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Construction crews work at the St. Lawrence Condos in Toronto on Oct. 29, 2020.Aaron Vincent Elkaim/The Globe and Mail

For the first time, more than half of condo investors in the Greater Toronto Area are losing money on their properties – a “meaningful shift” that could result in fewer available rental units and higher rents, according to a report from CIBC Capital Markets and market research firm Urbanation.

Of those investors who bought a newly built condo with a mortgage in 2022 and rented it out, 52 per cent lost money on a monthly basis. While rent reached new highs during the year, that growth was offset by rising mortgage costs as interest rates soared, in addition to condo fees and property taxes.

Investors still benefit from the accrued equity and capital gains – and experts say those benefits will continue to overwhelm negative short-term cash flow. But investors’ losses will only get worse in the next few years, as condos sold at peak prices in 2021 and 2022 are completed and put on the market, according to the report.

In 2020, GTA condo investors who bought a unit with a mortgage made $63 a month, on average. In 2022, they lost $223 – a reversal that could make them less willing to buy properties to rent out in the future. Fourteen per cent of condo owners lost $1,000 or more per month, the report found.

This hit to monthly earnings could reduce new condo demand and new construction and, ultimately, further constrain Toronto’s already stretched rental market, said Benjamin Tal, deputy chief economist of CIBC World Markets Inc. And if they want to break even, many condo investors will now need to raise rents even further.

This is bad news for renters in Toronto, where condo investors are the largest suppliers of rental units to the market, as opposed to purpose-built apartment rental companies as in most other cities, Urbanation president Shaun Hildebrand said.

Why more rent control isn’t going to fix Toronto’s housing affordability problem

Nor are things getting easier for investors buying condos in the resale market. In 2022, less than a fifth of resale condos bought and rented out were cash-flow positive. This is comparable to prior years. However, investors last year were 60 per cent further in the red than in 2021, losing an average of $537 a month.

Of condo investors, 75 per cent bought with a mortgage, and those who had a mortgage from a Big Five bank were most likely to turn a monthly profit, the report found. It did not assess the remaining quarter of condo investors without mortgages, but Mr. Hildebrand said many of these buyers use a home equity line of credit or are otherwise leveraged, and would therefore be even less likely to take on an investment that loses them money.

One possible result of a shift in investor behaviour could be a push toward more purpose-built rentals.

“Eventually, rents will rise to a level that will make the economics of building rental attractive again for developers. But it comes at a cost of rental affordability,” Mr. Hildebrand said. Already, average rent in purpose-built rental buildings was $3,002 a month during the first quarter of 2023 – a new high, Urbanation found in a separate report.

Currently, developers are reticent to put up those buildings because they have not been as profitable as condos, and because construction and management is a much longer endeavour. But purpose-built buildings or apartments in pre-existing buildings offered by rental associations are often considered more ideal, as they are managed by a professional landlord and because their rent tends to be cheaper.

Yet experts say that average short-term losses will have little effect on most condo buyers, who are banking on the equity and appreciation of the value of their unit for resale. Madiha Khan, a sales representative at Union Capital Realty who deals primarily with condo investors, says her clients are aware that Toronto condos are often held at a monthly loss.

And for most investors, units are still turning a profit over the longer term, said Avis Devine, an associate professor of real estate finance at York University’s Schulich School of Business.

“I don’t think that this is going to drive investors away,” Ms. Devine said. “If anything, this means that investors who own multiple units will curate their holdings. But there’s no fire sale.”

The overwhelming issue remains a mismatch between the existing and the required units in the GTA. In its annual housing market outlook published in April, the Canada Mortgage and Housing Corp. predicted a slowdown of housing starts over the next few years, as a result of mortgage rates, construction labour shortages and high costs of materials. Meanwhile, CMHC found that demand for rental units is only increasing, as immigration to Canada is expected to rise over the next decade.

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