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The reason why financial institutions generally retain the economic value to finance your rental building (second part)

The reason why financial institutions generally retain the economic value to finance your rental building (second part)

Let us imagine that, over a given period, the key interest rate of the Bank of Canada increases by 2%.


We could then expect that the output required by the investors and the interest rates increase.


Starting from this scenario, we can anticipate that the economic value of your property will be affected negatively. Given the standards governing the allowed rise of the rents, we suppose that your net income will not have increased sufficiently to counter the rise of the key interest rate. Here is an example, starting from fictitious data, illustrating this scenario:


If, during the years to come, the situation aggravates, it would be plausible that the commercial value of your rental building can, it also, diminish. Such a situation could cause a chain reaction:


?? A rise of the interest rates would decrease the capacity of the investors to purchase rental buildings since the monthly payments would be higher. Moreover, such an investment would become less interesting since the remaining income, after all expenditure including the refunding of the debt, would be, de facto, decreased.


?? Consequently, the reduction in potential buyers would result in a reduction in demand for your rental building.


?? This rise of the rates could also force certain owners to sell their buildings, and this, once again, because the monthly payments would be too high.


?? In this case, we would notice an increase in the supply of rental buildings, such as yours.


?? So, if the supply of the rental buildings increased on the market as well as demand decreased, that would inevitably result in a fall of the prices. Several owners could be forced to sell their buildings in order to avoid too great losses. However, few investors would be interested to buy since the conditions of financing (interest rates), causing a rise in the expenditure, would not favour such an investment. Also, certain salesmen would be obliged to lower their selling price in order to find buyers.


Nevertheless, be not alarmed since this scenario is only one among so many others. You must however understand that the financial institutions must strongly consider the probability that such a scheme can occur when comes the moment to finance your rental buildings. As mentioned previously, financial institutions act as such in order to protect themselves and, especially to protect you, against unforeseen occurrences. It is wise to prevent that a scenario similar to that experienced by our neighbours in the South occurs here…


About the author

É.A. Évaluateur agréé Yannick Lemelin

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