The Great Canadian Condo Hold: Why Vancouver & Toronto Investors Aren’t Selling

Despite the burden of soaring carrying costs, condo investors in two of Canada’s most competitive real estate markets, Vancouver and Toronto, are largely opting to retain their properties. This isn’t necessarily a sign of market confidence, but rather a reflection of a challenging sales environment where potential buyers are scarce, according to real estate professionals in both bustling cities. The current landscape presents a complex dilemma for investors: endure financial strain or face difficulty offloading assets.

In Vancouver, a notable surge in listings for investment condos has been observed, coupled with a rapid decline in sales over the past three to four months. Jesse Kleine, a realtor with Sutton Group-West Coast Realty in Surrey, BC, highlights this trend, indicating a significant shift in market dynamics.

Condo Investors Grapple with Equity Loss and Mounting Stress

Many Vancouver condo investors are sitting on substantial equity, often ranging from $100,000 to $300,000. However, the prevailing sentiment is one of fatigue and a desire to divest. Kleine notes a common refrain: “Let’s just get rid of it even if it’s worth less than it was six months ago. I just don’t want this headache anymore” – a clear reference to the financial pressure from high interest rates and the looming threat of running out of cash to sustain their properties.

Yet, the decision to sell is far from simple. Upon discovering a glut of similar, unsold condos on the market, many investors reconsider. Faced with the prospect of not finding a buyer or accepting a significantly reduced offer, the painful reality sets in. Consequently, many choose to weather the storm, often resorting to borrowing funds from family members to cover their negative cash flow and hold onto their assets, hoping for a market rebound.

This sentiment resonates in Toronto as well. Tim Syrianos, broker/owner at Re/Max Ultimate in Toronto, observes a similar pattern among potential sellers. “I’m not going to sell my property because people can’t buy it. I’ll just put it back onto the rental market,” they often state. This illustrates a strategic pivot from selling to holding, driven by the current market’s lack of liquidity for sales transactions, pushing more properties into an already tight rental sector.

The Mortgage Stress Test: A Monumental Hurdle for Buyers

While a recent Re/Max study in October indicated that 33 percent of Canadians planning to buy or sell a home within the next 12 months are adopting a wait-and-see approach regarding interest rates, Syrianos points to another critical factor hindering transactions: the government’s mortgage stress test. He unequivocally states that it is “the biggest obstacle to not just investors, but any person who wants to buy a condo.”

The stress test mandates that borrowers qualify at a rate of 5.25 percent or the lender’s offered rate plus 2 percent, whichever is higher. This regulatory measure, designed to ensure financial stability in the housing market, inadvertently creates a significant barrier to entry, particularly for first-time buyers and those with less financial flexibility.

Syrianos, whose brokerage primarily serves the dense, condo-heavy downtown Toronto area, emphasizes the widespread impact. “The majority of our realtors are talking about the stress test, and not interest rates, as being the biggest barrier to having first-time buyers or people who are renting who want to enter the market.” The additional 2 percent threshold often pushes potential buyers out of qualification range, despite their ability to manage current market interest rates.

Advocating for reform, Syrianos, a former president of the Toronto Regional Real Estate Board, suggests lowering the stress test threshold to 1 percent. He argues that such a change would significantly alleviate the pressure on potential buyers. With condo inventory steadily increasing in Toronto, he believes that “we would definitely see absorption of these condos” if modifications were made to the stress test, thereby revitalizing a stagnant segment of the market.

Investor Tenacity: How Long Can the Hold Last?

The prevalence of investment properties in Canada’s major urban centers is significant. Data released by Statistics Canada earlier this year, based on 2020 figures, revealed that 36.2 percent of condominium apartments in British Columbia and a striking 41.9 percent in Ontario are utilized as investments by their owners. This underscores the vast number of individuals whose financial situations are intertwined with the performance of these markets.

For some Vancouver investors, the current period is a delicate balancing act. Kleine shares that some have indicated they possess sufficient funds to cover their negative cash flow condos for a few more months. However, beyond that, they will be forced to seek additional financial resources as they await a potential downturn in high interest rates. This is not yet a panicked exodus; rather, it’s a sustained effort to hold on, fueled by external financial support and a steadfast belief in a market recovery next year.

The core philosophy of an investment condo is to enhance one’s life and financial well-being. When this fundamental purpose is undermined by financial strain and persistent challenges, the desire to divest becomes strong. Investors are continuously weighing the long-term potential against the immediate burden, leading to a prolonged period of market stagnation rather than a swift correction.

Downtown Vancouver: A Flood of Discounted Stock

In downtown Vancouver, the market is currently awash with “a whole whack” of generic, approximately 15-year-old, one-bedroom condos, according to Kleine. These properties are lingering on the market without generating significant buyer interest. What were once priced at $700,000 to $710,000 in July are now typically listed around $665,000. Despite these price adjustments, it remains uncertain whether a substantial pool of buyers is ready to capitalize on these discounted opportunities. The hesitation suggests that even with reduced prices, the barriers to entry, primarily the mortgage stress test and high interest rates, remain formidable.

