High interest rates for secondary properties and the federal government’s ban on foreigners buying property in Canada should help reduce cottage prices. (photo: 123RF)
The short-term rental segment will be one to watch in Quebec in 2023, especially cottages. With price declines and the inventory of properties expected to rise, there may be good investment opportunities.
The 2022 Winter Recreational Property Report, released by Royal LePage in December, shows Quebec cottage prices growing by 14.3% between 2021 and 2022, with the median price reaching $488,600. Condominiums located near the ski slopes increased by 33.2% during the same period, going from $303,700 on average to $404,500.
The real estate brokerage firm, however, expects prices to fall in 2023. It estimates a 7% drop in cottage prices, for two main reasons: high interest rates for secondary properties, but also the federally issued ban on foreigners buying property in Canada. The price correction should affect luxury properties more specifically.
“For the moment, what we see is that the display prices for sale remain the same, explains Élise Chartier, senior wealth manager and portfolio manager at Desjardins Securities.
It is the bids that are down and there is therefore less overbidding. There are a few more properties for sale, but it’s the beginning of the movement, so it’s not really having an effect on prices yet. We are seeing a deceleration in transactions rather than a drastic decrease in prices.”
Royal LePage confirms in its report that this market slowdown should lead to gradual and steady growth in the number of properties in this market segment.
Good time to buy?
Does the equation of more properties for sale and cheaper signal that it is time to invest in this market segment?
“Surely, decides without hesitation the president of the Monsieurchalets.com site, Philippe Hamel. I bought some myself.”
The senior economist at Desjardins, Hélène Bégin, however, does not share his opinion. “There are many more offers than before the pandemic, she notes. Many people have put their money into real estate rather than the stock market. It is a type of property that pays well when interest rates are low, and therefore, it is no longer necessarily profitable.
Philippe Hamel concedes that the offer of chalets for short-term rentals has grown significantly during the pandemic. The Quebec Tourism Industry Corporation had 6,200 permits in May 2020. At the end of 2022, it was more like 10,100, a growth of 63%.
Know the market well
An investor who wants to acquire a chalet for short-term rental must absolutely identify the market in which he is going to establish himself, says Philippe Hamel.
“We have to be meticulous in our market analyzes if we want them to give the right time, he specifies. You have to look at the offer that is present. In Val Saint-Côme, for example, half of the chalets have three bedrooms. The opportunity is therefore in the chalets of one or two bedrooms. Conversely, there are more five- and six-bedroom cottages in Stoneham. Better to select a property with three bedrooms.”
An investor who does not stand out with his offer exposes himself to a price war, he notes. But if he manages to isolate himself in a niche that is not well served, it will be easier to maintain his rates.
To minimize the risk of loss of income, the president of Monsieurchalets suggests a smaller property. The loss of nights at a lower rate will avoid greater losses.
“In the current situation, if I had to buy, I would bet on a property with one, two or three bedrooms, he says. When rates go down, I would aim for bigger.”
Advice
Philippe Hamel also suggests refusing proposals where it will be necessary to reinvest in renovations, which will inevitably lower the profitability of the property in the first years.
Buying a furnished chalet also reduces additional costs.
“Also ask for financial statements for the last five years,” he recommends. If you are shown only the last two years, you will only have the high traffic pandemic years. You will pay top dollar and you will not get a return on your investment.”
The acquisition price should fall within an annual revenue forecast range of 8% (pessimistic) to 13% (optimistic), with a realistic target of 10%. For investors who do not have enough capital, he suggests finding one or two other partners and grouping together to proceed with the purchase of one or more properties.
Tight management
Philippe Hamel believes that chalet owners will reach their income objectives at the end of 2023, provided that their management of the operation is tight.
“Operating costs should not exceed 40% of rental income,” he says. Don’t forget to take into consideration the increase in the hourly rate for labour, sanitary products and fuel.
For those who are able, he proposes to stretch the payment amortization period from 25 to 30 years. This allows us to remain competitive in the market and to have better cash flow for the operation of the chalet.
Short-term rentals have had the wind in their sails during the pandemic because Quebecers have stopped traveling outside the province and have become local tourists. However, the trend seems to be reversing in 2023, with a recovery in international tourism at the same height as before the pandemic thanks, in particular, to the lifting of health restrictions around the world.
In mid-December, the President and Chief Executive Officer of CAA-Quebec, Richard Lachance, indicated that despite the economic uncertainty, “we are very optimistic regarding the recovery, which will even exceed the forecasts of experts, which ‘not anticipating a return to normal before 2024’.
He adds, in the same breath, that the reservation books are filling up a long time in advance: 2023 had not even started that people were already looking towards 2024.
An international year
The observation is the same on the side of the online reservation sites kayak.com and expedia.ca. The first speaks of the year 2023 as being the “year of revenge travel”, following almost three years of pandemic. Despite a 21% increase in air ticket prices, the site sees an annual growth in searches for flights abroad of 98%. An Expedia poll indicates that 41% of Canadians consider it “very likely” that they are booking (or have already booked) an international trip for 2023.
This trend will be essential to monitor for any investor who wishes to acquire a property for short-term rental. How will the chalet rental market, but also that of platforms such as Airbnb and Vrbo, behave if Quebecers go back to vacationing abroad?
“We are closely linked to the travel industry, launches Philippe Hamel. If the international clientele increases, they will look for it somewhere. The summer went very well, but the spring break is quieter than in 2022. Last year, it was full in January. This year, at the beginning of February, there were still chalets available.”
However, he believes that this situation reflects the new habits of consumers in times of high inflation. People prefer to wait a little longer before booking and tying their money to a chalet or an Airbnb, as several financial mishaps can arise along the way.
Short-term rental platforms
At the same time, foreign tourists will also be back in Quebec, notes Élise Chartier. “I think that’s a positive point and that we can be optimistic for short-term rentals over the next few years, which will be favorable to rental platforms,” she said. But we are still in a context where the post-pandemic rules have not yet been established. We have to be careful.”
She also warns investors who use platforms like Airbnb and Vrbo to advertise their rentals.
“Watch the regulation of these platforms, particularly ratings and fee increases, warns Élise Chartier. They make sure you’re profitable before you are.”
