Interest Rates: A “Perfect Storm” in Real Estate, Believe a Construction Entrepreneur

Interest Rates: A “Perfect Storm” in Real Estate, Believe a Construction Entrepreneur

A construction contractor considering suspending projects due to rising interest rates understands the concern of buyers who are stuck paying the bill.

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“The more I increase 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 to pay becomes “unbearable”, according to her.

“The income necessary to access the purchase of a new property is excessive. A couple of professionals will have a hard time buying a condo on the island with the interest rate increases,” she laments.

At the Association of Construction and Housing Professionals of Quebec (APCHQ), we don’t foresee a pause any time soon.

“We expect housing starts to fall next year by 12,000, or 21%, to 46,000, compared to 58,000 in 2022,” analyzes its director of the economic department, Paul Cardinal.

“We have falls in the sales offices. Our entrepreneurs tell us. It is pushed less, ”she imagines.

“The real estate market was the first to be affected by the rise in interest rates,” Desjardins chief economist Hélène Bégin recently observed.

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And the most expensive materials…

On the ground, construction contractors are feeling the brunt of the fees.

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

To the trained actuary, it’s the “perfect storm.”


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

Luckily for her, her plans are presold. Her SME has a strong backbone. What she is more concerned about are new construction launches.

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

A TrunkMélanie 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 were $40,000! Today we have a completely different dynamic,” she breathes.

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

According to the Québec Construction Commission (CCQ), there will be a slight decrease 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 increases

After the real estate madness, the awakening is brutal for investors, who are struggling with “numbers that no longer work” when it comes to growing their money in projects, according to Royal LePage.

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

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

horse remedy

However, early buyers are no longer the only ones feeling the effects of the horse’s remedy to counter inflation, investors are savoring it too.

“We were selling plexuses at almost negative rates of return,” says Marc Lefrançois, who is feeling the backlash of repeated increases in the market.

“Banks are also a bit 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 play the killjoy.

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

Patience

Until then, investors should bear with us as the headwinds subside.

“Everyone is more careful. It has a domino effect. There is a cooling off”, concludes Marc Lefrançois, from Royal LePage.

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

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