The Rental Market, Like all Markets, Will Take Care of Itself.

April 18, 2017

"It feels like people shifted, en masse, from renting to buying in early 2017."

 

I do a lot of rentals, for both landlords and tenants. Many agents out there refuse to touch rentals. Maybe because they feel like it's a waste of time for the amount of money they stand to make (a typical rental deal earns each agent half of one month's rent as commission), or perhaps it's because...well, I can't really think of a reason any agent wouldn't bother with rentals other than the money. But I love rentals. It's an awesome way to keep current on that side of the market, since Toronto is quickly becoming a city where more and more people are choosing to rent. Plus, you never know - the majority of buyers I've worked with so far this year are renter clients from last year who have now decided to buy. So I'll never turn down an opportunity to do a rental. 

 

Which leads me to a couple trends I've seen so far this year:

 

1 - It feels like people shifted, en masse, from renting to buying in early 2017.

I know there is no accurate way to quantify this but as I said, a huge percentage of my previous renter clients have turned into buyers this year. And all at the same time. And what I've experienced is a big shift in sentiment from renting to buying. Perhaps it's all the talk about huge resale price increases in 2017 so far that is causing people to rush to buying, or maybe it's just a coincidence. But it feels like so many people decided to buy instead of continuing to rent, all at once. We'll see if this trend continues if resale prices just keep rising.

 

2 - The rental craziness has calmed down. At least a little.*
In 2016, multiple offers on rentals were commonplace. In fact, any time a new listing for rent would come up, I would call/email/text any client who could possibly be interested and told them we needed to see it that same day before it was gone. (Kinda sounds like the resale market today, huh?). Today, rentals are still nuts but that sense of urgency has subsided, at least a little. Maybe it's because rents are up 8% over last year, or maybe it's because there is more rental inventory (finally), or maybe it's both. Actually, it's probably both. There were a number of new condo completions late last year and early this year that have given a much-needed boost to the rental supply in the core, which has leveled off the rental price increases we experienced last year. At least for now. I had mentioned in a previous blog post how rental rates will need to increase if investors want the math to make sense on any investment units that have been purchased so far this year, so we'll have to see if they end up getting the higher rents they need, or if the market will keep rents steady for longer.

* - I should add this caveat: There is still (and likely always will be) a huge demand for units in high-quality buildings in prime locations, especially for larger units like 850+ sq ft two-bedroom places. $3000/mo+ is becoming the norm for a nice two-bedroom with parking in a sought-after building, and you likely won't be the only one in contention. If you're looking for a decent sized rental in a popular building, sorry but the craziness continues!

 

3 - The market takes care of itself. Forced rent control will just mess things up.
A recent report by Urbanation has shown that rental prices in Toronto for Q1 2017 are actually down slightly over Q4 2016. That's right, the market balanced itself out, just like markets do, without the need for any government intervention. Supply and demand is all that matters. Period. In fact, government imposed rent controls will actually reduce the supply of affordable rentals even further. Think about this, here's an argument against rent control I haven't seen talked about: When a new condo tower is complete, there are almost always a whole bunch of new rental units introduced to the market by investors who purchased with the sole intention of renting their units out. Nothing wrong with that. In fact, it's a good thing. Investors are a good thing. Not only are there new units in the rental supply, but these new units are almost always initially priced below market rents. Why? Because parts of the building are usually still under construction, or the amenities are still not ready, and because there is a large supply of units on the market at the same time. (At one point, INDX condos in the financial district had like 70 units for rent and Core condos near Ryerson at last check had around 25). Until those units get absorbed into the market, rents will be suppressed, and investors are ok with it. And renters should love it. It's like a micro economy developing in that one building. Everyone (tenants and landlords) knows that the rent they are getting will go up once the building is complete, all the amenities are done, and the supply of units goes back to normal. I actually let all my tenant clients know this ahead of time so they factor that into their budget for the following year. And landlords are willing to rent these units at a depressed price for the first year or so, with the understanding that they will rise to market levels at the end of the lease. This arrangement allows for below-market rental supply to be added to the city, albeit for a limited time. Better than nothing. Now imagine if these landlords, under a scary new rent control regime, were not allowed to raise their initial rents above a fixed percentage after the tenants' initial 1-year leases were up. Guess what? That below-market rental supply will disappear. Instantly. And all landlords in the building will follow suit and raise their rental prices. The only reason this less expensive rental supply exists is because of the current exemption on rent control for buildings built after 1991. No more exemption? No more inexpensive condo rentals in brand new buildings. Landlords will just hold out for higher rents from day 1. Even if the supply in that building is high, it's still not worth lowering the rent below the rest of the market to attract a tenant, who may not end up paying market rent for several years under strict rent increase guidelines. So the government would have eliminated yet another source of more affordable rental supply. Nice job.

 

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Your Toronto condo lover,
Adil Dharssi
 
#AdilKnowsCondos #TrustSomeoneWhoKnows

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