Stats Reveal Investor Takeover in Toronto and Vancouver Condo Markets!

October 3, 2024 – Today, Statistics Canada has released an eye-opening report that is sending ripples across the housing market, raising alarms about the future of housing affordability in Canada’s largest cities, particularly Toronto and Vancouver. The report, titled Investors in the Condominium Apartment Market, 2022, sheds light on a growing trend that could reshape the landscape of urban housing: the increasing dominance of investors in the condo market, especially in smaller units. This has fueled concerns about housing affordability, the shrinking size of units, and whether cities are still viable places for families or even first-time homebuyers to live.

Investors Dominate the Condo Market: The Numbers Are Staggering

In 2022, nearly two in five condo apartments (38.9%) in Toronto were owned by investors, while Vancouver saw a similar trend, with 34.2% of its condos owned by investors. In both cities, investors are fueling the construction of smaller units, which are more profitable per square foot. This surge in investor ownership has led to a significant decline in the size of newly built condo units, with properties shrinking over the years.

Toronto and Vancouver: The Epicenters of Investor-Driven Condo Construction

One of the most significant revelations in the report is that investor ownership is heavily skewed towards smaller units. For example, in Toronto, the median size of a condo built in the 1990s was 947 square feet. For those built after 2016, this figure has dropped to a mere 640 square feet. In Vancouver, the median size of condos shrank from 912 square feet to 790 square feet during the same period. Investors, it seems, prefer these smaller units because they tend to generate higher rent per square foot, making them more profitable, particularly in high-density urban areas where demand remains strong.

But what does this mean for ordinary Canadians trying to buy a home?

With interest rates rising and affordability decreasing, the condo market, once viewed as the entry point for first-time buyers, is increasingly out of reach. Higher prices combined with shrinking unit sizes make it difficult for individuals or families to find a suitable home, especially if they are looking for something larger than a studio or one-bedroom unit. Many now see condos as transient living spaces rather than long-term homes, leading to the perception that urban centers like Toronto and Vancouver are becoming less livable for families.

Investor Influence: Pre-construction Sales and Delayed Projects

Pre-construction condo sales have long been a cornerstone of how developers finance new buildings. Investors purchase units before they are built, with the expectation that prices will rise by the time the project is complete. However, the StatsCan report highlights a troubling trend: investors are increasingly reluctant to buy pre-construction condos. With rising mortgage rates, many investors are finding that the rental income generated from these units does not cover their mortgage payments, leading to negative cash flow.

This shift in investor behavior has contributed to a significant slowdown in pre-construction sales, which, in turn, is causing developers to delay or even cancel projects. This dynamic could have far-reaching consequences for housing supply. In cities like Toronto and Vancouver, where the demand for housing remains strong, the slowdown in new construction could exacerbate the already severe housing shortage, leading to even higher prices in the future.

How Did We Get Here? The Role of Investors in Condo Markets

The increasing dominance of investors in the condo market has roots in both national and global trends. Over the past decade, as cities like Toronto and Vancouver became global financial hubs, real estate in these cities began to attract international investors. Condominiums, in particular, were seen as low-risk, high-reward investments. Their appeal was driven by the expectation of continuous price appreciation, bolstered by a strong rental market.

Investors typically purchase condos either to rent them out for income or to sell them later at a higher price. This investor demand was a major driver of the condo boom in the 2010s, as developers rushed to meet the seemingly insatiable demand for new units. Pre-construction sales, in which buyers commit to purchasing a unit before it is built, became a key financing mechanism for developers. Investors were particularly drawn to these deals, as they allowed them to lock in a price and reap the benefits of any appreciation that occurred before the project was completed.

However, this model has become less sustainable in recent years. With mortgage rates rising and rent growth slowing, many investors are finding that the math no longer works. In some cases, the monthly rent they can charge for a unit is not enough to cover the mortgage payments, leading to a situation known as negative cash flow. As a result, many investors are pulling back from the market, which is leading to a significant drop in pre-construction sales. This, in turn, is forcing developers to rethink their plans, with many delaying or canceling projects altogether.

