A study released this year by CIBC and Urbanation revealed that a significant portion of investors who are renting out their new condominium apartment units in the Greater Toronto Area (GTA) are cash-flow negative, and people are questioning whether investing in new condos still makes sense. With unprecedented new condo price growth, a record number of new high-rise apartments under construction, rising interest rates, a foreign buyers’ tax, rent control, and a higher minimum wage putting upward pressure on monthly condo fees, what will be the straw that breaks the condo investor’s back?

First, some context. Condo investment activity in the GTA has been on the rise for well over a decade. In 2006, it was estimated that about 20 per cent of units in many new projects were being purchased for investment purposes, and not by buyers looking to live in the suites themselves.

The reasons that developers, sales and marketing managers, on-site presentation centre staff, and VIP brokers gave then for why condo investment activity was increasing are very similar to the ones given today: the Greenbelt and Places to Grow Act will restrict single-family development, pushing buyers and tenants into ownership and rental apartments; longer commutes will force people downtown; a desire to be more environmentally friendly, coupled with high automobile-related costs, will cause young people to ditch their cars and live closer to work; the downtown’s revitalization will bring new restaurants, bars, cultural institutions, and entertainment venues, which are all attractive amenities that people want to be close to.

Many investors simply viewed themselves as middle men, willing to tie up their money for several years, accept the pre-construction risk, and take advantage of real estate market appreciation (without having a mortgage). The younger generation, with its desire for instant gratification, didn’t want to put 15 per cent to 20 per cent down on a new condo and wait three to four years to take occupancy, they’d rather buy a resale condo with five per cent down and move in less than 60 days.

A major correction in the financial markets in 2008 and 2009 was another catalyst that impacted the market. Private investors, upset with stock market volatility, doubled down on hard assets. With low interest rates, a lack of purpose-built rental apartment construction, and high tenant demand, the “private landlord” market exploded, with many investors purchasing with the intent of renting the units out at completion.

By 2011, investors were purchasing 60 per cent to 70 per cent of all new condos in the GTA, and up to 90 per cent of units in many prime downtown locations. Nearly 28,000 new condo suites sold that year, more than double the total from two years earlier.

However, by the middle of 2012, investor sentiment had soured due to the constant media focus on the sector, the ubiquitous talk of oversupply, overvaluation, and foreign money, plus the habitually repeated theory that investors would all cash out at the same time and crash the market. As a result, new condo sales were very slow in 2013 and 2014 (and the market felt the delayed impact of fewer pre-construction sales in those years with a major lack of supply in 2017).

The 2015 market showed that the GTA could survive a major increase in new condo supply, as prices still increased (albeit more moderately), condo rents went up slightly, and the forecasted major speculative sell-off was avoided. Investors have not looked back since that time, setting new condo sales records in both 2016 and 2017.

Although a significant portion of investors who are renting out new condo units in the GTA are cash-flow negative as of 2018, it will likely take a major decline in resale condo prices to halt condo investors’ bullish outlook on Toronto real estate. Given that average GTA resale condo prices are even higher in 2018 in comparison to values in the bubbly 2017 market, this real estate consultant is willing to guess that major downward price pressure won’t be felt until at least late 2020, when investors start closing on the higher-priced suites bought in 2016.

By 2021, it will be clear whether the condo investor window has closed. When it does, it could mark the end of the unique set of circumstances that led to one of the longest and most successful high-rise markets in the history of North American real estate.

Ben Myers is the president of Bullpen Research & Consulting Inc. He produces market demand reports and residential pricing recommendation studies for builders, lenders and landowners in Toronto and Ottawa. He assists in the underwriting and due diligence of real estate development opportunities from a revenue and land value perspective. Find him on Twitter at @BullpenConsult