The slaughter

As if the condo market did not have enough grief already…

As you know, this has turned into real estate’s worst quagmire. In the GTA alone there are more condos for sale than ever before during an October. Currently there exists a 3.5-month supply of singles, while double that for condos.

Add to the almost 13,000 available units on the resale market in the region are more than 17,000 newly-built and available pre-con condos. Plus a slew more are currently coming to completion (about 21,000) which were sold three and four years ago, and on which you can count significant numbers of assignment sales and outright defaults.

As mentioned, a mess. Realtors report sales down 20%. Listings are up 36%.

“The condo market is very sensitive to interest rates, given that this segment is a traditional entry point into homeownership,” says the local cartel. “With monthly payments remaining high and average rents edging lower over the past year, many would-be buyers remain on the sidelines.”

And it’s ever worse for investors. A truly recessionary state of affairs. Amateur landlords are being, well, slaughtered. A landmark report by CIBC and Urbanation, referenced here recently, found that an astonishing 77% of all owners with a mortgage are in negative monthly cash flow. Yes, they’re subsidizing their tenants by hundreds of dollars a month. On average, almost $600. (A year ago losses averaged a mere $220 monthly.) Rents are miles away from covering the ongoing monthly ownership costs – and the opportunity cost (loss) of the downpayment or other equity in the unit is effectively 100%.

This is because the properties are depreciating. Average prices have declined in the past twelve months. Now average rents are also on the way down in major urban centres.

Sales of new condos, as a result, have tanked.

A mere 225 condos (of all types) sold in August in this massive market, for example, down 61% from 2023 levels and 81% below the 10-year average. So much for the federal government’s goal of four million new housing units in seven years. We’re going backwards. Fast.

“This reality will result in a sharp pullback in completions and a stagnating housing stock in the coming years, which is sure to make the affordability situation even worse,” says the CIBC/Urbanation report

Well, could this get any worse?

Of course.

Many hemorrhaging condo rental landlords have given up on stable, long-term tenants. Not only are they subsidizing others’ living expenses, but the law has turned against them. Non-payers can simply keep on living in those units for months (or years) before disputes are even heard by the regulator.

The alternative?

Airbnb, baby. By converting to short-term vacation rentals, lots of owners figure they can wildly increase cash flow while ridding themselves of vexatious and sketchy tenants. But a recent Tax Court ruling, and the publicity surrounding some sad owners, is casting a pall on everything, especially combined with new rules on STR. Cities have lowered the boom on rentals of 28 days or less outside of a principal residence and some (like Toronto) also collect an accommodation tax.

Naturally, this has not stopped a myriad of owners from being on short-term rental platforms. And now they may face a staggering HST bill when selling their properties.

The Tax Court made headlines by upholding a CRA bill for $77,079 representing 13% HST on the sale of a condo that was converted from having long-term tenants for nine years to being an Airbnb for little more than a year. When the $670,000 unit changed hands the revenuers claimed it was operating like a hotel or motel room and no retail sales tax exemption applied. The judge agreed. And thus the tax was applied to its entire appreciated value. Gulp.

As a tax specialist is reported saying: “I don’t think there is an easy way around this. The court’s will discourage people from short-term rentals.”

Lose money each month leasing to tenants. Watch rental revenues decrease as rents drop. Absorb hikes in condo fees, property taxes and insurance premiums. Face a potential devastating sales tax bill when you exit.

Is there any good news for condo investors?

Nope.

No dirt, no joy.

About the picture: “Here’s a few pictures of our 2 year old girl, Laka enjoying the fall here in Salmon Arm BC,” writes Scott. “The only being left in the house that greats me with enthusiasm when I come home from work. She’s completely uninterested in who has won our recent election and only cares that her walks are accomplished daily. Wondering if you can touch on DB pension plans and how to ensure, if possible, to have that money move to the kids once both parents pass away. Ie, is it reasonable to pull out the money from the plan prior to retirement and generate wealth that can be passed on?”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2024/10/25/the-slaughter-2/