The Fall Market's September has come and gone. Here is what we are seeing...
As September has now come and gone, we are noting what a different fall market this has looked like thus far, compared to previous years. From a micro perspective, the Toronto Beach has seen three sales on MLS and one sale off of MLS for the month of September. Compared to last year in which twenty one homes had sold by this time last year.
Unanimously, and across Toronto, sales transactions have come down considerably in number. Depending on the area and property type, somewhere in between 10-25% of properties are selling at the moment.
Key items to note. The rental market is on fire. While it is rising in real time, we did lease four properties this month. For one property, we received four competing offers within 24 hours of being listed, and it leased for 25% more rents than it realized a year ago. Through our network of agents, we are hearing that some properties are collecting a 6% capitalization rate (cap rate) from previous lease rates. Capitalization rates, also known as cap rates, are measures used to estimate and compare the rates of return on multiple commercial real estate properties. We do use this calculation for residential investment properties as well. Cap rates are calculated by dividing the property's net operating income (NOI) from its property asset value. We also use this calculation for buyers when hunting for properties.
Over the past ten years, dependent on the property and asset class, cap rates were around 2.5% to 3%. Maybe 3.5%. We personally and professionally haven’t seen 6% cap rates in Toronto since 2009. We looked closely at 100 investment condos in Toronto last month and noted a consistent cap rate of 4%. It seems that cap rates are going up as prices are coming down and rents are increasing. Good news for investors.
We also experienced a multiple offer this week for a client searching for an investment condo. This condo was on the market for awhile, and price dropped before receiving multiple offers. While our clients didn’t get this one, we are confident another opportunity will arise. In this market climate, buyers don’t have a sense of urgency and seem confident opportunities are coming.
It seems that the current rental rates are continuing to fuel the investors and condo market. We also note that we have had the highest growth in the number of people in Canada of any quarter. International immigration accounted for 94.5% of that. Perhaps this is also fuelling the rental market in Toronto. The question is, at what point will the rents surpass the cost of home ownership? And will we hit a tipping point in which people who are renting will realize that perhaps purchasing might make more sense financially, despite the rise in interest rates and further two increases projected. With home ownership, the obvious upside is the principal down payment and of course, the stability of owning your own home. At what point will this tip? We are watching closely…