Toronto is expecting a lot more real estate supply, and that’s going to be a drag on rental price growth. Urbanation, a leading research firm for developers, is forecasting a big drop in the rate of growth for apartment rental rates in 2019. The firm expects the rise in new apartments to trim growth in half, compared to what we’ve seen in the past few years.
Urbanation is real estate consultancy that’s been around for a looong time. They’ve been providing real estate analysis for the development industry for 40 years. Usually developers are the last place you might expect to hear decent information. However, these folks provide research to help manage risk and project expectations. That makes them less likely to depend on market “enthusiasm” for their reports.
That said, industry forecasts do tend to overlook a few issues that give numbers a positive spin. A few issues with the condo data worth noting are the size of the pool, inclusion of short-term rentals, and Realtor skew. Most of these issues are a result of rental reports being created using just MLS data. We won’t bore you with why that’s an issue today, but you can read about that from our favorite, foul-mouthed, landlording professional here.
Toronto Apartment Rents Increased Over 7%
The rental rate of condo and purpose built rental apartments made huge climbs. Urbanation reports, apartments saw the average rent rise to $2,385 in Q3 2018, up 7.6% from last year. On a square foot basis, the average price per square foot reached $3.26 per month, up 9.4% from last year. Basically, the size of units have been shrinking to help mitigate some of the price increases.
Purpose built rental apartments are making even faster climbs, but still remain more affordable. The price per square foot reached $3.09 per month, up 17% from the year before. The gap between a condo and purpose built rental is now just 5.21%.
Rental Increases Are Unsustainable, Especially With Incomes
Those numbers seem absurdly high? That’s because they’re not even close to sustainable, and may have an issue sticking. Urbanation president Shaun Hildebrand added, “Income growth certainly isn’t keeping pace with this level of rent inflation.” Further adding, “the average tenant’s income is $65,000, which isn’t sustainable.” You can probably already spot the problem, but let’s take a dive into those numbers anyway.
The majority of the average tenant’s income is being eaten up by rent. A household making $65,000 gross will take home an estimated $49,166 after taxes in Toronto. The average condo renter is spending ~$28,620 in rent, or just over 58% of their income. Experts recommend a household spends no more than 30% of their net income on housing expenses.
Renters are now at the point where it’s not just going to be difficult to squeeze them for anymore rent. Households that spend this much will have to cut general consumption, and investment. This is an issue that catches up with the general economy pretty fast.
Toronto Rent Price Growth To Slow In 2019
Rental price growth is projected to slow as a lot more new supply comes online in 2019. “The injection of supply from new investor-owned condos that end up in the rental market could lead to 4 or 5-per-cent rent growth rather than the current near 10 percent year over year levels,” noted Hildebrand. That’ll be fun for Toronto’s fast growing negative yield investor community.
Toronto 1 Bedroom Rental Price Change
The annual percent change in price for a 1 bedroom rental, as reported on the MLS.
Source: TREB, Better Dwelling.
The magic of supply and demand. The city will see a flood of new investor properties released. The increased competition is likely to compress growth. Considering Toronto investors are already having a difficult time filling units with tenants that pay enough rent, this is bad news for productive investment. More “investors” will have to use income to top up rent, further diluting the region’s consumption.
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