A higher mortgage payment can change a family’s moving plans before it changes anything else. The same down payment buys less breathing room, and staying in a rental for another year can become the sensible choice.
That gives apartment investors one possible benefit from higher borrowing costs. People still need somewhere to live when buying becomes more expensive. A landlord with suitable homes can keep earning from that need.
The connection isn’t automatic. Mortgage rates and rental demand respond to several forces, while property companies have their own borrowing bills. I’d own a good apartment business for its ability to collect rent and manage costs, with the housing squeeze providing part of the backdrop.
Source: Getty Images
The payment changes the choice
Variable mortgage rates are closely connected to lenders’ prime rates, which generally respond to the Bank of Canada. Fixed mortgage rates depend more on bond yields and funding conditions. One central-bank decision doesn’t move every mortgage offer by the same amount.
For a simple illustration, an extra half-point of annual interest on a $500,000 balance is about $2,500 before allowing for repayment effects. That’s roughly $208 a month. An actual mortgage payment calculation depends on its terms, but the scale helps explain why households may delay buying.
Renting longer can support demand for apartments. Local supply, employment, population changes, and household budgets still determine whether landlords can raise rent. Expensive ownership doesn’t give every rental building unlimited pricing power.
CAPREIT
Canadian Apartment Properties REIT (TSX: CAR.UN), usually called CAPREIT, owns rental housing. Investors can participate through units instead of finding a down payment and managing a building themselves. The trust pays distributions from the wider property business.
Its Canadian residential occupancy was 97.5% at June 30, down from 98.3% a year earlier. Most homes were occupied, but the change shows that demand wasn’t strengthening everywhere. It is an important counterweight to an easy claim that higher mortgage costs must boost rental profits.
Occupied average monthly rent increased to $1,738 from $1,693. That’s about 2.7% growth. Meanwhile, net operating income from the same properties rose by only about 0.9% in the quarter, showing that higher rent doesn’t all flow through to shareholders.
Property taxes, repairs, staffing, and other costs take a share. Financing expenses sit beyond that property-income measure. A successful landlord therefore needs to control several bills while keeping apartments attractive enough for tenants to stay.
Considerations
CAPREIT reported diluted quarterly funds from operations (FFO) of $0.654 per unit, slightly below $0.661 a year earlier. Quarterly distributions of roughly $0.388 used about 59% of those earnings. That leaves a meaningful portion for other needs before considering additional cash requirements. I find that more reassuring than a payment consuming nearly everything the trust earns.
I’d consider a modest long-term position, with gradual purchases. The appeal is recurring rent and the opportunity to improve properties and earnings. I wouldn’t buy simply because another household is finding a mortgage difficult to afford.
Higher refinancing costs, weaker local rents, and changing regulations could reduce the return. A diversified portfolio gives those risks less control over household savings. REIT distributions also have different tax characteristics from ordinary corporate dividends.
Bottom line
CAPREIT offers a practical way to own rental exposure without becoming a landlord yourself. Housing affordability can support the need for its homes, while the latest figures show why operating discipline remains essential. I like the covered payment and recurring business, with patience for a rental market that won’t improve in a straight line.
