#1 Buyer’s Market
A few weeks ago, I published this video with an update on our housing crisis.
On the supply side, Toronto and Ontario in general are very behind in building new homes because of the slow sales.
On the demand side, the government will maintain the same target for the next 3 years, around half a million immigrants per year.
So we are going to face a housing shortage down the road.
Here’s Paul’s comment:
“According to everyone else on youtube that uses real published statistics unlike this video, we are in a buyers market. That means there is supply so you are wrong.”
A buyer’s market and housing supply going forward are two very different things and it is important that you understand the difference.
On October 1, before any official report came out, I have already said that we are in a buyer’s market just based on market observations.
What is a buyer’s market?
The simple way to put it is there are more sellers than buyers, so buyers have a bigger negotiation power.
But does that mean we have an oversupply?
Not necessarily.
If there are many vacant units sitting on the market, no one wants to buy them and no one wants to rent them either, then we have an oversupply.
However, this is not the case with the current Toronto market.
At the moment, the majority of sellers are investors.
In many cases, the rent they are collecting is not enough to cover the high mortgage payment after the interest rate hikes.
So obviously, we won’t expect to see many investor buyers.
As for end users, the high interest rate is discouraging them from home ownership and with the market uncertainties, many of them prefer to rent instead of own.
So we don’t see many end user buyers either.
And we end up with more sellers than buyers, it is a buyer’s market, in terms of resales.
The majority of the unsold units in the resale market are not vacant, they are actually tenanted.
In some cases, the investors are purposely leaving the unit vacant after the tenant left because it is just easier to sell without a tenant.
But it is definitely not like the market is flooded with vacant units and no one wants to live in them.
I also have some sellers who tried to sell vacant for a couple months but didn’t get the price they wanted, so they just leased out their units again within a couple weeks.
You see, the demand for housing is coming from the rental market.
So yes, we are in a buyer’s market, but at the same time, we are also in a landlord’s market.
That’s why you hear a lot of news about steep rent inflation.
Now that we are into winter, the rental market is much slower than in the summer and the rent is not as high, but we are still leasing out units every day.
It is not necessary for housing demand to come from the ownership market.
The current high interest rate environment just favours rental over ownership.
It doesn’t matter whether it’s rent or own, it is a demand to live in a housing unit.
So don’t confuse a buyer’s market with housing supply.
#2 Rent Control
Percy said “Don’t forget Ontario has rent control. Most rentals are below market. Why don’t you speak about that?”
It is true that for units first occupied before November 15, 2018, they are subject to rent control, which means you can only raise the rent for around 2% or so every year.
If you are like me, who gave a rent discount during the peak of Covid, the rent you are collecting right now is probably way below market.
For a large studio in Regent Park, I’m only collecting $1,347 of rent, which is way below the market rent of $2,000.
Yup, almost $700 below market rent.
There is a flip side to this though.
If your unit was first occupied before 2018, chances are you bought the unit at a much lower price compared to today’s price, so your mortgage payment should be relatively low even with the high interest rate.
For my studio unit, it was first occupied in 2015 and I bought it at pre-construction for $210,000.
That being said, is there a way to bring the rent up to market rent?
The only legitimate reason to get your tenant to move out is to sell the unit to an end user.
But before you put the unit up for sale, you can let the tenant know that you plan to sell the unit to an end user, in which case the tenant would have to move out and find another unit at market rent.
Then you can offer them a rent that’s $200 below the market rent.
It would be a win-win situation if they agree to it, they still enjoy a discount compared to market rent and you bring your rent much closer to market without selling the unit.
We have had some success with this strategy, but of course there are always tenants who feel entitled to the low rent.
In that case, the only way out is to sell the unit to an end user.
Investors are unlikely to take over your unit because the rent is significantly below market.
If the low rent is really bothering you, you can consider trading the unit for a newer resale unit without rent control.
Yes, you would have to sell low in the current market, but you can also buy low with quite some choices in the resale market.
If you need advice for your specific situation, you can schedule a call with me.
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