This post was corrected and updated on Saturday April 11, 2015.
As Toronto condos go, a cramped unit on the 52nd floor of a newly built downtown tower is as good a place as any to pick apart one of the most oft-repeated real estate stats in Canada’s largest city: the ultra-tight vacancy rate of little more than one per cent. You hear it all the time, on the lips of every condo buyer and regurgitated in real estate reports. It’s one of the reasons a growing number of developers say they’re shifting gears from building condos to building rentals. But like all statistics emanating from Canada’s clubby real estate industry, this one should be taken with a grain of salt—especially since investors are a huge source of demand driving frothy condo markets here and across the country.
Rachelle Berube, a property manager who oversees several hundred rental properties in Toronto, is showing me the unit—located in a building at 12 York St. marketed as the “Ice Condos”—which she’d tried for weeks to rent out on behalf of the condo’s owner. We’d talked a few days earlier about Toronto’s rental market and how the official vacancy statistics don’t jibe with what she’s seeing. And so Berube invited me up to the unit to see things first-hand. While the view out the window was impressive, it was the scene in the hallways that truly surprised. On the door to almost every unit on the floor in this sold-out building, and multiple floors below, notices were posted by work crews to say they’d entered the units to do repairs—notices that hadn’t been touched in days or weeks. These were empty condos. A few are up for resale, most are for rent. On Realtor.ca, the official site for real estate agent listings, there were more than 30 units in the building listed for rent the other day. On Kijiji.ca, an online classifieds site, another 40 or so were listed. Sure, there’s some overlap, but Berube has seen the same situation across the city. Empty rental units are piling up everywhere.
There are a couple of things you should know about Berube before we go on. First, she has a heightened awareness for numerical balderdash. Second, she’s not afraid to kick up dirt. For example, a few years ago as she sifted through documents from a company called League Assets Corp., which operated one of Canada’s largest private real estate investment trusts, red flags went up at the company’s promise to deliver double-digit annual returns to investors. She dug deeper and on her blog accused the company of operating a Ponzi scheme. League filed a $2.6-million defamation suit against her in May 2013. That October it filed for bankruptcy protection, leaving thousands of investors facing more than $300 million in losses.
Berube says she has the same sense of “cognitive dissonance” when analyzing condo vacancy stats as she did early on looking at League’s financials. “There’s something seriously wrong with these numbers,” she says.
What are those numbers? According to the Canada Mortgage and Housing Corp., the federal agency that insures lenders against mortgage losses while simultaneously serving as one of the main sources of real estate data in the country, the vacancy rate for condo rentals is just 1.3 per cent—about as close to zero as you can get.
As Berube points out, several things don’t make sense. After 20 years in the business she’s seen periods of ultra-tight vacancy rates during which scores of applicants would respond to listings. Nothing like that is happening now. A tight rental market should also lead to higher rents, but CMHC’s own rental market report from the fall of 2014 noted that rent collected from condo tenants declined 1.5 per cent from the previous year. She’s seen the same trend with her own clients, with rental units regularly fetching the same or less than they did five years ago. (In the end Berube rented that downtown unit after slashing the rent 10 per cent, to $1,500.) There’s also the fact a roughly one per cent vacancy rate is just an astonishingly, almost unbelievably low number. New York City, arguably the most brutal place to try to find a place to rent anywhere in the world, has a rental vacancy rate of 3.45 per cent. For higher-end units, it’s 7.3 per cent. Sorry, but Toronto isn’t New York, as much as people in Toronto like to think it is.
*Please see below for a correction to this paragraph Not surprisingly the vacancy-rate calculation on condos is something of a black box. It’s not, as you might think, a measure of the percentage of condos meant to be rented that are currently sitting empty. A condominium-owners survey by CMHC last fall makes that clear—it showed percentage of investment condos sitting vacant at 5.5 per cent for units purchased more than six years ago, and up to 10.1 per cent for those bought in the last three years. Instead the vacancy rate reflects empty units as a share of the whole condo market, including those units occupied by their owners. “It seems to be a Franken-number,” says Berube. “It means absolutely nothing and it’s encouraging people to buy condos thinking they’ll be easy to rent.”
There’s no question for a lot of people in Toronto looking to rent, it’s hard to find a decent place at an affordable price. And yet there’s glaring evidence of a huge stock of condo rental units sitting empty. Why the disconnect? Simple. Renters live in the real world of cash—the rent they pay is tethered to their paycheques. But condo investors who’ve been buying properties to rent exist in debt lalaland, leveraging up to buy properties at prices that in no way reflect the incomes of the people they hope to rent to.
Once that reality sets in—that other than being a speculative bet on rising prices, condos as investments are money losers—it’s only a question of how many will run for the exits.
*Correction and update: CMHC responds. And then I respond.
I spoke with CMHC chief economic Bob Dugan Friday. He pointed out an error in my column where I wrote about the methodology behind the vacancy rate for rental condos. It is not a measure of vacant rental condos as a share of the total condo market, as I wrote, but of those units that are being rented out. To get the 1.3 per cent vacancy rate figure, the CMHC surveys a sample of property managers and condo boards in buildings across the city and asks them how many units in their buildings are rentals and how many of those units are vacant. The condominium-owners survey, a separate undertaking, is a survey of condo owners who own at least one other unit, and has several exclusions that mean it only reflects a part of the condo rental market. As such it shouldn’t be compared to the 1.3 per cent vacancy rate figure. I apologize for the error.
Now, moving on…
Dugan asserted that Toronto’s condo rental market truly is as tight as the CMHC’s 1.3 per cent vacancy rate claims. It still doesn’t add up for me.
For one thing, CMHC’s analysis indicates there are just 1,200 condo rental units currently vacant (or at least as of the survey date last fall) in the entire Greater Toronto Area. Right now on Kijiji.ca there are roughly 5,700 condo rental listings. Dugan rightly points out that Kijiji is not an ideal data source (as the federal department of finance found when it infamously used Kijiji for its jobs vacancy statistics). Over at Realtor.ca there are another 4,500 condo rental listings. Dugan argues that not all those units are necessarily vacant at this moment (for instance, a landlord might post a listing in anticipation of a tenant moving out) which is true. But the scale of vacancy listings relative to the CMHC’s findings bears closer scrutiny.
As for the question of declining rents, Dugan insisted I was inaccurate to write that rents for condo units declined by 1.5 per cent. He said CMHC’s analysis shows that condo rents actually rose 2.5 per cent between 2013 and 2014.
Then I read the following to him, from page six of CMHC’s most recent Rental Market Report for Toronto: “Despite the strength of demand for condominium apartment rentals this year, the fixed-sample average condominium apartment rent edged lower by 1.5 per cent in 2014 compared to the previous year. Given the increase in new supply of rental condominium apartment units this year, landlords appear to have limited rent increases, and keep rents low, in order to remain competitive.”
Dugan couldn’t explain why the report said that and suggested it might have been an error. But CMHC’s apparently erroneous rent statistic makes a lot of sense and fits with what Berube and others are seeing. A report released earlier this year by Toronto condo research firm Urbanation found that in 2014 rents rose just 0.8 per cent, compared to a 4.1 per cent increase in 2013. Which means that after factoring in inflation condo landlords saw rents drop.
Here’s a final point. Because rent controls don’t apply to properties that hit the market after 1991, condo landlords are legally able to raise rents by any amount they wish. So if the condo vacancy rate really is just 1.3 per cent—immensely tighter than in places like New York City—landlords should be in an incredibly strong position to hike rents. And yet that’s not happening. Why?