Friday, June 13, 2014

Condos Aren’t to Blame for "High Rents"


A recent OECD report on Canada (reported in a Globe and Mail article) suggested that the condominium market has played a big role in creating a shortage of affordable rental housing.
It argues that because developers favour building condos over rentals (for a number of reasons), the growth of condos has crowded out new rental construction. And, because investors are buying new condos and renting them out, their units are raising rents to levels beyond the reach of average renters.
But is the condo market really to blame?
They certainly have become the dominant form of new rental supply in the GTA. As the table below shows, condos have accounted for 99% of the net change in the total rental apartment stock over the past five years. Over one quarter of all condos are now used as rental. But while the supply of condo rentals has seen remarkable growth of 80% since 2008, they represent 25% of all apartment rentals – meaning traditional rentals still represent three quarters of the market. This share is consistent for the City of Toronto.

As shown in the chart below, the average rent for purpose-built rental units in Toronto is considerably less than condo rental apartments ($1,035 vs. $1,576 for one bedrooms and $1,225 vs. $1,835 for two bedrooms). A couple key factors are that the stock of purpose-built rentals is mostly outdated, and most are subject to rent control – rents for sitting tenants can only rise by provincial guideline amounts (2.5% in 2013 and 0.8% for 2014).
But notice that rents in purpose-built units constructed since 1990 (rent control doesn’t apply to buildings built after 1991) are very close to condo rentals — a difference of $111 for one bedrooms and $144 for two bedrooms. In fact, there are many examples of new purpose-built rentals charging above nearby condo rentals.
Ultimately, when including condos in the measurement of average rents for all apartments in Toronto, the level rises by just $97 (see chart below). In other words, when excluding condos from the equation, average rents for apartments in Toronto are 8% lower.
So it can be said that condos have played some role in raising overall rent levels in the market, but certainly can’t be blamed for creating a shortage of what is defined as ‘affordable’ rental housing. Why? Because it can’t be said that rents would necessarily be lower if the growth in condo development was replaced by purpose-built rental construction.  Investor-owned condos, which have been declining in size, are actually attributed to slowing growth in rents — average condo rents were down 1.7% year-over-year in Q1 according to our latest UrbanRental Report (although still up year-over-year on a rent per square foot basis).
If a housing segment is to blame for crowding out purpose-built rental construction, then look towards the low-rise market. Population density, provincial growth policy and land availability in the GTA have dramatically shifted development away from low-rise homes, leading all development to gravitate towards high rise and creating greater competition for multi-residential land. High-rise is now the dominant form of construction, representing over half of all housing starts in each of the past four years compared to a 30% share 10 years ago.
The lack of low-rise supply has played a major role in pushing up housing prices in the GTA and impacting ownership affordability. As shown in the chart below, when excluding condos, average resale prices have grown by 84% over the past 10 years. By comparison, condo values have appreciated by 63%. As a result, the gap between the average price of condos and their alternatives has grown to a record $233,000, which is more than twice the gap from 10 years ago.
It can be argued that if it weren’t for the growth we’ve seen for condos, we would be facing a much bigger housing affordability issue. Not only would rents be likely close to or just as high as they are now, prices for entry-level homeownership would be out of reach for first-time buyers, spiralling towards even lower rental vacancy rates and an even greater shortage of ‘affordable’ rental units.


5 comments:

  1. Well, there is no reason to blame condominium units for high prices of rents because condominium units and luxury penthouse Singapore are supposed to be very expensive because of the amenities and features that it provides. It is a different market compared to normal apartments.

    ReplyDelete
  2. Very thoughtful words, thank you and hope that you will give us more information soon. Thanks for very thoughtful words. Hope to get more soon.Golden beach homes for sale

    ReplyDelete
  3. Agree with Michelle. Buying condos for sale are supposed to be very expensive because of the amenities and features it provides. For me, nothing to blame. You can actually find some cheap units. It always depends.

    ReplyDelete
  4. If you have purchased or are thinking of purchasing a pre-construction condo in Toronto, then I'm sure you have plenty of questions. Here are a few common questions that I am asked by clients regarding purchasing pre-construction real estate.see more, [http://www.jalilirealty.com] Pre construction Condominiums Toronto

    ReplyDelete

  5. Luxury always has to come with a high price tag. But that doesn't mean that you can't get the space you have always wanted.
    Although buying a new, modern and spacious house in Toronto and areas as Brampton is not within the average earner's budget.
    see more, [http://www.jalilirealty.com] New Condo sales Toronto

    ReplyDelete