Condo rents may have plunged, but that doesn’t mean Toronto has become more affordable

·4 min read

Toronto rents may have stopped climbing in recent months, but don’t hold your breath for a sustained shift in affordability until the city’s building boom includes more purpose-built rentals, says a senior analyst with Canada Mortgage and Housing Corp. (CMHC).

The rental market was already softening before the pandemic, but COVID-19 exacerbated the shift, largely due to a reduction in immigration — typically a “huge driver” of rental demand in cities like Toronto, said Dana Senagama.

In less than a year, bidding wars among tenants have been replaced by landlords offering incentives just to fill their units.

A third-quarter report from market research firm Urbanation this year showed that there were twice as many condo rentals available for lease this year than last and that the average rent for those units had dropped 9.4 per cent to $2,249 annually. That was the lowest average since the start of 2018.

While immigration is down, a flood of new condos have come up for occupancy, many of them owned by investors who now hold about a third of Toronto’s rentals.

Some downtown area rents were down by nearly 17 per cent year over year, reported Urbanation, which measures rents per square foot. The drops were found to be less dramatic as the distance from the core increased, declining only about 2.5 per cent in some parts of the 905.

“The current level of supply, particularly downtown, would suggest there are further declines in rents that are going to come,” said Urbanation president Shaun Hildebrand.

There are about 5,000 purpose-built rental units expected to be completed next year, the highest number in 25 years, said Hildebrand. Most years, that number would be about 1,000.

But that won’t be enough to considerably move the dial on rental affordability, according to Senagama. For every four condos built in Toronto last year, there was one purpose-built rental, she said.

In the five previous years, the ratio was closer to one in 10.

Annually, 20,000 condos are built in Toronto’s census metropolitan area compared with about 2,000 purpose-built rentals, according to CMHC. Tens of thousands of new purpose-built rentals are needed every year solely to match Toronto’s usual population growth, said Senagama.

For the moment, some tenants are getting a break after a very tough market, said Realosophy real estate broker John Pasalis. “A lot of tenants are asking for rent reductions because they’re seeing what (other) units are renting for in their building, so they talk to the landlord and say, ‘Listen, cut my rent by $300 or I’m just going to move three floors up,’” he said.

Competition for tenants is most severe downtown, said Simeon Papailias of Royal LePage Signature Realty, who manages 80 downtown rentals. COVID-19 has changed the services and workplaces that are operating in-person. “Nobody can rent their buildings — there are no students, the restaurants are closed and supporting staff have moved away,” he said.

Pre-COVID restrictions on short-term rentals have also amplified the pandemic effect, said Senagama.

All combined, she said it’s likely that overall rent costs will remain flat through 2020 in the Toronto area — a stark change from last year’s 13 per cent increase in average condo rents, and six per cent average increase in two-bedroom purpose-built rentals.

Still, she believes the drastic changes in the rental market will only be “temporary shocks.”

“In terms of improving affordability, I don’t think it’s done that much,” Senagama said.

Even if condo rents are dropping, they still aren’t necessarily an affordable option, as they cost on average 50 per cent more than a purpose-built unit, she added.

On top of that, households’ earning potential may be hindered right now, she said – whether directly through a job loss, or in cases where one parent may have cut back on their working hours to manage online schooling or other pandemic complications.

“If you don’t have the income, then that also eats into affordability,” she said.

At this point, she cautioned, it’s difficult for economists to predict exactly how the housing market will react in the long term — since it isn’t clear how long the pandemic will last, and whether there will be periods of stricter lockdown to come.

It isn’t as simple as comparing the current conditions to the last time rent growth flattened out, in the 1990s.

“This is a health crisis,” said Senagama.

“Really, there is no basis for comparison, not at least in our generation.”

Victoria Gibson, Local Journalism Initiative Reporter, Tess Kalinowski, Real Estate Reporter, Toronto Star