“Bidding Wars on… Rentals! Say What?!”

Published on 5th November 2017

The real estate market is in cycles, whether that is up and down in prices or the seasonal activity changes. This year was no different. We often go through a high activity season (spring), and then a low activity season (summer), followed by a high activity season (fall). The slight difference this year is that we may have hit the brakes harder and faster in the Spring with the introduction of the Fair Housing Plan (15% foreign buyer tax and rent control), which resulted in many people stopping to wait on the sidelines – speculating and seeing what happens next.

One of the interesting things that the media tends to overlook is the rental market. Often when you see headlines for real estate, it is referring to the prices and sales volume for buying and selling real estate. Many forget that there is a huge rental market in Toronto, especially in the condo sector. The stories just aren’t as eyeball-grabbing unless its “Rent Increases by 100%”.

As the market activity for sales slows down in the summer (the slowdown is very evident right now), the rental market tends to go into hyper-drive right before September 1st. As many of you may have figured out by now, the surge in rental activity is driven by the end of summer and the start of fall which usually includes new school semesters, kids back in school, work starts being busy and new jobs starting. All of this always converges into one glorious rush of rentals leading up until September 1st. It happens every year without a doubt.

One of the unfortunate turn of events caused by rent control was that it resulted in the increase in rental prices but demand for rental units also ironically increased (in other words, that goes against the economics of pricing versus demand). When major institutional players (Sunlife, Manulife) turn their rental building developments into condos due to rent control, it puts even more stress on the rental market as the supply of rentals dwindles. Pair that with the high summer rental activity, the increased demand for downtown housing, and the fear of buying a property…. ladies and gentlemen, we have an overheated rental market where we are seeing bidding wars on rentals! Yes, you read that correctly, we now have bidding wars on rental units too. This is the state of our market – things got real heated in the rental world.

Putting things into perspective, here’s an example: A regular 1-bedroom condo near a subway station (5 minute walk) with approximately 550 square feet for $1,900/month (no parking) gets put on the rental market. For this type of unit, you will see at least 20 tours on the first day and 3 offers almost immediately right after with a final leased priced of $2,100/month. This is absolutely insane as the demand is so intense for a “nice” condo in downtown Toronto. This is based on a true story. The tenant in this example ended up being a six-figure income earner with an untouchable credit score. This is not an isolated event as I see this happening all over the city right now.

There is a normal rationale that if your rent is so high, then why not buy a place instead? This metric is measured in Canada’s Organization for Economic Co-operation and Development (OECD) in a ratio known as Home Price-To-Rent; a long name, but fairly easy to understand. This ratio is a great indicator to determine whether you should be buying or renting. If the ratio goes up too high, that means house prices are soaring and it may be a better idea to rent. If the ratio drops, it means buying a house could be the better option as rents are too high. Below is a graph of Toronto’s history of this ratio.

The last inflection point, outlined in red, is Q2 2017 – right before prices started to fall. You can see how the ratio soared in the last 2-3 years. This all makes sense because the cost to buy a home was so high that your monthly rent was lower than your carrying costs for buying the home (mortgage, taxes, insurance, etc.).

With all of the reasons that I outlined above pushing the rental market to ridiculous levels, are we about to see the ratio dip given that the house prices have dropped? I think so.

Here’s why. Let me give you some numbers to illustrate. Remember that 1 bedroom 550 square feet condo that rented for $2100/month? Well, you can buy that condo for less than $550,000 in this current market WITH conditions! The mortgage on a $550,000 (20% down and 3% interest rate, which is on the high side) is $2,080/month. Woah – that is less than the rent! Say what?! Don’t forget though, the Landlord has to pay for insurance ($50), taxes ($125), and maintenance fees ($400).

So the difference to own and rent right now is your 20% down payment and a monthly cash outflow of $555/month (the cost to own a place vs rent). The cost is not too shabby to be able to own a place.

Now here are some interesting points that can tip the scale of the market very soon. If home prices continue to drop a bit more and your monthly carrying costs for a home becomes even less, then you can imagine what will happen next.

Also, when October rolls in and the official 33% increase in minimum wage takes into effect, this will introduce a huge handful of minimum wage earners into the market – those who will be able to afford condo living. What kind of pressure will that put on the rental market and what will happen to the rental rates and our prices then?

This is all speculation but there could be a shift in mindset for renters to become buyers again very soon. Best bet is to stay locked in and see the activity of the much-anticipated fall market. Don’t worry, I’ll be sure to keep you all posted!

Until next step, Happy Real-Estating.

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