August 20, 2020 | renting
Renters around Toronto are finally rejoicing. Landlords… not so much. It seems for the first time in a long time, rents in Toronto have gone down. Nothing crazy. Nothing I would consider a huge correction, but it has gone down. From June of 2019 to June of 2020, Toronto condo rents were down roughly 3.6 lower year over year. Not much of a drop (if any) for units in houses. Outside of the city, there have been small increases.
Why the drop? Well, the obvious culprit is Covid, but let’s try to be a bit more specific. Immigration is way down. Bigger cities like Toronto and Vancouver generally welcome more immigrants than other regions in Canada. That flow on new incoming Canadians has been turned down. I don’t say turned off though. I just worked with a family that immigrated here from France in June. Though they were quarantined and their immigration process was slowed down, they now live in Toronto.
The other big thing taking a chomp out of the rental donut is the slowdown in tourism. With many of our tourists coming from the United States and a closed border with the United States, most tourists don’t wish to travel up here to be quarantined for 14 days before starting their vacation. As many of us have learned, Airbnb is taking a hit. Some of these short-term rentals have gone long-term because there is less use for short-term rentals that rely heavily on tourism. And this leads to a larger stock of residential rentals.
Then there’s the students. When I was a student, I rented like so many do now. With many university courses now online, students are not necessarily required to be physically in class. So in turn, they do not need to be renting in Toronto. So, many are living with their parents at home while they are in school.
From my own experience, the rental market has not been too far off the market mark. I did assist a client with the rental of his house in Trinity Bellwoods this summer. It may have taken longer than usual, but it still rented easily, but this was an easy house to rent – presents well, in a highly coveted neighbourhood. The bigger question should be what I have in the title: Do lower rents lead to lower real estate prices?
Theoretically, the answer is yes. From an investment perspective, lower rents tell us that a given property that generates profit for the owner through rent will produce less profit. So, if you are an investor buying a condo, and that condo brings in less profit, it is less valuable to another investor.
If you’ve been following the market for houses this summer, you would know that houses have been rising very fast in prices, even houses that are income properties. Why would they sell so well if rents are falling? Well, if the buyer is not an investor, it doesn’t matter how much the unit or house brings in for income. The new owners want it for themselves. The draw to the house has more to do with living in it. Since rates are shockingly low right now, a higher price tag is much more attainable.
Does that mean lower rents won’t have an impact on residential real estate in the future? Not necessarily. If continual downward pressure on rents persists for long while, it could put pressure on prices. Rentals tend to be much bigger component of the condo market. So, they would feel that downward pressure more than houses. For now, there are two very different markets happening in Toronto. Houses are selling at stronger prices than before Covid-19. Competition this summer has been fierce. The bounce back from the initial Covid shut down was fast and quick. Condos are more sluggish for now. They are functioning very differently than houses. You are seeing less competition and more time on the market. Some of this does have to do with slipping rents.
Whether its houses or condos, I think it is important to point out that Toronto’s market has been extremely resilient. Earlier on in the pandemic, there was a call for an 18% drop in real estate prices of the next year, and that was revised over and over because the market is not correcting in the way some people had thought. I suppose if the drag on the economy and high unemployment stays with us for a time, that could certainly impact the market, but it’s going to take a lot to cause a serious drop in prices for Toronto. Houses are only showing signs of upward movement for now. What will be interesting: When the economy does start to come back and people start returning to Toronto in larger numbers than now, I do think the turnaround could be quick. I don’t think rents will stay down once Covid has become less of a presence. Landlords, hang in there. Renters, enjoy your moment.