Local media has dedicated significant attention over the past several years to the state of the residential real estate market in Toronto especially to the condo boom. Many experts in the Toronto real estate community believe that the Toronto real estate market is experiencing a bubble over the last 10 years. As a result, many potential investors have been waiting on the sidelines for years in hope of a market correction. Some have been waiting so long that prices have increased to the point where even a modest correction would still leave them with less “condo purchasing power” than they had when they first became interested in the market.
Others believe that this increased property values over the last 10 years is just the beginning of a long term trend caused by increased globalization and that Toronto real estate is in the process of lining up with other world-class cities across the globe. Cities like London, Tokyo, New York and Hong Kong are often cited as examples that make Toronto still seem like a bargain. Another argument suggests that large institutional investors (such as pension funds and mutual funds) are starting to use Toronto real estate as a complement to stocks and bonds which is further driving up real estate prices.
While there is plenty of information available about the buyers and sellers of condos in Toronto, it doesn’t paint a full picture of whether real estate is attractive as an investment option for the layman. The missing piece is the rental market which generates the majority of the returns for a real estate investment. What does it cost to rent an unfurnished one or two bedroom condo in Toronto? How do these rents compare in different areas of the city?
To help answer these questions, we have mapped the unfurnished rental prices for properties near each subway stop in Toronto.* The ranges shown in the infographic (full version: Toronto Rent Map) represent monthly rents.**
The infographic does confirm a lot of things we already know:
• As you move away from the downtown core, rental prices start to decrease
• The most expensive areas to rent are near Bay, Bloor-Yonge, Rosedale and Summer Hill stations, where a lot of wealthy Torontonians call home.
• Surprisingly, the rental prices around Union Station are lower than other stations in the area (for example, St. Andrew, St. Patrick and King).
For a potential investor looking at this information, the obvious question is, “with the increase in condo prices, is buying an investment condo worth it based on current rent prices?” To answer this question, we took a sample listing from a new one bedroom condominium near Union station and computed the annual rate of return on investment (ROI):
Purchase Price: $370,000
Down payment and closing costs (20% down, land transfer taxes, lawyer fees): $83,125
Mortgage Rate: 2.5% per annum
Mortgage Term: 25 years
Average Monthly Rent: $1,600
In this example, the ROI on the $83,125 paid to close the sale is approximately 9.1% per year over a 10 year period***.
By comparison, below is a list of investment vehicles and their average annual ROIs for available to regular individual investors: GICs/Government Bonds (Risk Free) – Returning roughly 1%-2% per year (depending on term).
AA & AAA rate Corporate Bonds (Low Risk) – Returning 3%-4% per year.
Stock Market / TSX – Return has been extremely volatile since 2002. An individual buying into the market in 2007 would have seen their investment shrink if that money were still invested in the market today.
No one can say for sure how real estate prices will behave in the short term, but for the long term investor, it’s clear that investment condos in Toronto are still a very attractive option despite the higher purchase prices.
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Footnotes
* Rent data was collected over the course of a year from multiple online / offline sources for both one and two bedroom condos/units in the vicinity of each subway station. Because of the lack of condominium data near some stations, simplifying assumptions were used to collect rent information. Subway stops highlighted in purple (dense condominium locations), exclusively represent rent data on relatively newer high rise condominium developments. Subway stops highlighted in orange, due to the lack of high rise condominiums in the area, represent rent data from all types of dwellings including homes, apartments and condominiums.
** Actual rent data collected were asking prices. It was assumed that the asking price was a good estimate for the final settled price due to the efficiency of the rental market in Toronto.
*** Assumptions
1. Condo prices continue to grow at 2% per year on average (over the long run)
2. Rental prices increase at 1% per year
3. Condo related costs (condo fees, taxes, etc) increase at 2% per year
4. The property is sold at the end of 10 years