New rent control measures unveiled last week by the Ontario government could push some small investors out of the condominium market, according to a new report.
Urbanation, a research and consulting firm specializing in the Toronto condominium market, said the imposition of rent control by the government on recently built units is the "single biggest and potentially most harmful change" introduced in the government's plan.
Last week, as part of its plan to tackle hot housing prices, the government revealed that rent control will now be extended to all units, including those built after 1991, which had previously been exempt.
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Ontario's Fair Housing Plan also means annual rent increases for existing tenants can be no higher than the rate of inflation. Under the plan, rent increases will be capped at 2.5 per cent, even if the rate of inflation is higher.
In its report, Urbanation said the average pre-sale investor with a 20 per cent down payment on a condo unit finished this year will have carrying costs equal to the going rate on the rental market. "So even with historically low interest rates, a rental investment with the maximum allowable borrowing limit generates zero net income."
Urbanation also said that while condo investors who bought several years ago have a stronger cash flow due to their lower purchase prices and mortgage carrying costs, those who purchased more recently are at greater risk of rising costs, and may prematurely decide to sell.
"This would lead to an outright reduction in the supply of rentals in the GTA and would eventually negatively impact new condo sales volumes, which would have wider reaching consequences for the overall housing market," Urbanation said.
Citing Canada Mortgage and Housing Corp. estimates from 2016, Urbanation said that about half of recently finished condos were used as rentals.
Urbanation said that without small investors, condo development would be drastically reduced and the rental supply would be dramatically lower than it is today, leading to even higher prices and rents.
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The group said that given how fast prices have risen recently, even incremental increases in interest rates will mean higher holding costs that far exceed the rent controlled limit.
"The bigger issue is that rent control will eventually cause condo investors to begin to shy away from making new purchases, effectively slowing new development … and choking off the market's key source of new rental supply," Urbanation said in its report.
Thus far, the province's plan has been met with mixed reaction. On the day it was unveiled, a group representing low-income families applauded it, while the Federation of Rental-housing Providers of Ontario panned it.