Condos and other buildings in downtown Vancouver. One Vancouver realtor says his investor clients are selling their units.DARRYL DYCK/The Canadian Press
Investors who thought buying a condo would be a safe bet are doing damage control as they attempt to sell in a market that has fallen off in the past couple of years and shows no signs of picking up any time soon.
Realtor Steve Karrasch just sold an investment condo he never thought he’d sell. Now, he plans to invest in upsizing his primary residence. He said he thinks real estate will boom again in the next decade, and he wants to increase the value of his property, which is exempt from capital gains taxes. He said he sees no upside for the condo market in the short term, with rents declining and a looming avalanche of purpose-built rental now in development.
Realtor and real estate investor Steve Karrasch inside the Surrey, B.C. he recently sold.
The six-year-old, two-bedroom, 800-square-foot condo he recently sold is a couple of blocks from his Surrey, B.C., home, and was purchased in early 2021. He bought it as an investment after seeing prices in the detached house market take off. He expected the condo market to do the same. He planned to hold onto the condo, perhaps selling it in the far future to help his kids get into the real estate market one day. He was delighted to see it grow in value by about $200,000 within 12 months. The rent more than covered his costs.
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But then his tenant troubles began. By the end of December last year, his tenant gave him notice. That coincided with renewal time for his five-year fixed-rate mortgage, and rates were much higher. Property taxes and strata fees had also gone up, while condo values dropped. Tenant applicants didn’t have stable incomes. Increasingly stringent tenancy regulations had made it too difficult to be a landlord, he said.
He listed the condo for sale and received an offer just slightly below asking after two days. At the peak, he’d have made maybe $150,000 more, said Mr. Karrasch. Still, he doubled his initial investment, so he considers himself lucky.
Mr. Karrasch said his new strategy is more conservative, reducing taxes and growing wealth where it’s less exposed to risk. A rental condo can lose value or get damaged by tenants. The safer bet, he said, is investing in a bigger principal residence.
“Real estate is taxed in every possible way to the most amount possible – except for our principal residences,” said Mr. Karrasch. “So the idea is if you can take that money [invested in a condo] out, move it into your principal residence.
“Moving that money into tax-free savings accounts, RRSPs [or] a principal residence is much more effective for my future, because I’m not sure if things like CPP and OAS and all that will really be there, or be that effective, when I get to collect it.”
Mr. Karrasch sold his condo for slightly less than asking price but considers himself lucky he doubled his initial investment.
Many mom-and-pop landlords are getting out of the landlord business, said realtor Ian Watt, who specializes in Vancouver condos. His investor clients have been slowly selling, he said.
“If [real estate] were a stock and all the governments, whether municipal, provincial, or federal, said, ‘If you buy this stock, our goal is to make it cheaper by next year,’ would you buy that stock? And that’s what they are doing with real estate. They are doing everything they can to take everyone’s net worth away. So why would you want to be a landlord?”
Kelowna realtor Richard Deacon has clients who’ve sold and taken a loss. He’s even politely turning away clients who are trying to sell properties that he knows won’t sell. While the presale and new-build market had been driven by investors, it’s the end user, the person who plans on living in the unit, driving the market now, he said.
“It’s a great time if you’re an end user because you’re going to get it for 20, 30 per cent off of maybe what that investor paid for it. The investor is getting out of it because their borrowing costs have gone up so much. They can’t rent it the same way they thought they could. The market rates have gone down. Short-term rentals have evaporated. So, you know, they’re kind of dumping it, kind of cutting their losses.”
Not all investors will lose out, he added. Some losses will be offset by money made in other real estate ventures.
“What I’m telling clients right now, though, is, ‘If you’re sitting on a condo, do what you can to cash flow it and make it work. But it’s going to be a few years. It’s not going to be a few months. . . It’s probably three to five years until the condo market corrects or maybe gets you back to where you’re whole or can turn a profit.’”
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In the meantime, those end-users who are driving the market are going to want spacious, quality units. Developers spent the last several years building small studios and one-bedrooms that were intended for investors, catering to young transient renters.
In the city of Vancouver, non-investor condos were generally bigger than investment condos by 18 per cent, said Andy Yan, planner and director of the City Program at Simon Fraser University.
Mr. Deacon said he was recently explaining to a buyer that he might get a deal on an investor unit, but it likely won’t have the quality finishes or square footage he might want to live in.
“Those are the ones that are maybe still selling; some of your older inventory that were built for end-users and not for investors,” said Mr. Deacon.
City planning consultant and former City of Vancouver planner Sandy James said part of the problem has been an overreliance on the residential tower, which made financial sense for a developer who wanted to maximize the value of square footage. Larger three-bedroom units didn’t fit the tower space or make as much financial sense as the studios and one-bedrooms. To obtain financing, the developer had to sell units quickly, and the smaller units were a faster sell.
Ms. James doesn’t see the city of Vancouver shifting toward the new demand for housing that answers diverse needs, instead of generic investor-based housing. And she doesn’t see the development industry pivoting.
“The city’s current policy is promoting housing that is in tower form that I don’t think is particularly open or generous to thinking through other stages of life.”