Rising rents keep investors optimistic – for now.
As featured in the September 2022 Move Smartly monthly report – watch the video above or on our YouTube channel Move Smartly here; read the story below and go to the report to read all the stories of the month.
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Housing markets with a high share of real estate investors are often more vulnerable to a sharp drop in prices when the market slows, as it has recently done in the Toronto area, as investors tend to be more willing to sell and leave the market only at the end. users or owner-occupiers (i.e. those who live in their dwelling) are. Investors are usually the first out when the housing market begins to calm down, because unlike homeowners, they are less attached to their properties and see selling as a business decision rather than a personal one to uproot and to uproot his family.
We saw this happen in the housing bubble years leading up to the 2008 U.S. financial crisis, when states with the most home-buying investors saw the biggest drop in home prices.
More recently, we’ve seen this dynamic play out in the Toronto condo market, which has a high share of investor-owned units. In the first year of the COVID-19 pandemic, falling prices and rents led to an increase in condo listings and my April 2021 ReportI showed that an increase in the share of investors selling was a big part of the story.
But if so, why aren’t investors rushing to sell now as the market cools?
This time around, a very strong rental market with rapidly rising rents helped keep investors optimistic about their investments. In 2020, when investors rushed to sell, prices and rents tended to fall, which made many investors very pessimistic. Today, only prices are trending lower and condominium prices are holding up better than low rising prices. Condo rents, on the other hand, are up 20% in Toronto reaching a record average of $2,806 in August according to a research firm Urbanizationmaking investors optimistic about the future development of housing prices and rents.
Now, we’ve probably only passed the first phase of potential investor action – in the early stages of a downturn, investors exit when they think prices will be lower in the future and want to avoid future declines.
In the later stages of a real estate cycle, some investors exit the market due to financial difficulties.
The more leverage an investor has, the more sensitive and vulnerable they are during periods of rapidly rising interest rates. If investors are unable to repay their higher debts once their mortgage is up for renewal, they may decide to dispose of one or more of their properties to reduce their debt. We have yet to see investors exit in significant numbers as most have yet to feel the impact of today’s higher rates on their debt repayments, but that may gradually change.
In the case of investors who have purchased pre-construction homes and condos with a down payment, some of them may not be able to qualify for a mortgage at current rates to actually take possession of the property. . We are seeing the first signs of distress among these investors eager to ‘assign’ or ‘flip’ the contracts for these properties (i.e., sell to another buyer) before they have to close and take possession of the property. . Many are willing to take a financial loss on the transaction to avoid missing out on their purchase, but buyer appetite for disposal sales is currently very low.
I will expand on these dynamics in the pre-construction market in a future report.