With interest rates rising, retail real estate investors are having to recalculate as income property prices come under pressure and financing costs rise.
As with any business, the profitability of a real estate investment will depend on the purchase price of the building, financing costs, maintenance expenses and rental income, summarizes François Des Rosiers, full professor in the Department of finance, insurance and real estate from Université Laval.
Winning conditions become more difficult to achieve in an environment where rates are rising and prices remain high. “Over the past few years, what we’ve seen is a surge in prices, for example in Montreal, but not just in Montreal,” he says. There are people who buy without measuring the risk of their investment, without taking into account all the costs, and who find themselves stuck by the throat with incomes that are not commensurate with the maintenance and financing costs of their debt. »
When the Bank of Canada decided to use heavy artillery against inflation by increasing its key rate by 1 percentage point on July 13, the effects began to be felt in the income property market, notes Éric Leblanc, residential and commercial real estate broker in Montreal and on the South Shore at Royal LePage. ” That’s where it all began. We have seen a marked slowdown in the demand for plexes. »
Across Quebec, the number of plexes with 2 to 5 units sold fell 34% in the third quarter compared to last year, according to data from the Association professionnelle des courtiers immobiliers du Québec (APCIQ). In comparison, the decrease for single-family homes was 13%. Prices also underwent a rapid correction from July to the end of September. Although the value of plexes remains 11% higher than a year ago, prices have nevertheless suffered an 8% drop in three months. This is the largest quarterly decline since 2008.
The APCIQ data show that investors are less present in the market, believes Hélène Bégin, senior economist at Desjardins Group. She judges that the plex market is “more vulnerable” than that of single-family homes.
An increase in interest payable can cause the owner of an income property to find himself “caught by the throat”, continues the economist. The fall in prices acts as a foil while potential buyers lose hope of being able to resell at a profit in the short or medium term. “When the sale is made at a lower price than the price paid, it is certain that we have a spiral, says Mme Begin. The plex market is particularly vulnerable to a change in the behavior of investors, some of whom have already started to withdraw from the market. »
The president of the Club of real estate investors of Quebec, Yvan Cournoyer, did not note, for his part, a drop in interest for the activities of his association. “When interest rates are low and real estate is doing well, everyone wants to go in there. When things start to slow down, there are those who say: “Now it’s time: prices are starting to fall. Finally, I can start.” It’s still too early to know what will happen with that. »
Buyers could revise their investment strategy, believes Mr. Cournoyer. The latter could associate with partners in order to pool a larger down payment, for example. Mr. Cournoyer says he has noticed an increase in the number of members who have used the sale price balance. This is an agreement where the buyer pays only part of the sale price and incurs a debt to the seller (the balance) in addition to the bank loan. “It’s something we are already seeing. »
An occasion ?
It is difficult to make money in real estate for small investors whose profession it is not, warns Mr. Des Rosiers. Ten years ago, the professor did a study on the plex market in the Rosemont district of Montreal. He had found that the returns were “very low, even negative”. “If we had to do the exercise again, I don’t think it would be very different. »
The market could, however, offer opportunities for sophisticated investors, he said. “In a few months, he may have some good chances. Perhaps also cases of hasty sales from owners who are no longer able to hold on and who will be bought by others. The owners are not in panic mode, observes Mr. Leblanc. “We don’t have hasty sales, people who have been forced to sell, replies the broker. This is not the case. It’s a market where people are buying at prices a little lower than six months ago, but still it’s still going strong. »
The spring of 2023 could give a clearer picture of the market, if rates stabilize, he predicts. Buyers might be more comfortable determining the price at which they’re willing to bid if they have more predictability about rates, he said.