Shrinking Units: A Consequence of Investor Preferences

One of the most significant consequences of investor dominance in the condo market is the shrinking size of units. As the StatsCan report notes, investors tend to prefer smaller units because they generate higher rent per square foot. This has led to a proliferation of studios and one-bedroom apartments in cities like Toronto and Vancouver, while larger, more family-friendly units have become increasingly scarce.

The data released today shows a stark contrast between smaller and larger units in terms of investor ownership. In Toronto, for example, nearly two-thirds (64.5%) of new condos under 600 square feet are owned by investors, compared with just 44.1% of units 800 square feet and over. A similar pattern holds in Vancouver, where 58.4% of units under 600 square feet are investment properties, compared with 38.9% of those 800 square feet and over.

This trend has led to a growing perception that condos are not suitable for long-term living, particularly for families. While condos were once seen as a more affordable alternative to single-family homes, the shrinking size of units and the dominance of investors have made them less appealing to people looking for a permanent place to live. Instead, condos are increasingly viewed as temporary living spaces, suitable only for young professionals or singles.

Impact on First-Time Buyers and Families

The rising influence of investors in the condo market has created a challenging environment for first-time buyers. In cities like Toronto and Vancouver, where single-family homes are prohibitively expensive, condos have traditionally been seen as the entry point to the housing market. However, with prices remaining near their pandemic-era peak and unit sizes shrinking, even condos are becoming out of reach for many.

For first-time buyers, the combination of high prices and rising interest rates means that monthly mortgage payments are often unaffordable, especially for larger units. This has led to a growing divide between those who can afford to buy a home and those who cannot. In many cases, buyers are forced to choose between a small condo in the city or a larger home in the suburbs, where prices may be more reasonable but commutes are longer.

Families, in particular, are finding it difficult to find suitable housing in urban centers. With the median size of new condos in Toronto and Vancouver falling below 800 square feet, many families are opting to move to the suburbs or even leave the city altogether. This exodus of families from urban centers could have long-term consequences for the social fabric of cities, as neighborhoods become dominated by transient renters and young professionals.

What’s Next for the Condo Market?

The StatsCan report raises important questions about the future of the condo market in Canada’s largest cities. With investors pulling back from pre-construction sales and developers delaying projects, there is a real possibility that housing supply will tighten in the coming years. This could lead to even higher prices, making it even more difficult for first-time buyers and families to find affordable housing.

At the same time, the trend toward smaller units shows no signs of slowing down. As long as investors continue to prefer smaller, more profitable units, developers are likely to keep building them, further reducing the availability of larger, family-friendly condos.

Policy Implications: What Can Be Done?

The rise of investor dominance in the condo market has prompted calls for policy interventions to address the housing affordability crisis. Some have suggested introducing taxes on vacant units or foreign buyers, similar to measures that have been implemented in cities like Vancouver and Toronto. Others have called for stricter regulations on pre-construction sales, to ensure that new developments are more accessible to first-time buyers and families.

There is also a growing push for policies that encourage the construction of larger, more family-friendly units. This could include incentives for developers to build larger condos or changes to zoning laws that make it easier to build multi-family housing in urban areas.

At the same time, there is a need for policies that address the broader issue of housing supply. As the StatsCan report notes, the slowdown in pre-construction sales is leading to delays in new projects, which could exacerbate the housing shortage in the coming years. Policymakers will need to find ways to encourage developers to keep building, even in the face of rising interest rates and slowing demand from investors.

Conclusion: The Future of Housing in Canada’s Cities

The StatsCan report on investors in the condo market paints a sobering picture of the future of housing in Canada’s largest cities. With investors increasingly dominating the market and driving the construction of smaller units, it is becoming harder for first-time buyers and families to find affordable, suitable housing. At the same time, the slowdown in pre-construction sales raises concerns about future housing supply, which could lead to even higher prices in the years to come.

As cities like Toronto and Vancouver continue to grapple with these challenges, policymakers will need to take action to ensure that the housing market remains accessible to all Canadians. Whether through tax policies, zoning changes, or incentives for developers, there is a growing recognition that the status quo is unsustainable. Without intervention, Canada’s largest cities risk becoming playgrounds for investors, while ordinary Canadians are left behind.