The hike adds $42 a month to a condo loss. The gap is $94,573

The question the headlines skip

The Bank of Canada raised its overnight rate to 2.50% on Wednesday. If you own a rented condo or you are thinking about buying one, the question is what 25 basis points does to the deal. I have already run the numbers on the benchmark Ottawa condo twice this fall, so I can answer it by changing one input and leaving everything else alone.

The answer is about $42 a month. The more useful answer is how small that is next to the number it sits beside.

The unit, unchanged from October 9

Same inputs as the condo post from three weeks ago. OREB's September benchmark apartment is a two bedroom of 952 square feet at $380,800, down 6.1% on the year. CMHC puts the average two bedroom rental condo at $2,503 a month. Buy with 20% down, so the loan is $304,640.

Rent is $30,036 a year. Take off 5% vacancy ($1,502), condo fees ($7,997), property tax ($4,189), insurance ($540) and a maintenance reserve ($600). Net operating income is $15,208, which is a 3.99% cap rate on the price.

That post financed it at 4.5% over 25 years with Canadian semi-annual compounding. The mortgage constant is 6.64%, so debt service is $20,233 and the unit loses $5,025 a year, or $419 a month. The 4.5% came from my mortgage constant post, where brokers quoted A-lender rental money between 4.50% and 5.50%. I do not have a rate sheet from this morning. Treat 4.5% as a placeholder, not a quote.

Now add 25 basis points

Assume the worst case, where the full hike lands on a landlord's rate and nothing offsets it. Same unit at 4.75%.

The constant goes from 6.64% to 6.81%. Debt service goes from $20,233 to $20,744. The annual loss goes from $5,025 to $5,536, which is $511 worse, or about $42 a month. Cash return on your $76,160 goes from negative 6.6% to negative 7.3%.

The hurdle, which is the constant times 80% leverage, moves from 5.31% to 5.45%. Your unit is at 3.99% either way.

Rent needed to carry the loan: add debt service to the $13,326 of fixed costs and divide by 11.4, which is 12 months at 95% occupancy. At 4.5% that is $2,944 a month. At 4.75% it is $2,989. That is $45 more.

What the hike does to the price a leveraged buyer can pay

Divide NOI by the constant times the loan to value. At 4.5% that is $15,208 divided by 0.0531, or $286,227. At 4.75% it is $279,174. The hike takes $7,053 off what a leveraged investor can bid and still carry the unit.

Here is the part I want you to look at. That break-even bid was already $94,573 under the benchmark price ($380,800 minus $286,227). The hike moves it by 7.5% of that gap. If the hike had never happened, an investor borrowing at 80% still could not get within a quarter of the benchmark price.

For scale, the benchmark has dropped about $24,700 in a year (380,800 divided by 0.939 is roughly $405,500). The hike is worth about 29% of that, in the worst case. It matters. It is not what is driving this market.

One more check, because someone will ask. Does a lower price mean a lower tax bill, which would help the owner? Not here. Ottawa still taxes off the 2016 assessment, as I explained in the tax bill post, so the $4,189 does not fall with the price. Condo fees do not fall either.

The rent side is slower than the rate side

Rent would need to reach $2,944 at 4.5% and $2,989 at 4.75% to carry the unit. At the 1.9% guideline from last Friday's post, reaching $2,944 from $2,503 takes ln(2,944 / 2,503) divided by ln(1.019), which is 8.6 years. At the higher rate it takes 9.4 years.

So the hike adds roughly ten months of guideline increases to the wait. That is a big deal for a unit under the guideline. It matters less if your unit was first occupied after November 15, 2018, because those units are exempt and you can price to the market. Many rental condos are that new. Check your own building before you assume either one.

What I would do with it

If you own a rented condo and your lender renews in the next year, the 25 basis points is the smallest number you have to plan for. Condo fee increases, the special assessment risk in an older building, and what you do at turnover will each swing your cash flow by more than $511 a year.

If you are thinking about buying one to rent, stop modelling rate moves. A quarter point is $7,053 of bid. Your real lever is still price, and the market is giving you very little to work with. A seller who has sat 32 days does not drop $94,573. You have to find the building, the fee level and the unit where the NOI is higher than the benchmark's, because that is the only way the hurdle gets cleared.

Remember the appraisal gap too. A benchmark that keeps falling can leave an appraisal short of your offer.

How I will score it

The October OREB release lands in the first week of November. If the hike is already reaching condo prices, the apartment benchmark should print about 1.85% below September, which is under $373,700 (380,800 minus 7,053). If it prints above that, the hike is not the story yet. CMHC's next rental report in December still scores my rent claims.

I sell houses. I do not arrange mortgages or give tax or legal advice, so your rate, your amortization and your tax position belong with your mortgage broker and your accountant.

If you have a condo in mind, send me the rent, the fees and the tax bill and I will run these lines on it. Call 613-262-6545 or email fil@613realtor.ca, and in the meantime see what is listed.