What Is An Exclusive Listing?
Since we have been fielding these types of questions more and more, we thought we would turn our response into a Blog Article.
Perhaps you could benefit from our thoughts and ideas, or you may have a completely different perspective (which we certainly welcome)!
So, what is a wise real estate investment in today’s climate?
This article will focus on condominiums because they are palatable, available and highly rentable.
For passive investors who otherwise have busy “day jobs” – working, parenting or travelling – condominiums are a low-maintenance real estate investment that can yield positive returns that hedge against inflation.
At a very high level, a condo investor will want to consider the following:
To simplify, let’s break down these 5 Critical Investment Factors as they relate to Toronto’s residential real estate market:
1 / Inflation
Inflation is a persistent rise in the average level of prices over time. When prices go up, money can’t buy as much as it used to. In other words, there is a loss of purchasing power.
When inflation is high, investors are uncertain about their costs from one day to the next.
High inflation is often unstable and unpredictable, keeping the economy from performing at its best.
Historically, real estate has proven to be a stable hedge during inflationary periods due to its “rock-solid” stability. Simply put, people always need a place to live.
Whereas the stock market, cryptocurrency and start-ups become highly volatile to the downside during times of uncertainty, like what we are experiencing now.
2 / Interest Rates
The Bank of Canada uses the overnight rate as the primary tool to control inflation, the starting point for setting interest rates in the Canadian economy.
If the economy grows too fast and begins to overheat, it can lead to rising inflation (as we’re experiencing today). So, the BOC increases the policy rate, forcing people and businesses to pay higher interest on loans and mortgages. This tactic dissuades borrowing, reduces spending and slows inflation.
As of October 2022, the Bank of Canada has increased their policy interest rate by 3% since the beginning of the year to curb rising inflation.
So, if you were to take out a mortgage at one of Canadian’s Tier 1 banks right now, the variable rate would hover around 5.35%, pushing borrowing costs to their highest since 2008.
Interest rate hikes appear to have had some desired impacts, with the inflation rate dropping to 6.9% in September 2022 from an 8.1% peak in June. However, more interest increases are forecasted, so stay tuned.
3 / Appreciation Rates
Despite persistent negative headlines news, condominiums are still performing well year-over-year. Yes, sales activity has slowed, but condo prices are holding – in fact, they are up versus the same time last year in most areas of the city.
As Covid restrictions have eased, people are back at work, and many are taking advantage of what the city has to offer (which is a lot); the desire to live in the hustle and bustle is back.
When we pull the year-over-year percentage change from TREBB’s September 2022 market report, the composite appreciation rate ($) for condos in the City of Toronto is +12.52% year-over-year. Not too shabby when everyone thinks the bubble is bursting, right?
While the cost to borrow is higher, the appreciation rate outpaces many investment options.
Holding cash may not be a good investment strategy in an inflationary environment. Just think about it! If you decide to sit on your $200K, the value of your hard-earned dollars will depreciate by the equivalent of the inflation rate. In other words, at the current rate of inflation, if you had a hundred dollars in the bank, its buying power would be reduced to 93 dollars in a year’s time. So to ensure your $200K doesn’t simply erode, you could consider Toronto Real Estate an intelligent hedge.
4 / Market Rents
If you’re thinking through the lens of a real estate investor, you will want to take a deeper dive into the rental market.
Competition between renters is fierce right now and has resulted in strong upward pressure on average rents. Rental supply remains a major issue in the GTA and will become more pronounced in the short term as an increasing share of well-employed individuals turn to the rental market. “Policymakers need to develop a diversity of options to bring more rental supply online, whether we’re talking about investor-held condominium apartments or purpose-built rental developments,” said TRREB Chief Market Analyst Jason Mercer.
As buyer demand for Toronto condos has outpaced the 905 since January 2022, tenant demand has followed suit. The average rent for a downtown Toronto condo has risen a mind-blowing 20% this year. When rental prices escalate this quickly, tenants’ ability to spend lags, pushing more renters to smaller condos.
Studio-sized and one-bedroom suites have seen the most dramatic rent rise this year.
And with no end in sight, we project that this trend will continue for supply to catch up with demand.
In C08 (Downtown East End), the average studio rented for $2,135 and the average one-bedroom for $2,430 in September.
Simultaneously, the average studio in the exact location median sale price of $475,000 and the average one-bedroom for $595,000 on the resale market. If you are putting $200k down on a purchase, numbers like this will yield positive cash flow. We have a healthy supply of condos on the market as buyers take a “wait and see” approach adjusting to higher borrowing costs. Opportunity is knocking.
5 / Return on Investment
At this stage in the game, you have likely conjectured where we may direct our client sitting on $200K in cash:
A small studio that yields $2,135 in rent per month looks like a no-brainer to us:
So, let’s test our theory by playing the numbers game. We had to make some assumptions and could account for every gain and every expense, but we want you to get a sense of the big picture:
In a few years, if interest rates begin to decline, you could be in a position to refinance your debt at lower rates, which would increase your cash flow and may even position yourself to buy a second property.
Aside from having the potential for significant upside, owning bricks and mortars of Toronto Real Estate will always remain strong unlike crypto or stocks on screen during a period of economic uncertainty.
6 / Location
This scenario could play out in many city areas, including Toronto’s downtown West and the lower-east side, including St. Lawrence Market, The Distillery and the Canary District. With a lower percentage of studios relative to other suite types and a dramatic increase in population density over the next 5-10 years in the lower east side, you should see the largest amount of appreciation.
In addition to density & population growth, these are some additional reasons we love the Lower Eas-Side of the city:
The bottom line? If you’re sitting on some cash savings, it may be wise to consider investing in Toronto’s bright future while the market takes a short breather. Not only is it a great inflation hedge, but it is also a wise long-term strategy. Strike while the iron is HOT! If you’re curious about what your money can buy in today’s changing market and want to run through some scenarios with us, we are always one phone call or text message away!
Contact Us (We’re Nice).
This article was written by Jerome Werniuk a Sales Representative at Fox Marin, working with residential clients to buy, sell, lease & invest! Jerome has lived and worked in many exciting neighbourhoods and real estate markets across Toronto, New York, and San Francisco. Now representing residential clients in the city that has always been his true home, Jerome is excited to channel his unique knowledge base in real estate and technology to help his clients achieve their desired results. Having negotiated transactions with Fortune 500 companies, Canada’s largest commercial real estate firms, and individual landlords, Jerome brings a breadth of negotiating experience to the table!