However, it’s important to note that for many existing vendors, selling at these discounted prices would still yield substantial profits. If they purchased their properties five or ten years ago, even a sale at $665,000 could translate into a profit ranging from $100,000 to $200,000. This underlying profitability provides a cushion, allowing some investors to hold out longer or to accept lower offers without facing catastrophic losses, unlike those who bought more recently at peak prices.

The Catch-22: Long-Term Tenants and Below-Market Rents

The Greater Vancouver Area’s real estate board reported 5,446 detached, attached, and apartment properties listed for sale in Metro Vancouver in September, marking a 28.4 percent increase compared to the previous year. This rise in inventory highlights the growing supply, but the demand remains constrained.

A significant “catch-22” for many condo investors is the presence of long-term tenants who are locked into below-market rental rates. Kleine elaborates that these tenants might be paying around $2,200 per month, whereas current market rents are closer to $3,200 or even higher. This discrepancy is crucial, as the owners’ current expenses—including mortgage costs, property taxes, insurance, and maintenance—are often in the $3,000 range. Consequently, the rental income frequently falls short of covering the total carrying costs, creating a negative cash flow situation for the investor.

For a new investor, acquiring a property with below-market tenants is generally undesirable. “Any investor buying property always wants it either owner-occupied or vacant so they can rent it at the new market rent,” Kleine explains. This preference significantly narrows the pool of potential buyers. The most viable buyer for such a property often becomes an owner-occupier who is legally able to give notice to the existing tenant for their own use. This limits competition and can depress sale prices for properties with entrenched, low-paying tenants.

Slower Condo Markets in Canada’s Largest Urban Centres

Data from Re/Max illustrates the slowdown in condo sales across Canada’s largest markets. From January to August 31, condo sales in the Greater Vancouver Area experienced a 17.1 percent decline, with 10,075 transactions compared to 12,159 in the same period of 2022. The Greater Toronto Area (GTA) saw a similar trend, with condo sales dropping by 10.8 percent, from 20,948 transactions in 2022 to 18,263 in 2023.

Shaun Cathcart, senior economist at the Canadian Real Estate Association, attributes this deceleration to the dramatic shift in interest rates. “Since interest rates have gone from their lowest ever to generational highs, it’s no surprise the condo markets in Toronto and Vancouver have slowed.” This fundamental economic shift has fundamentally altered affordability and buyer behaviour, leading to a more cautious and less active market.

Key Differences: Vancouver vs. Toronto Market Dynamics

Despite shared challenges, Cathcart highlights important distinctions between the two major cities. Vancouver’s market, while slow, exhibits some resilience: inventories are not as high as in Toronto, condos are generally selling at a slightly faster pace, and prices did not dip as much and have shown better recovery. These factors suggest a relatively stronger underlying demand or perhaps less speculative overbuilding in Vancouver compared to Toronto.

Another significant divergence lies in new supply. Cathcart, referencing CMHC data, notes that “Toronto and Vancouver condo completions were about the same about 20 months ago.” However, the trajectories have since diverged sharply. Vancouver completions have plummeted to an eight-year low, indicating a significant reduction in new housing stock. In stark contrast, Toronto completions have “took off and are setting records,” suggesting a robust pipeline of new units entering the market, which could put further pressure on prices and absorption rates in the GTA.

Mortgage Arrears: A Measure of Distress and Rental Market Pressures

Cathcart identifies mortgage arrears as “perhaps the best measure of distress in the housing market.” Encouragingly, the current rate stands at 0.15 percent, barely above the all-time low of 0.14 percent recorded approximately 18 months ago. This low arrears rate suggests that despite high carrying costs and financial pressures, a widespread wave of forced sales or foreclosures is not currently materializing across the broader housing market. Investors, while strained, are largely managing to meet their mortgage obligations.

This stability, however, comes with a caveat. Cathcart points out that condo investors are predominantly passing on their higher carrying costs to tenants, which explains “why rents are going absolutely bananas.” The low mortgage arrears and the strategy of offloading costs to renters indicate that while individual investors might be facing financial discomfort, there is “little evidence at this point that (condos) are flooding the market” due to widespread distress. Instead, the market is characterized by a standoff, with investors holding on and the rental market bearing the brunt of increased costs.

Navigating the Future of Canadian Condo Investment

The current situation in Vancouver and Toronto’s condo markets presents a complex and evolving narrative. Investors are trapped between the desire to offload financially burdensome properties and the harsh reality of a buyer-scarce market, largely stifled by the mortgage stress test and high interest rates. While there are regional nuances, with Vancouver showing slightly more resilience than Toronto in terms of inventory and price recovery, both cities are experiencing a slowdown in sales activity.

The investor’s tenacity, often supported by family funds, and the strategic pivot towards the rental market are key factors preventing a widespread market collapse. However, this also contributes to soaring rental costs, transferring the burden of high interest rates to tenants. The low mortgage arrears rate provides a measure of stability, suggesting that the market is experiencing a prolonged pause rather than an immediate crisis.

As the market continues its delicate balancing act, the long-term outlook remains uncertain. Any potential changes to the mortgage stress test could unlock significant buyer demand, as suggested by experts like Tim Syrianos. Until then, the “great Canadian condo hold” will likely persist, defined by investor resilience, market stagnation, and the ongoing hope for a future rebound.