But when the introduction of tougher federal mortgage rules slowed the real estate market in late 2012, Vallée realized he wouldn’t hit his target of a five-per-cent return on the sale of the units.
So like a growing number of condo owners, the 33-year-old financial and real estate consultant decided to rent out the condos — as opposed to selling them — at a time when most major Canadian markets are becoming balanced, amid softer sales and weak price gains.
“The market has not progressed as much as I thought it would,” Vallée said. “Prices have not dropped, they just haven’t increased as much as expected.”
Industry data published Wednesday by the Canadian Real Estate Association showed average home prices continued to rise nationally in April, even as year-over-year sales fell three per cent, leaving economists divided over whether the once sizzling housing market is heading for a soft landing. The national average price in April was $380,588, up 1.3 per cent from a year earlier in April 2012.
“I think some people are perhaps confused by the fact that we’ve seen a drop in sales but prices haven’t fallen yet,” said David Madani, an economist at Capital Economics.
“But that’s normal because prices respond to sales activity with a lag,” said Madani, who believes it’s still too early to rule out a sharp correction in what until recently has been an overheated market.
On Montreal Island, the median price of a condo remained flat at $260,000, as sales between January and April dropped 18 per cent, compared with an exceptionally strong first four months of 2012, statistics recently published by the Greater Montreal Real Estate Board show. With Montreal’s condo market now favouring buyers for the first time in 15 years, owners like Vallée who once considered selling their properties are now turning to the rental market, October data and industry observers say.
According to a January report from Canada Mortgage and Housing Corp., 11.8 per of all condos were being rented on Montreal Island in October 2012, up from 9.5 per cent during the same month in 2011.
Nikki Middlemiss, owner of Four and a Half — a company that assists locals and non residents find Montreal rentals — said she’s just launched a new service aimed specifically at helping condo owners find tenants.
“Toward the end of last year I was getting a lot of these kinds of questions,” Middlemiss said. “Some of (these condo owners) have never done this before.”
In Toronto, the number of condo apartments leased on the Multiple Listing Service during the first quarter of 2013 rose by almost a third over the same period in 2012, the firm Urbanation said this week. Since 2011, Toronto rents have risen by more than 10 per cent, equal to an additional $170 per month, Urbanation said.
By contrast, according to the latest data available, average rents paid for a Montreal condo dropped from $1,241 in October 2011 to $1,131 during the same month in 2012, where the condo vacancy rate held stable at 2.3 per cent.
For Vallée, the decision to lease the two condos made sense financially because he was able to buy the duplex below market value, stay on budget while renovating the property and had no existing tenants so he could charge market rents.
The rent he charges covers his carrying costs — including mortgage payments and taxes — on the properties.
Condo owners who purchased at the height of the market, but have existing tenants who pay below-market value rents, will have trouble covering their costs, he said.
“If you’re buying at a higher price, you’ll have to rent at a higher price and that’s tricky in the market where you’re dealing with old leases,” he said.
“You have to be able to rent the place at current market value.”
Vallée’s next plan is to lease the separate Plateau Mont Royal condo where he’s currently living and reduce his expenses by moving into a rental apartment. He will only sell the three units when he can make a higher return than the one he’s earning by renting out the properties. Analysts are divided on when that would happen.
Despite optimism from BMO chief economist Douglas Porter that “Canadian home prices remain incredibly calm, cool and collected,” others warn that sales won’t soar anytime soon.
“High home prices and tighter mortgage rules are squeezing affordability, especially for first-time homebuyers,” wrote Scotiabank Economist Adrienne Warren. “Combined with sluggish economic growth and elevated household debt burdens, we expect the more cautious attitude of Canadian households toward major outlays and borrowing will continue.”