Cap rates in Toronto will likely decline further.
There was a time when you bought an income property that the price would have been based on its actual income. As prices increased and rents basically stayed the same, cap rates and returns started to go down. In the past year, rents have started to really increase (due to lack of available rentals) but still are not commensurate with the actual prices. We have seen some crazy sales over the past year where there doesn’t seem to be any fiscal justification for the prices. I have often seen cap rates under 3%! Real estate investment returns in the city of Toronto are being outperformed by other investment opportunities, since real estate has become so expensive.
There are some that think that the prices of duplexes and triplexes will even go higher this year. With years of low interest rates, a lot of foreign as well as
domestic investment, and fewer properties overall available for sale, the gap between supply and demand has gotten wider. The government’s foreign buyers’ tax stalled the market temporary but multiple offers leading to higher prices started again shortly thereafter. Two years ago, major banks started applying their “stress” test to borrowers (you would have to qualify at a higher rate than you were actually getting), and again there was a temporary slow-down but no long- term change.
Whilst no one has crystal ball, I don’t see anything changing in the short term.
I think that the reason why a good four-plex is always in high demand is that there simply aren’t that many of them compared to every other type of real estate. Compared to condos and single family it is a very small percentage. Income properties can always be converted back into single family so that makes them desirable in the top Toronto neighbourhoods. That with low interest rates and a depressed supply will likely make the prices continue to steadily increase in 2020.