Metro Vancouver tenants could take the hit if condo investments become less viable

Like Metro Vancouver rents keep shooting upsome housing analysts say factors affecting a key segment of the rental market are likely to make things worse.

Data from the Canadian Mortgage and Housing Corporation shows that apartments owned and rented by private investors make up about 40 percent of all market-based rental apartments in Metro Vancouver.

But the combination of rising interest rates, real estate prices and maintenance costs make condos a less attractive prospect for those looking for a good return on their investment, according to some experts.

“Certainly, people are less interested in buying apartments to rent than they would have been if interest rates had stayed lower,” said Tom Davidoff, an associate professor in UBC’s Sauder School of Business.

“Those capital gains and growth and rents are still there, but the high interest rates are a big burden to be able to make payments.”

Crack numbers

In the Greater Toronto Area, a recent report last year marked the first time more than half of investors in newly completed apartments lose money on their rental properties.

Even the ever-increasing rent burden isn’t enough to cover mortgages now that interest rates have risen, Davidoff says — and apartment owners are tied to what the market will bear.

According to the BC Real Estate Association, the average cost of a Metro Vancouver apartment is now $830,000.

Even with a 20 percent down payment of $166,000 paid out over 25 years, an interest rate of 4.99 percent would result in monthly payments of $3,858.

No business case

David Hutniak, CEO of Landlord BC, says payment is not included sky-high strata fees and other increasing maintenance costs.

“Property investors offering rental properties, both in the primary and secondary markets, should take a hard look at the financial viability of their current investments, and look even harder at new acquisitions/developments,” Hutniak said in an email.

“I suspect more and more of them are saying there’s no business case for doing it. The risks are too great and the returns just aren’t there.”

Hutniak says legislation limiting rent increases in the county means many current owners who bought a condo on a variable-rate mortgage are struggling to keep up.

Less supply, increasing pressure

Both Davidoff and Hutniak warn that a housing market with fewer investors, coupled with higher interest rates, means that many new apartment and rental apartment developments are on hold until conditions are more favorable.

They say the decline in supply is likely to put even more pressure on the region’s tight rental market in the coming years and drive rents up even further.

Eric Bond, a senior specialist in market analysis at CMHC in Vancouver, says the apartment rental market, also known as the secondary rental market, plays an important role in Vancouver.

In recent years, says Bond, the number of new apartments for rent has doubled compared to the number of purpose-built rental properties added to the rental market.

“It’s becoming increasingly important for delivering new rental offerings to the region,” Bond said.

According to CMHC, the secondary rental market now accounts for 30.5 percent of all apartments in Metro Vancouver.

And that does not apply to secondary suites such as avenue homes and basement suites. Bond says data is harder to pin down, but estimates show it rivals apartment rental numbers.

CMHC data shows that people are increasingly investing in rental apartments. But Bond admits the data only extends to 2022, when the resale market was weaker and investors may have chosen to keep their properties rather than sell them.

Condos still a good investment: BCREA

Brendon Ogmundson, chief economist for the BC Real Estate Association, says condos remain a good investment and show no signs of abating.

Advance sales for buildings under construction have become weak, Ogmundson says, but total apartment sales continue to grow — though the association’s numbers don’t break down whether those sales are intended for owner-occupiers or investors.

“I suspect we won’t see much of a decline in investor activity,” Ogmundson said.

Ogmundson says the steep rise in apartment prices in major markets like Metro Vancouver, coupled with rising rents, means many investors are willing to take a loss until they cash in on their properties.