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Myth Busters: Renter’s Market Edition

Last week I came across this article in the Toronto Star written by Mark Weisleder whose headline claims that we are in a “Renter’s Market for Condos”. I had to scratch my head when I read that headline and I thought it was a typo. Reading through the article and the comments section was even more shocking because it seems that there are plenty of people out there that believe that we are in a renter’s market.

Please note: this blog post is not meant to be a critique of  Mark Weisleder or his article. Mark has written many great articles of late on the condo market and this latest article actually contains some great tips on things to include in a lease if you are a renter. I use Mark’s article simply as an example of the popular myth that Toronto is in a renter’s market.

 

The Basic Premise is Flawed

The basic premise of the renter’s market myth is something like this: “they are selling so many condos to investors that when these buildings finish they will flood the market with rental listings and you will be able to rent a brand new condo for dirt cheap”.

This premise is a close cousin to the ever pervasive “they are building too many condos (I see cranes everywhere), the market is over supplied and prices are going to crash 25-50%”.

These premises are ripe with assumptions and beliefs that are just not substantiated by the market itself. The new condo industry has basically been continuously running at full speed for a decade and in all this time we have not seen rental rates or prices fall with any significance (one exception being the recession of 2008-2009 when prices fell about 10%-but rents did not fall at all).

It is Clearly Not a Renter’s Market

Before I tell you why I think it is definitely not a renter’s market right now, but rather it is quite the opposite, let’s first define what we are talking about when we say renter’s market.

In a renter’s market,

There is an abundance of supply of properties to choose from for any given unit type, and for any given neighbourhood.

Renters hold the power in negotiations and can regularly negotiate rental prices that are below asking prices.

Units for rent would sit on the market for a long period of time before they are rented out.

Bidding wars for rental units are non existent.

It follows that in a landlord’s market, the opposite of these things would be true: shortage of supply, landlords hold the power, properties rent very quickly, bidding wars are common.

So what are we seeing in the Toronto condo rental market today?

Anecdotal evidence strongly suggests that it is not anything close to being a renter’s market in the downtown condo world. Ask anyone who has tried to rent a downtown condo in the last 6 months if they believe it is a renter’s market. Condos are routinely renting out the first day they are on the market. Landlords are being flooded with applications. Bidding wars are driving prices over asking. Stories of tenants paying in cash for six months or the entire year up front are even emerging. And as I have been blogging about for the past year, prices are going up.

Statistical evidence (granted in somewhat short supply for the rental market in general) supports the anecdotal returns. I just did a MLS search of all the condos that had been leased out over the last week or so in the largest downtown sub-market (C01). I found that the actual rental price : asking rental price ratio was 100.6%. This means that on average, most condos are renting for more than the asking price. The average days on the market for these listings was only 10. So in barely a week, the average condo downtown is renting out for about $10/month over asking. Doesn’t exactly support the renter’s market hypothesis!

History of the Renter’s Market Myth

The “renter’s market due to condo over supply” myth is one that has been around for a long time in Toronto. People have been speculating that it is a renter’s market when clearly it is not for years!

See this Toronto Star article with a nearly identical headline to the article from last week dated May 2011. And see this blog post on a financial blog from February 2009 that also contains the basic and unsubstantiated premise (they are building so many condos therefore it will be a renter’s market).

Could Toronto Ever Become a Renter’s Market?

There may come a day where the condo rental market in Toronto is a renter’s market. In theory, this may come about because of an over supply of units that were pres0ld to investors, however, there is simply no evidence that I have seen to date that supports this will be the case any time soon.

I personally believe that as the resale market cools off in the second half of this year, we will continue to see upward pressure on rental rates as more would-be buyers continue to be renters, adding fuel to the already red hot fire of the condo rental market.

Thanks for Reading. Now what?

If you are a renter or a landlord and you have a story to share on the rental market for condos in Toronto, I’d love to hear it. Leave it in the comments below or send me an email.

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Or check out the rest of the Myth Busters series.






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7 Responses to “Myth Busters: Renter’s Market Edition”

  1. Kevin

    Hi Andrew,

    I could not agree more with you. I was able to rent out my 1+1 unit in the Modern condo in just 5 days in May. The prices have even gone up in the last two months, now the same unit can be rented out for at least $100 more!

