In early 2022, it looked like Canada’s condo market would never slow down. For older buyers with a little extra cash in hand, buying one may have seemed like a smart way to set themselves up for retirement.
Three years on, experts warn that the condo crash makes these units a bad investment — especially if you’re planning to use them as a nest egg.
According to Statistics Canada, nearly two in five condominium apartments (38.9 per cent) in Toronto in 2022 were investment properties, while this was the case for about one in three (34.2 per cent) in Vancouver.
In addition to having a lower entry point for first-time homebuyers, the condo market made it easier to make a quick buck with rental income.
But Canadians are increasingly wary of investing in condos, research shows.
A survey conducted by Leger for Rates.ca found that 30 per cent of Canadians said condos were once a good investment but no longer hold the same appeal. Only 11 per cent said they would buy a condo as an investment, while 57 per cent stated they would not buy a condo for any reason.
The condo crash is particularly sharp in Toronto, once one of the hottest condo markets in North America.
A July report by Urbanation found that condo inventory in the Greater Toronto and Hamilton Area rose to record highs after sales dropped 69 per cent compared to the same period last year.
Some sellers could very well end up making a loss on a condo they bought a few years ago, experts warn.
“If they were purchased at the pandemic peak or perhaps bought pre-construction at that time, those units certainly have seen a loss in value, and we don’t know when or if they’ll recuperate that value,” Graham said, adding that the drop in value “certainly is going to impact people who have concentrated the retirement nest egg” in condos.
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“For many retirees, a condo once felt like a sure path to financial security. Today, the market is far less predictable. Rising supply, higher fees, and uncertain appreciation have made condos significantly riskier than they used to be,” said Ben McCabe, CEO of Bloom Finance, which works with older Canadians to help them manage their finance.
Buying a condo is a big investment and can create a lack of diversification, said another financial expert.
“This is especially true if it’s in the same city as your home, doubling exposure to a single real estate market,” said Jason Evans, a certified financial planner who works with older Canadians.
He added, “When you invest in a condo, you can only access the income it generates through rent. The principal, or the value of the condo itself, is locked in until you sell. This makes it less flexible than other investments.
Rents across Canada fell for nine consecutive months as of July, making rental income harder to bank on.
“It’s become less attractive to invest in the housing market. We saw interest rates spike. It became very difficult to make a monetary case for being a small landlord,” said Penelope Graham, mortgage expert with Ratehub.ca.
“We saw a lot of existing small landlords sell off their units and a severe drop in people who wanted to purchase units,” she said.
Canada’s condos are getting tinier.
The average size of a Toronto condo apartment in the 1990s was 947 square feet, according to Statistics Canada. The average size of a Toronto condo apartment built after 2016 is 640 square feet.
Vancouver, too, saw condo sizes decline from an average of 912 square feet to 790 square feet in the same period.
This is because the condo market started catering to investors, instead of end users, experts say.
“When we talk to seniors, even though they are looking to downsize, they still want to have a backyard. They want to garden in their spare time. They want to host people. Condos, unfortunately, don’t cater to this need,” said Rishard Rameez, CEO of real estate brokerage Zown.
This is making older homebuyers reluctant to sell their larger family homes and downsize to cheaper, more manageable condo units, said Royal LePage broker Shawn Zigelstein.
“Older buyers, for the most par,t are trying to stay in their homes as long as they can,” Zigelstein said.
Financial experts say there are better, more flexible ways to grow your nest egg than putting all your savings into an investment condo.
“Tax-advantaged accounts like RRSPs and TFSAs, diversified investments such as REITs, and balanced portfolios that include both growth and income assets can give retirees the ability to grow wealth without the risks and headaches of speculative property ownership,” McCabe said.
“For someone close to retirement, it often makes sense to focus on growth within a portfolio of stocks and bonds. Asset allocation ETFs are a relatively new tool that can make this easy,” Evans said.
For those getting close to retirement, it might be a good idea to start putting away a larger chunk of your income into an RRSP.
“For getting the most out of retirement savings, RRSPs are still a great option, especially late in a career. At this stage, income is often at its peak, so RRSP contributions can create large tax deductions,” Evans added.
