Real estate cycle of Toronto Rental Market
It has been a little while since my last blog post! Pardon me for not updating in time, but hey I got the desired job that I compared and prioritized. Just in case you are interested, check it out my last blog post regarding how I chose between career options.
The exciting news is that I will relocate to Toronto with my loved one! Super exciting to be in the city, given that Toronto was ranked the second best city to live in for quality of life in North America after Vancouver, Canada, and the 16th in the world, after some East European countries in the mid and northern hemisphere such as Austria, Germany, and Denmark. With said, I am pretty satisfied for now moving from US South back to North (much closer to Boston where I spent 5+ years with my education), where I hope to enjoy a more diversified and welcoming environment, with thriving nice restaurants.
So my interest in the real estate propels me to take a look at the rental market in Toronto, specifically its positions in the life cycle. Like every fascinating creature in this world, real estate in a living and breathing industry, which has a life span of approximate 18 years, traveling through the 4 quadrants - Recovery, Expansion, Hypersupply, and Recession.
Market Cycle Quadrants (URL click through picture)
You might wonder why 18 years as a real estate cycle? Since I will not go into details of explanation in this post, it is mainly due to macro policies, public interventions, and the long reaction time of supply to demand in real estate. Check out the article, Riding the Upswing of the Real Estate Cycle: 2012 - 2022, by Fred Foldvary, a well-known economist who predicted 2008 housing crisis and leads the discussion of real estate cycle.
Toronto (picture from Unsplash)
As indicated by the cycle quadrants, there are only two things to explore to determine where Toronto rental market is on the quadrant. First is the direction of vacancy, and second how does it compare to its long-term occupancy average. Follow me here. Understanding the direction of vacancy will tell us if the market is on the left or right quadrant, and understanding its relativity to long-term average will indicate whether it is above or below. Putting it together and you get the rough idea. Another background knowledge to have is that upwards pricing pressure appears when current occupancy is above long-term average, and vice versa. Intuitively, more people than usual living in the buildings means that landlords can raise rents to charge. With the understanding, let’s dig up some data.
To find out the direction of vacancy of Toronto rental market, Toronto Storeys - a local real estates news and narratives - have some useful reports that show the data. In October 2020, rental vacancy rate rises above 2% in Toronto for first time in 10 years.
“Vacancy rates for purpose-built in Toronto have reached a 10-year low, rising over 2% in Q3-2020, while the Greater Toronto Area (GTA) saw rental rates reach 2.4% — or three times higher (0.8%) — than the same time last year, according to Urbanation’s latest rental market results.”
- Ainsley Smith, Toronto Storeys
Other sources also indicate that Toronto rental market is expected to hit price floor, as rents for both one-bedroom and two-bedrooms are down around 15% year-over-year in October. Such downward pressures on pricing come from COVID-induced unemployment and suspended construction, combined with previous Canadian policy on mortgage stress test.
With rental vacancy rate hits record high, Toronto Regional Real Estate Board (TRREB)’s Multiple-Listing Service (MLS) - a database established by cooperating real estate brokers to provide data about properties for sale - reported sales hitting record high. From their latest publications, both sales and new listings rise up since April in the housing space. In particular, listings were up 113.9% during Q3.
On the rental side, TRRED reported 14,036 condominium apartment rentals through its MLS System in Q3 2020, an increase of 30.2% year-over-year (click on link to see full report).
“The demand for condo rentals remained very strong in Q3 as the economy experienced a substantial rebound. However, this demand was overshadowed by the very rapid rise in rental listings. Even if rental transactions remain at or near record levels, it will take some time for the added supply to be absorbed. Once we move into the post-COVID period, population growth from immigration and non-permanent residents will bolster rental demand and absorption.”
- Jason Mercer, TRREB’s Chief Market Analyst
The increase in vacancy rate since April pushed more property owners to list in traditional marketplace such as MLS shown above, due to less attractive short-term gains and less reliable or even gloomy future in the uncertain times. However, the increase in sales-to-new listings in the housing market also indicates that the overall consumer confidence and property valuation does not evidently show weaker sign. Investors are buying in assets during the challenging yet exciting time.
Going back to real estate cycle and two questions posed earlier, we can have a general picture where Toronto’s rental market is on the four quadrant graph. As of October 2020, vacancy continues to increase above 2%, record high in 10 years. However, looking further back beyond the past 10 years, vacancy rate was predominantly over 2%. See below public records.
Given the data, the long-term average vacancy could be in the neighborhood of 2.0% (unfortunately, I do not find dataset to calculate the weighted average to be exact). As current vacancy rate hit 2% and downward pressure on rents, I would conclude that the rental market in Toronto (GTA area) is entering into the fourth quadrant - Recession period. Nevertheless, due to COVID and temporary restriction on construction activities, some new constructions might still reasonably be expected to carry out (more on housing than rental), while predominantly completions of current projects in the rental space.
My conclusion is also echoed by the latest report, COVID-19 Special Edition: Real Estate Cycle Update, from The Real Estate Investment Network Canada (REIN).
“When looking ahead, the signals indicate markets are further entrenched in the early phases of the slump, so homebuyers and investors are wise to proceed with caution.”
- Jennifer Hunt, Vice President Research, REIN
Thanks for reading. Comment below to let me know your thoughts, or any further blogs on this subject, or any subject, that you would like to read.
