October 5, 2024

Ever-Shrinking Condos Are the Choice of Investors in Toronto and Vancouver

	By Ian Austen

There is a group of Canadians who want to see house prices continue to soar: investors. A report from Statistics Canada released this week details their outsize influence on the condominium markets in Vancouver and Toronto. And it's an influence that may now be thwarting some new construction.

A cluster of high-rise buildings with lights on in many windows.

Small condos have become about a third of the market in Toronto over the last eight years. Ian Willms for The New York Times

In Toronto, the study found that investors own 39 percent of all condo apartments. In Vancouver, the figure is 34 percent.

But those numbers rise drastically when you look at condos under 600 square feet in size, a growing segment of the market that previously was seen as an affordable entry point for real estate ownership among first-time buyers. About 64 percent of those cramped apartments are investor-owned in Toronto, and the similar measure for Vancouver is just over 58 percent.

"When you think about Canadian housing, especially Vancouver and Toronto, it's become a pretty, pretty expensive game to own," Thomas Davidoff, the director of the University of British Columbia's Center for Urban Economics and Real Estate, told me. "Ordinary mortals, working people, can afford to rent, but they can't afford to buy, so you get a landlord-tenant relationship."

That rise of condo investors, in turn, has shaped the nature of condos in the two cities, the study suggests.

The nature of condo financing has inflated the influence of investors as buyers. Banks and other lenders generally don't advance any money to condo developers for construction until the presell about 70 percent of the units in any new building. Investors who aren't going to live in a property are an easier market for such pre-construction sales than people who intend to make it their home and most likely need a firm timetable for its availability.

Condo investors hope to make money from rent in addition to profiting from their units' rising resale value. And when it comes to rent, how many dollars per square foot of it a unit generates is a key measure. That figure tends to be higher for smaller condos.

Statistics Canada's analysis shows that the median size of condos in Toronto built after 2016 is now 640 square feet compared with 947 square feet before that time. In Vancouver, it has dropped to 790 square feet from 912.

Again using 2016 as the benchmark, Statistics Canada found that since then about 38 percent of condos built in Toronto have been less than 600 square feet in size compared with only 7.7 percent before.

Joshua Gordon, senior analyst at the agency, told me that it was impossible to prove that builders are shrinking condos mainly to cater to investors. But he said the data does show "that investors prefer these smaller units" in the two cities. He added that investors who don't live in the condos that they buy as investments also "might be less concerned with some of the downsides of the smaller units."

Investors own a large percentage of condos in Vancouver. Jennilee Marigomen for The New York Times

Longstanding worries about foreign investors driving up housing costs in Canada have led to, among other things, a 15 percent tax on residential real estate purchases made by foreign buyers in and around Vancouver. But an earlier study by Statistics Canada, made using the same data, shows that the largest groups of residential real estate investors in Ontario and British Columbia are people who live in the province where they put their money.

The rise in interest rates has cooled the desire of many investors for condos. In some cases, the study reports, some investors using borrowed money are now unable to charge rents that are higher than their mortgage payments.

When that's combined with the 70 percent preconstruction sale condition most condo builders face from their bankers, another problem emerges. Without investors putting money down early, many developers have been forced to postpone or even cancel construction of new condos at a time when politicians at all levels of government are pushing for more housing to be built.

While he's not optimistic, Professor Davidoff said that he hoped the current lull in condo investments would end the growing trend of individual Canadians sinking all of their investment money into a single condo rather than investing in a trust that owns a wide array of buildings or investing it in something other than real estate.

"Why are these people committing a million bucks to a not-yet-built unit in a single building built by a single developer in a single location?" he asked. "That's a heck of a gamble. You have a bunch of highly non-diversified nonprofessionals owning individual units and putting themselves at tremendous risk. It's really weird."

Trans Canada

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Ana Swanson reports that Canada is among many nations that have been quietly trying to shield themselves against trade disruptions and high tariffs that could come with a return to office by former President Donald J. Trump.
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Real Estate looks at what $650,000 can buy in Nova Scotia.

Ian Austen reports on Canada for The Times based in Ottawa. He covers politics, culture and the people of Canada and has reported on the country for two decades. Follow him on Bluesky: @ianausten.bsky.social. More about Ian Austen

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