The Current State of the Condo Market in GTA and Vancouver

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In the bustling real estate markets of Vancouver and Toronto, condominium investors are facing a unique challenge. Despite high carrying costs and concerns about eroding equity, many are choosing to hold onto their properties. Why? It’s not just about property appreciation; it’s because there are few willing takers if they attempt to sell, according to realtors in both cities.

Vancouver’s Condo Conundrum

Jesse Kleine, a realtor with Sutton Group-West Coast Realty in Surrey, BC, reveals that listings for investment condos in Vancouver have surged while sales have taken a sharp decline over the past few months. This trend has left many condo investors grappling with the decision of whether to sell.

With substantial equity tied up in their condominiums, some investors are beginning to feel the strain of high carrying costs, compounded by the spectre of rising interest rates. Kleine shares the sentiment: “Let’s just get rid of it, even if it’s worth less than it was six months ago. I just don’t want this headache anymore.”

However, upon exploring the market, many investors discover a plethora of nearly identical condos languishing unsold. Faced with this reality, some opt to hang on, borrowing money from family to ride out the storm.

The Mortgage Stress Test Dilemma

One of the significant roadblocks to condo buyers in Canada is the government’s mortgage stress test. Tim Syrianos, broker/owner at Re/Max Ultimate in Toronto, highlights its impact on the real estate market, stating that it’s “the biggest obstacle to not just investors, but any person who wants to buy a condo.”

This stress test requires borrowers to qualify at a rate of 5.25 percent or the lender’s offer plus 2 percent, whichever is higher. Syrianos asserts that the stress test hinders not only investors but also first-time buyers, creating a barrier to entry.

Many aspiring first-time buyers find themselves unable to enter the real estate market due to the 2 percent stress test threshold. Syrianos suggests that this threshold should be lowered to 1 percent to facilitate market entry. Altering the stress test, he believes, could boost the absorption of unsold condos.

Investors Holding Out

Statistics from 2020 indicate that a significant percentage of condominium apartments in British Columbia and Ontario are used for investment purposes. While some Vancouver investors can keep their negative cash flow condos afloat for a few more months, the prospect of high-interest rates looms.

In the words of Kleine, “It’s not really a rush for the door yet; people are still getting money from family and still holding on and sacrificing in hopes of the market coming back next year.” However, the primary purpose of an investment condo is to enhance one’s life, and if it’s not doing that, people want to divest themselves of the burden.

Downtown Vancouver’s Discounted Stock

Kleine notes that downtown Vancouver is flooded with generic, 15-year-old, one-bedroom condos that have seen minimal market activity. Originally priced at $700,000 to $710,000 in July, these condos are now listed at approximately $665,000. Yet, it remains uncertain whether there is a significant pool of buyers ready to capitalize on these reduced prices.

Nonetheless, vendors who purchased these properties five or ten years ago stand to make profits of $100,000 to $200,000.

The Tenant Conundrum

According to the Real Estate Board of Greater Vancouver, many condo investors face a catch-22. Their tenants are paying below-market rents, often substantially lower than the owners’ expenses, which include mortgage costs, property taxes, insurance, and maintenance. This discrepancy has narrowed the pool of potential buyers, as only owner-occupiers can effectively terminate tenant agreements.

Slower Condo Markets in Major Centers

Condo markets in Vancouver and Toronto have experienced a slowdown in recent months. In the Greater Vancouver Area, condo sales from January to August declined by 17.1 percent, while in the Greater Toronto Area (GTA), the decline was 10.8 percent for the same period.

Shaun Cathcart, a senior economist at the Canadian Real Estate Association, attributes this deceleration to rising interest rates. However, there are noteworthy differences between the two cities. Vancouver has lower inventories, faster-selling condos, and less price depreciation compared to Toronto. Additionally, Vancouver’s new supply is dwindling, while Toronto’s is setting records.

Mortgage Arrears: A Measure of Distress

Cathcart points out that mortgage arrears, often a reliable indicator of distress in the housing market, remain at 0.15 percent, just slightly above the all-time low of 0.14 percent from about 18 months ago. Notably, condo investors are passing on higher carrying costs to tenants, leading to surging rents, but there is little evidence to suggest a flood of condos entering the market.

In the challenging real estate landscapes of Vancouver and Toronto, condo investors are cautiously navigating their portfolios. With high carrying costs and government regulations affecting the market, the future remains uncertain, leaving many to ponder whether it’s time to hold or fold.

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