour and preferences due to our pandemic reality, with homeowners wanting home offices and gym space, for example … Buying preferences may be shifting towards a desire for properties with more square footage than this property type offers.”

The number of condo apartments available for sale in Toronto jumped 155 per cent in October, from the same month a year earlier, to record highs. Sales fell 0.4 per cent. Condo sales were still up from a year earlier in Vancouver, by 13.4 per cent, but active listings jumped 53 per cent. This shift in supply and demand is by far the strongest sign a correction may be headed to the condo market.

So how long, or how bad will it be? Amid the second wave of the pandemic and more economic uncertainty than anyone has seen in decades, no one is willing to hazard a guess. Stay tuned.

Rental rates falling in most Canadian cities