An epidemic of repossessions in the condominium sector - The end of rental condos?

Last December, hundreds of rental condo tenants received a notice of repossession from new buyers who had purchased a condominium for the purpose of housing themselves. All these rental units are being taken off the market, at a time when units available for rent are already in short supply in this housing crisis, which seems to be gaining momentum. This is also true of small plexes, where profitability is no longer an issue, but rather an outright loss, given the sharp rise in costs in recent years, including interest charges, which are making the situation untenable for many owners.

The rental condo sector has been hit particularly hard, with almost 100% of sales transactions resulting in repossessions, as the rental vocation has become unviable. Even before the rise in interest rates, the profitability of rental condos was difficult, as insurance and condominium fees skyrocketed. The introduction of reserve funds - a good long-term measure - also had a strong impact, resulting in significant outlays on the part of co-owners. "Even before the rise in interest rates, many rental units were already in deficit; with the rise in rates, owners of rental condos have no choice but to sell, as losses easily reach $400 to $500 per month, an unsustainable situation after a while," explains Benoit Ste-Marie, General Manager of CORPIQ.

Rental condos in figures

To fully understand the phenomenon, it's important to take a numerical example, based on a conservative scenario comparing the ownership of a rental condo in 2021 and a rental condo in 2023. Let's take the example of a $350,000 condo with a down payment and principal payments of approximately 25%, leaving a mortgage of $262,500 and interest payments of $1,112 per month at 2%. Add to this the condo fees estimated at $200 per month, insurance at $125 per month, plus municipal and school taxes of around $150, and the total monthly cost of the mortgage ($1,112 + $200 + $125 + $150) comes to $1,587, not including maintenance fees, repairs to the private portion, special assessments to the condominium syndicate, and, above all, not including the time and trouble of managing the tenancy by the owner. This condo, rented at $1,650 a month at the time and considered expensive by activist groups, was already barely breaking even, especially considering the capital gains tax and the risk involved in rental activity.

This same condo in 2023 will have seen its income increase from $1,650 per month to $1,778 (i.e. a 3% increase in the first year and a 4% increase in the second), but all at a heavy loss, since the owner now makes a dry loss of $450 every month. Considering tax increases of 9% in 2 years, insurance and condo fees increases of 20%, this leads to a monthly cost to the owner of $1,665, not counting the effect of higher mortgage payments. Based on a mortgage rate of 6% instead of 2%, mortgage payments alone have risen from $1,112 to $1,680 per month. Adding up the effect of interest rates, total monthly costs rise to $2,233, leaving a dry loss ($1,778 income minus $2,233 cost) of $455, month after month, for an annual loss of around $5,500, again not counting maintenance and repair costs inside the condo.

This illustration reflects the vast majority of rental condos in Quebec, and a significant proportion of small plexes, where owners are faced with losses that make no economic sense month after month. What's the point of looking after a rental property in such a situation, where there's a complete lack of profitability?

Unfortunately, the entire stock of rental condos owned by small investors is in jeopardy. "We've never seen so many people wanting to sell their rental condos. It's a real epidemic, and unfortunately, even a turnaround in the mortgage rate situation will have a hard time resolving the chronic lack of profitability, since the equation has become impossible to solve," says Benoit Ste-Marie. "We are very concerned about the effects of the unprofitability of the rental sector in general. We can expect thousands of condos and rental units to be withdrawn by 2024, which will further complicate the housing crisis," adds CORPIQ's General Manager.

17,000 fewer rental condos

Of the 400,000 condos in Quebec, some 85,000 are rental units. CORPIQ estimates that 20% of condos will leave the rental market over the next 5 years, representing a withdrawal of 17,000 units. In 2023, nearly 20,000 condos were transacted, and CORPIQ estimates that between 2,500 and 3,500 units will leave the rental market to accommodate new buyers who had until December 31 to submit their notice of repossession. To this will be added all the repossessions in the traditional rental sector, which, in the small plex segment, are experiencing the same difficulties as condos. "At a time when we need to add units to the stock to meet demand, it's sad to see the market contracting in this way. What's more, as long as profitability remains elusive, we can expect to see sustained rent increases and large numbers of repossessions," says Benoit Ste-Marie.