Is this a renters’ market?

Posted by on February 18, 2009 in Real Estate

If you were to drive through downtown Toronto on any given day, you will notice a lot of construction cranes. Call it the last gasp of the real estate boom. Many of these cranes are for condo projects launched 18-24 months ago which are finally being finished now. In cities like Toronto, where a lot of condo developers rushed in to fill market demand, a staggering number of units are entering into the market in the short term. In fact, the Globe and Mail estimated there will be approximately 23,000 condo units closing in 2009 in the Greater Toronto Area.

With such a large supply of units being completed or, in economically battered areas, a large number of vacancies occurring, are we entering into a renters’ market?

On the basis of supply and demand, one would think yes. After all, as the market is flooded with new units or people simply abandon their units in hard-hit regions, supply increases which forces rents downwards as renters can pick and chose and name their price.  People are either moving from apartments to condos, old condos to new condo, down-sizing to smaller units or simply moving back with their parents. Regardless of the reason why, a lot of supply is coming on-line.

In areas hard hit by the downturn, there appears to be an inverse correlation between the unemployment rate and the rental rate. For example, Business Week reported in the New York Metro area (which includes Manhattan), the unemployment rate went up 1.4% from Q4 2007 to Q4 2008 but the rental rate dropped 3.7%.

However, the flip side of the argument is that in some areas all developers did was build condos, many of which were purchased as investment properties. The carrying costs of these units can be quite high, especially in a tight credit market and the higher costs of financing are simply passed on to renters. While supply may be increasing, the owners cannot afford to give renters too great of a break or else they are simply renting at a loss which cannot be sustained over a long period of time.

We have to differentiate between an apartment landlord/owner who has economies of scale to work with and an individual landlord who is much more price sensitive and may not be about to offer as many concessions.

Which is it? It all depends on local effects and the type of rental unit you are looking for. As the Business Week article noted, in areas hard hit by the slowing economy, many renters are downsizing. If you actually have job security, it may be a good time to move up to a better rental unit (assuming you believe housing prices will continue to fall and you are willing to wait until the housing market to recover to buy if you are so inclined). The upper end of the market is certainly collapsing but the lower end may be stable if this is a flight to the bottom for many renters.

Locally, in the land of the condos, what I have noticed is that apartment style housing stock is certainly coming down in pricing and older condos have attractive price points; I manage our family’s condo which we rent out (its almost 20 years old now) and it was certainly harder to rent out as recently as last year than two years ago and we had to keep the rent the same. We plan to keep rent the same to entice our tenant to continue to occupy the unit.

But the more expensive condo market (the 2 bedrooms, 800 sq. ft. and up) appears to be holding up given that the landlord has to recover its carrying costs and many of the recent condos built locally are entry level 650 sq. ft. or smaller units. Thus, the supply is not concentrated on the mid to high end and buyers may actually be moving into their larger units and not renting them out.

But, locally anyways, if a price decrease is coming, it may not happen until the summer when a whole slew of condo projects finish at the same time as university students give notice on their rental units and the unemployment rate creeps up (we are always about a year behind the U.S. so we can use that as a guide). In other words, patience maybe key.

13 Comments on Is this a renters’ market?

By CanadianFinance on February 18, 2009 at 1:52 pm

Here in Edmonton there are quite a few condos being built that started during the peak of the market days. I can already notice the desperation in the constant amount of radio ads from condo companies boasting immediate possession.

My parents just signed a lease for a place that was originally meant to be sold. They’re going to be paying almost $500 less a month than their current, comparable apartment.

By Mr. Cheap on February 18, 2009 at 9:39 pm

Interesting, and timely for me, post. I just renewed my lease with my tenants for another year and wasn’t sure what the rental market was like. My feeling was that there’s a lot of housing available, so I didn’t raise their rent, but you’re right that there are a number of (conflicting) factors at play.

By Friday Links | The Canadian Finance Blog on February 20, 2009 at 8:42 am

[...] Thicken My Wallet asks if this is now a renter’s market? [...]

By Ray on February 20, 2009 at 2:17 pm

Interesting post, I think rent prices have been on the rise over the last couple months. I think more and more people are waiting to make a home purchase and choosing to rent in the meanwhile increasing demand, but as you said ones we pass through this stage it will become a renters market.

By Purchasing condominium in downtown Toronto | Financial Highway on February 20, 2009 at 3:09 pm

[...] The rental cost in Toronto currently is about $1000/month for a small 1 bedroom in the outskirts of Toronto and over $1200 in downtown Toronto which is our preferred location. Thicken My Wallet recently wrote about the market becoming a renters ‘ market. [...]

By Selfish Reasons to be a Good Landlord on February 26, 2009 at 6:14 am

[...] so).  With the recent real estate turmoil, I wasn’t sure what the rental market looked like (Thicken My Wallet had an interesting post on this topic recently) and decided it was better to keep the tenants I had then risk finding new [...]

By Shank on February 26, 2009 at 10:58 am

Question for those renewing your tenants lease – why do the let you resign them when the tenant law states that the lease automatically goes month to month when the initial lease period expires?

As for Toronto rents – downtown for a 1bdrm, with parking its $1500-$1700, no parking about $1300-$1400 and stable right now…I don’t expect the premium condo building rent to decrease…nor do I expect it to increase.

By admin on February 26, 2009 at 1:43 pm

From the landlord’s side, I would like to lock the tenant’s up for another year’s lease rather than have them go month to month so I have some predictablity of cash flow. It is harder to break a one year lease then to give 60 days notice on a month to month.

By Shank on February 26, 2009 at 1:47 pm

Admin – i agree with you from the landlord perspective. What i can’t/don’t understand is why the tenants would agree to sign on again for a year restricting their optionality. I have never resigned a lease after the initial period – why would I?

But yes, as a landlord of course it is in your best interest.

By admin on February 26, 2009 at 2:08 pm

Some tenants want cost certainity in uncertain markets. People on short-term work contracts may just want to lock in (of course, they are often spending their company’s money). I do agree with you. Most tenant’s go month to month.

By Shank on February 26, 2009 at 2:11 pm

In Ontario tenants do have cost certaintly as landlords can only raise rent 1x in a 12 month period, by providing 60 (or is it 90?) days notice of the increase as per government guidelines. That’s why I’m confused as why tenants would sign on. But my underlying assumption is that tenants are aware of their rights, which is likely not the most accurate assumption.
Good topic!

By REFinance on March 3, 2009 at 4:46 pm

The number of investor-owned units are so small when compared to the overall rental pool, especially in areas like Toronto with continuing demand generators, that I wouldn’t worry a whole lot about it being a renter’s market. May stagnate for a while with the rest of the economy, though.

By Eric on March 13, 2009 at 11:00 pm

If you own a unit built after 1998, the increase guidelines don’t apply.

A tenant is typically offered a year lease for less than the month-to-month, e.g., sign up for 1200/mth for a year, or I bump the rent to 1220 and you go monthly.

Still a better system than the cellphone plan I have.

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