How hot is the residential housing market? Well, for the first time in decades, developers are considering building rental housing because they can actually make money — buoyed by consumers priced out of becoming homeowners.
In Toronto’s red-hot housing market, where January prices across existing homes climbed 22.6 per cent from a year ago, consumers have been flooding back to apartments where the vacancy rate was already just 1.3 per cent, according to a Canada Mortgage and Housing Corp. October market survey.
A report from Avison Young suggests that tight vacancy rate, which the company says is now closer to one per cent, is leading to rising prices that have seen what it calls “challenged” properties go for $150,000 per rental unit and up to $300,000 for premium properties.
The capitalization rate, the ratio of net operating income to property asset value, is now just four per cent on average across the GTA but as low as 3.25 per cent. The lower the cap rate, the more a property is worth. A four per cent cap rate assumes it will take 25 years for a property to pay for itself based on its income stream.
Valuations, coupled with changes to rent control rules that allow landlords to charge market rates, have created a viable economic option to build. It’s not the golden age of the 1960s and 1970s when most of the apartments in the country were built, but market conditions are better than they’ve been in three decades.
That has led to a spike in the number of proposed purpose-built rental units: In Toronto, developers are currently planning to build 27,812 units, almost triple the number a year ago. That compares to 49 purpose-built rental projects with 8,484 units have been added to the market since 2005.