Is this a renters’ market?
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.