Interest rates: A ‘perfect storm’ in real estate, believes one developer

A developer who is considering putting projects on hold due to rising interest rates understands the discomfort of buyers caught footing the bill.

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“The more I raise my costs, the more difficult it is for people to make the down payment and the mortgage,” testifies Mélanie Robitaille, vice president and general manager and shareholder of the Quebec company Rachel Julien.

Today, new buyers get a 5%, 6% or 7% mortgage. As a result, the cost becomes “unbearable”, according to her.

“The income necessary to access the purchase of a new property is made unreasonable. A couple of pros will struggle to buy a condo on the island with interest rate hikes,” he laments.

At the Association of Construction and Housing Professionals of Quebec (APCHQ), we do not expect a reprieve anytime soon.

“We expect housing stocks to start declining by 12,000 units, or 21%, to 46,000 next year, down from 58,000 in 2022,” analyzes his economics director, Paul Cardinal.

“We have some crashes in the sales offices. Our entrepreneurs tell us so. He pushes less,” she imagines.

“The real estate market was the first to suffer from the rise in interest rates,” Desjardins’ chief economist Hélène Bégin recently observed.

And the more expensive materials…

On the ground, building contractors are feeling the brunt of the tariffs.

“And I’m not talking about the incredible increases in building materials and construction site delays,” continues Mélanie Robitaille of the Rachel Julien construction company.

For the seasoned actuary, it’s the “perfect storm.”

The company founded by his uncle 40 years ago has never seen anything like it while building its 4,000 units in Montreal.

Luckily for her, her designs have already been sold. PMI of hers has a strong backbone. What worries him rather are the various new buildings.

“Do I really want to finance myself with 7% interest to build a real estate project in Montreal where people will have a hard time buying it? he asks himself aloud.

Au magazineMélanie Robitaille insists: the market has absolutely nothing to do with that of the 80s when we also found very high rates.

“Yes, the interest rates were higher, but the houses cost $40,000! We have a completely different dynamic today,” she breathes.

“It is a sad moment that must pass. It will last a few months”, he concludes.

According to the Commission de la construction du Québec (CCQ), there will be a slight decline of almost 4% in hours worked next year. We should go from 210 million hours worked in 2022 to 202 million in 2023.

Investors cooled by the increases

After the housing craze, the awakening is brutal for investors, grappling with “numbers that don’t work anymore” when it comes time to grow their money into projects, according to Royal LePage.

“The acquisition cost increases by 15% per year. Financing increases from 2% to 6%. As for income, you’re lucky if you can increase it by 2%. It is no longer profitable,” summarizes Marc Lefrançois, real estate agent and spokesman for the Royal LePage agency.

On Wednesday, the Bank of Canada raised its key rate by another 50 percentage points, from 3.75% to 4.25%.

horse remedy

However, early adopters are no longer the only ones feeling the effects of the inflation-fighting horse remedy – investors are getting a taste too.

“We sell plexes at near-negative rates of return,” says Marc Lefrançois, who is feeling the backlash from repeated market hikes.

“Even the banks are a little more cautious. You can feel it,” she adds.

For Paul Cardinal, director of the economic department of the Association of Construction and Housing Professionals of Quebec (APCHQ), it is above all the exorbitant interest rates that are the killjoy.

“We are waiting for interest rates to fall and/or improve,” he stresses

Patience

Until then, investors should be patient as the headwinds ease.

“Everyone more attentive. It has a ripple effect. There is a cooling ”, concludes Marc Lefrançois, of Royal LePage.

In the third quarter of 2022, sales of single-family homes fell by 13%, condominiums by 25% and apartment buildings by 34%, according to the residential barometer of the Association professionnelle des courtiers immobiliers du Québec (APCIQ).