A report from a major Canadian bank and leading research firm says investors in Toronto's condo market, a key driver of rental supply, face increasing pressure from negative cash flow driven by rising costs.

Benjamin Tal, deputy chief economist with CIBC World Markets, teamed up with condo research firm Urbanation Inc. on the report written with Shaun Hildebrand that found even today's red-hot rental market is increasingly not covering carrying costs.

The year 2022 "marked a turning point towards negative cash flow that is expected to worsen in the years ahead as increasingly higher-priced new condos that were presold to investors in the past few years at the market peak reach completion in a higher interest rate environment," said the pair in their commentary.

In a first for the market, only 48% of leveraged condo investors buying new units in 2022 were cash flow positive, leaving a majority to contend with rent that did not cover their mortgage costs, condo fees and property taxes in Canada's largest city.

"With condos representing the majority of new home development and new rental housing, understanding the financial position of condo investors is critical to understanding the housing landscape" in the Greater Toronto Area, wrote the pair.

According to the most recent census, rental investors account for 39% of the total condo stock in Toronto and 59% of units built in the past five years, 20 percentage points higher than a decade ago.

Their comments come with signs that the housing market is rebounding from lows reached during the pandemic after the existing home market peaked in February 2022, only to be turned upside down by several interest rate hikes from the Bank of Canada.

The Toronto Regional Real Estate Board reported this May that existing condominiums sold for an average of $724,818 in April, an 8% decline from a year ago. But the price was up from the average of $724,118 in March.

The pair noted sales in the resale market are approaching pre-pandemic levels. Still, new listings continue to fall to a level not seen since the 1991 recession other than a brief decline during the economic downturn driven by COVID.

"That lack of supply in the resale market is working to stabilize prices. The Toronto housing market is approaching sellers' market territory," the report argues.

The pair noted the supply situation of new homes is also getting tight, with per capita housing completions in Toronto dropping to a 20-year low in 2022.

They expect a rebound in condo completions in 2023 because of condo buildings already in the pipeline but said low presales for unbuilt condos in the second half of 2022 do not bode well for the market.

For investors, the problem is inflation is driving costs higher, and interests rate hikes are rising just too fast, even in the face of increasing rents.

Average asking rents across Canada were $2002 in April, a 9.6% increase from a year ago and up from a pandemic-low of $1,662 in April 2021, according to rentals.ca.

The study found that in 2020, the average Greater Toronto Area investor was collecting $2,140 per month in rent but had costs, including condo fees, property taxes and mortgage, of $2076. By 2021, that gap closed to an average rent of $2,139 and average costs of $2,113.

Last year, it flipped, with average costs rising to $2,680 per month against $2,457 monthly rent.

"A reduction in interest rates and further growth in rents will lighten the impact on investors in the years ahead, but it won't be enough to stop their financial situation from getting worse," said the authors.

"The bigger picture issue is that investors may no longer be willing to buy presales to the same extent as in the past. This reduces new condo demand, new construction, deliveries and, ultimately, rental supply."