A growing number of condo investors in Canada's biggest housing markets are planning to list their units over the next five years, banking on the profits from rising prices to cash out.
A new survey of nearly 42,000 local condo owners in Toronto and Vancouver by Canada Mortgage and Housing Corporation found that 52.6 per cent of investors were planning to hold their units for at least five years, down from 58.4 per cent last year.
The changes were driven largely by investors in Toronto, where 52 per cent of investors expected to own their unit for at least five years, down from 61 per cent from a year earlier. In Vancouver, the number of investors who said they planned to hold their units for less than two years rose from 8 per cent to 12 per cent. The biggest increase was among investors who planned to hold their units for between 2 and 5 years.
Most condo owners, 84 per cent, said they used their condo as their primary home, while 16 per cent had bought as investors. A third of those said they were renting their units to relatives, or lived there themselves, while little more than half had put them on the rental market.
Most investors owned just one unit, CMHC found. About 18 per cent owned at least two units and nearly 10 per cent owned three or more. The survey covers condo owners in the census metropolitan areas of Toronto and Vancouver, which includes suburban housing markets.
The shift comes as more investors expect prices to rise, with nearly 55 per cent telling CMHC they expected their unit to increase in value this year, up from 48 per cent last year. "You can't find fault with people for thinking that because prices have really gone up in Toronto," said CMHC senior market analyst for Ontario Dana Senagama. "You're bombarded with news every day in terms of price growth has been really strong."
Home prices in both Toronto and Vancouver have risen 8 per cent for the year. While much of the frenzy is for single-family homes, condos have not been immune. Condo prices have risen 4.4 per cent over the past year in the Greater Vancouver Area and 3.6 per cent in the Toronto region. CMHC expects prices to continue to rise this year and into next year.
"Rates are so low so anytime mortgage rates start to go lower prices will always start to go up," Ms. Senagama said. "It creates this whole bidding war situation where people are able to pay more and it drives the price."
Toronto's market in particular is only likely to get hotter this year, as workers flock to Ontario from hard-hit resource provinces like Alberta, driving up demand for housing, predicts David Rosenberg, chief economist at Gluskin Sheff + Associates Inc.
A surge in interprovincial migration to Ontario "will, in turn, risk taking what is a hot market back to a bubble by the time the cycle is over," he wrote in a Friday note to investors.
The economic situation in Alberta and Ontario appears strikingly similar to the mid-1980s, when oil prices collapsed and tens of thousands of Albertans moved to Ontario. At the time, the combination of a low dollar, cheap energy prices and U.S. economic growth helped fuel a Toronto-area property bubble. Housing starts jumped by 15 per cent a year in southwestern Ontario and prices soared at an annual rate of 24 per cent between 1986 and 1988.
It all came crashing down when the Bank of Canada began hiking interest rates, although Mr. Rosenberg believes today's central bank is much more focused on stimulating inflation rather than trying to stop it. Interest rate hikes, when they eventually come, are likely to be far more modest than in the late 1980s.
That will likely mean more pain for first-time buyers looking to get into Toronto's soaring market. "Escalating in-migration inflows coupled with tight land supply and ultra-low interest rates means that this hot real estate market is about to get a lot hotter in the next year or two," Mr. Rosenberg wrote.
Strong migration and the preferences of Millennial workers, who often prefer to rent rather than buy, has kept Toronto's vacancy rate low, despite a surge in condo supply.
Ms. Senagama expects the vacancy rate to rise slightly because of a glut of new rental inventory that hit the market late last year. Investors reported slightly higher numbers of vacant units last year compared to a year earlier, CMHC found: 7.6 per cent said their units were empty, up from 6.9 per cent last year.
CMHC also found substantial differences between people who bought condos as a home and those who bought as an investment. Investors were more likely to have bought their units presale, and more of those lived in Toronto than Vancouver. They put down higher down payments (45 per cent of investors paid 20 per cent or more, compared to 31 per cent of owners), were less likely to have a mortgage, less likely to expect their unit to rise in value, and kept their condos for shorter periods of time (23 per cent of investors said they planned to keep their condo for 10 years or more, compared to nearly half of owners who lived in their unit.)
It is the second year that CMHC has surveyed Canada's two largest condo markets in an attempt to get a better understanding of the explosive growth of investor activity in the housing market.
The survey excluded a large swath of condo owners from its definition of investors, including those who owned two homes but were choosing to live in their condo and rent out their other home, along with condo owners who were renting out their units and also renting elsewhere themselves. Foreign and institutional investors, were also excluded from the survey, as well as condo investors who owned units in Toronto and Vancouver but lived elsewhere in Canada. The narrow focus of the survey was due to "survey design and cost considerations," CMHC said.
"The point we want to make with this survey is this is a data gap that we've identified, that the industry has told us," Ms. Senagama said. "This is just part of the puzzle of the overall investor picture that we're hoping to get at."