If Toronto’s real estate market cools, where are the investors?

Toronto real estate sales are plummeting and home prices are dropping as interest rates continue to climb, pushing buyers and sellers to wait on the sidelines.

But where are the investors?

The pandemic market of the last two years resulted in a feeding frenzy for investors drawn to lower borrowing costs, experts say. For those who decided to sell, they were able to make substantial profit as prices soared. In recent years, those who own multiple properties became the biggest slice of Toronto’s home-purchasing market, overtaking first-time homebuyers, according to Teranet.

But the market has changed drastically — and while some real estate experts believe it’s ripe for investors to scoop up more property, with less competition, rising rental demand and falling prices, others say rising interest rates are also keeping investors on the sidelines, waiting for prices to drop further.

There are two main types of investors: those who buy property to rent out, adding more rental supply to the market, and those who speculate — buying a property to flip it, sell it, and put it back on the market to make a profit , said Murtaza Haider, professor of data science and real estate management at Toronto Metropolitan University.

“One in three Canadians rent and with demand back up, this is the time for the rental supplier (investor),” Haider said. “But for speculators, because homes are on the market for longer it will take more time to sell a property and by the time the closing date arrives, they could be losing tens of thousands of dollars, so it’s not worth it.”

Phil Soper, CEO and president of Royal LePage, said rental demand is back as Canada aims to bring in a record 431,600 immigrants this year with many choosing to rent for the first three years of settling. And, many choose to live in the Golden Horseshoe, resulting in greater demand especially in the condominium market, which has been increasing in value after seeing a drop as people sought larger spaces during the pandemic.

Rents are climbing in the Toronto area at their fastest rate in more than a decade with an increase of 16.7 per cent now compared to the same time last year, showing that “there’s a lot of demand for renting condos that wasn’t there before, and it’s pent-up demand,” Soper said.

Another fallout from the pandemic is hybrid work; if more people go back to the office part-time living far from the city isn’t practical, bolstering demand in urban centres, he said.

In June, year-over-year home sales plunged by 41 percent and the average sale price for all houses and condos decreased to $1.15 million from the February peak of $1.33 million. With fewer transactions it’s one of the best times in years for investors to negotiate, said Christopher Alexander, president and CEO of Re/Max Canada.

“The reality is investors love when they can secure a property at a discounted price and for so long it wasn’t an option,” he said.

Even with the changing market, it’s still worth buying property to rent, if it’s a long-term investment, said Alexander. “Most investors hold (onto the property) for a long time,” he added.

But not all real estate experts agree, with some seeing investor activity substantially less as interest rate hikes continue — especially after the Bank of Canada’s one per cent increase on July 13, the biggest hike since 1998.

“When that hike happened it startled people,” said Ron Butler, one of the founders of Butler Mortgages. “It’s a desert out there, everyone is on the sidelines.”

In October 2021, the interest on a five-year fixed mortgage was 1.79 per cent and now it’s 5.09 per cent. In December 2021, interest on a variable rate mortgage was sitting at 1.45 per cent, now it’s 3.45 per cent, he said.

“It’s a big difference and it happened very quickly. During the pandemic with incredibly low interest rates people could pay their monthly payments, but now they can’t,” Butler said.

For investors who want to buy two or more homes, they often use a home equity line of credit, or HELOC — a line of credit secured by the person’s home that provides a revolving line of credit to use for large expenses.

Many homeowners have used HELOCs to make investments on a second property — allowing a homeowner to take out a second mortgage. But often times it uses a variable rate mortgage, not fixed, meaning it’s vulnerable to rising rates.

If the Bank of Canada raises the rate by another 0.5 per cent in September the interest rate on a HELOC could reach 5.95 per cent.

“All the formulas to finance another property become more difficult,” Butler said.

Those who are buying right now are typically homebuyers who can afford higher mortgage payments as well as those who have no choice but to buy now as part of a long-term investment, and can’t wait further, Haider said.

John Pasalis, president of real estate brokerage Realosophy, also doesn’t see active interest from investors. Because mortgage payments are up 50 per cent compared to a year ago, even if rents are raised it won’t help cover the higher mortgage payments needed.

“Rents are unable to cover carrying costs, which have escalated significantly. Now borrowing costs are much higher, which is the biggest barrier for investors right now,” he said. In addition, investors are also waiting for property prices to drop further.

Once interest rates have peaked, and the Bank of Canada lowers rates because inflation is under control, investors will be ready to jump into the market again but the numbers will still be less than the pandemic as rates were exceptionally low, Pasalis added.

However, with strong rental demand and rising rents, Royal LePage’s Soper said it’s less risky for investors to act now, especially in the condo market.

“Prices right now are off their peak and look good, even if mortgage rates rise, the demand in the condo sector is exceeding supply and we’re seeing investors active in this space,” he said.

And, in Canada during times of economic uncertainty equity markets become more volatile than the housing market, making the latter a safer investment, said Toronto Metropolitan University’s Haider.

“Housing doesn’t disappear, it offers a flow of services,” he said. “Demand is always there for rentals. You’ll get a guaranteed rental income and build equity on the property.”

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