    Thanks for great posts!

  2. Jimmy Jax

    Another great blog. Really liking the content and site redesign. I’m curious what you think about Jamie Johnston’s assertion that rents are too low compared to their current price, namely that rents should be $300-$400 more across to board (so instead of $1550 for one beds, they should be $1800+ and over $2500 to $3000 for a 2 bed).

    Do you see rents increasing rents rising to this level over the next 12-18 months? If prices for resale stay flatish, seems like higher rents could actullay make some relates in the 550ish PSF range cash flow positive with 25% down.

  3. Andrew la Fleur

    @Kevin,
    I was just at The Modern yesterday with an investor client who is showing his unit to prospective tenants. He posted his ad on craigslist and received 19 emails in less than a day. I told him he is not charging enough. Great building by the way, now that the rooftop is finished!

    @Jimmy
    I agree that there are multiple factors putting upward pressure on rents. One of these factors is the fact that thousands of investors will be looking at negative cash flow UNLESS they raise the price on their rents. This may seem like I’m advocating against the free market process, but at some point an investor says, ‘I don’t care what market value is supposed to be, I need to charge more to break even’. When this process happens on a wide scale, we will see rents rise even more (my theory).

  4. Adam

    OMG.This guy should go out and try to rent something before posting something like this. One of my rental rates is up almost 6% year over year and I leased it for top dollar the year before. People in my age group (around 25) are having hard times finding decent places at good prices because landlords can afford to be discriminative. When it comes down to the partying 20 year old without many references and a relatively new job vs. the established 40 year old with great references and a stable income who are you gonna pick?

  5. Joe Q.

    Seems to me that low asking prices are a great way to spark bidding wars and rapid turn-over in both the resale and rental markets — it’s easy to drum up a lot of interest if you under-list. That doesn’t necessarily mean that renters are getting shafted, though — if they are still getting good deals despite the bidding wars, then it’s hard to argue that landlords are coming out ahead.

    I know of one example (not a condo, but it still illustrates the point) where a house appraised in the mid-$600k’s was listed for rent with an asking price of $1,800 per month. This did indeed spark a rental bidding war and went $400/month “over asking” — but even at $2,200 per month, price-to-rent was 25x, generally a good deal for the tenant (and in the absence of a large down-payment, cash-flow negative for the landlord). So I think it’s important to consider what the actual rental value of these bidding-war rentals “should be” (as much as one can estimate this).

    Another factor to consider is that there is a “selection bias” when considering rentals listed through MLS, because MLS represents only a small fraction of the rental market and also leans heavily toward RE agent-owners, absentee landlords, etc.

  6. Andrew la Fleur

    @Joe Q
    thanks for the comment. I don’t think the practice of under-listing to spark a bidding war is very common in the rental market game. The vast majority of renters in my experience do not even contemplate that a rental unit could ‘sell over asking’ in the way that every home buyer in Toronto is conditioned to think. The price is assumed to be the price. the game is not really played this way in the rental market like it is in the resale market. However, it is an interesting theory to think that this may be changing because the rental market has been so hot for so long. Maybe intentional bidding wars will become the way that units are rented out in the near future…something to watch for sure.

    I agree that the type of landlord who lists on MLS is typically different from the ones who list on craigslist/kijiji/etc but I don’t understand what your point is with respect to how this might affect prices. If the MLS rental market is a portion of the overall market, then it is still bound to the same forces of supply and demand and (leading to price) as the whole market. The MLS rental market does not exist in a vacuum. So what we are seeing in the MLS market must be reflective of what the entire rental market as a whole is doing.


  7. The new mortgage rules which took effect on July 9th, make it more difficult for first time buyers to buy their first home (condo) if they have less than 20% down which is good news for RE investors since the pool of possible renters will increase. Another consideration is higher rates; once rates interest rise in the future, it will be more difficult to buy. If a prospective buyer can’t qualify when rates are in the low 3’s, it won’t be any easier at 5%. Other factors to take into account are condo supply and unemployment.

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