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Condominium development in the Liberty Village area of Toronto.Peter Power/The Globe and Mail

An increasing proportion of people are choosing to rent condos in Toronto rather than buy them, driving up rents while sales slide and prices stall.

But the large number of new condos that are coming on stream is weighing on the rise in rents in the city's inner core.

The number of condo rental leases that were signed in the Toronto area topped 5,000 for the first time during the latest quarter, coming in at 5,315, according to data to be released by research firm Urbanation on Monday. That's up 20 per cent from 4,439 during the second quarter last year.

In contrast, the number of newly constructed condos that sold during the latest quarter fell 18 per cent from a year earlier, to 3,903, while the number of existing condos that changed hands dropped 7 per cent, to 4,689.

"The total number of leases over the past four quarters reached a historic high of 17,166 units – higher than [either] condominium apartment sales in ... the resale market [14,247 units] and new home market [13,789 units] over the same period," Urbanation says in its report.

Toronto's high-rise market, which has more towers under construction than any other city in North America, was one of the key reasons why Finance Minister Jim Flaherty tightened the country's mortgage rules last summer. The changes that he made, including cutting the maximum length of insured mortgages to 25 years from 30, made it harder for first-time buyers to enter the market. The central bank, meanwhile, has been warning about the potential dangers of oversupply as the number of unsold units has climbed above 19,300.

Sales have plunged amid the concerns. While Urbanation says that prices are relatively flat, some developers and economists say that doesn't take into account the large incentives – such as free furniture or a year without maintenance fees – that developers are increasingly offering buyers in an effort to unload units. One Toronto developer, who declined to be named, said all things considered he thinks the price of new condos are down 15 per cent.

But the strong demand for rentals is driving rents up. The average rent per square foot rose 4.1 per cent over the last year to $2.35, according to Urbanation. The average rent that tenants are paying rose by slightly less, or 3.9 per cent, to $1,847 per month, as a large number of smaller units came on stream, shrinking the average size of a rental unit to the smallest on record, 785 square feet. "Smaller rental units in newly registered projects are now visibly impacting the market," Urbanation said in its report.

An abundance of brand-new condos did dampen rental growth in the city's core however, where rents per square foot rose by only 1.6 per cent from a year ago. "Several downtown submarkets experienced a surge of listings from new projects, keeping rental rates competitive despite higher demand," Urbanation said. "Quarterly variations in index rents can often be seasonal and driven by supply; however, in aggregate index rents have shifted higher across the market spectrum."

It adds that the shift toward renting comes as few new apartment buildings are being built. "The growth in condo rental activity reflects a greater movement of younger households into the core, and a lack of growth in traditional rental supply," said Shaun Hildebrand, senior vice-president at Urbanation.

But it also comes as some condo owners choose to rent out, rather than sell, their units amid the downturn, and as some potential buyers choose to rent instead because of the tightening that has taken place in the mortgage market.

The number of condos listed for rent in the latest quarter was up 22 per cent from a year earlier.

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