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How are interest rates affecting the cottage real estate market?
Has the short-term rental market finally peaked, then?
Can we expect to see more cottage inventory on the market in the spring?

If someone had told you in late 2019 that a virus first spotted in China would create unprecedented demand for cottage real estate in Canada, would you have believed them? Because that’s what we saw: a mass exodus north during the pandemic. From 2020 to 2022, cottage prices across the country jumped an eye-popping 39 per cent, with waterfront properties reaching an aggregate price of $736,900, up from $498,111, according to Royal LePage.

Limited inventory sparked bidding wars that sent prices well over asking. Buyers snapped up properties without setting foot on them, foregoing home inspections to make offers more appealing. And cottage rentals were booked 365 days a year. It was a good time to be a cottage owner.

But then the fog of the pandemic cleared. Offices recalled employees to the city. Reopened borders offered alternative vacation destinations. And the global supply chain, which was rocked by labour shortages during the pandemic, caused a steady uptick in inflation, peaking at a 39-year high of 8.1 per cent in Canada on June 1, 2022. To wrestle the economy back to a manageable state, the Bank of Canada raised interest rates to five per cent early this summer, where they’ve held since.

These post-pandemic shifts have drastically changed the cottage market. In April 2023, Royal LePage predicted a 4.5 per cent decrease in cottage prices across the country as lack of inventory and rising interest rates dampened sales. And cottage rentals have seen their bookings slow as vacationers explore other destinations and more rentals flood the market—Airbnb reported a 70 per cent increase in the number of available Canadian rentals between 2021 and 2022.

With the heat of the market cooling, some buyers are hopeful that spring could bring an influx of affordable listings. But while financial strain may shake some inventory loose, buyers shouldn’t get their hopes up. Cottages will still be in demand in 2024, real estate experts say, with three main factors shaping the market.

How are interest rates affecting the cottage real estate market?

So…interest rates have to be playing a role, right?

Interest rates remain discouragingly high, but with the Bank of Canada holding at five per cent and inflation dropping from 8.1 per cent in June 2022 to 3.8 per cent in September 2023, there is optimism. Andrew Thake, a mortgage broker in Ottawa, says that at the National Mortgage Conference in Toronto last fall, some experts speculated that the Bank of Canada could start dropping interest rates by next summer, and they may eventually fall by about two per cent.

“Over the years ahead, we’ll see the interest rates continue to trickle down,” Thake says. “We won’t necessarily get back to those pandemic levels, but we don’t want to—that was what triggered all of the insanity that was going on in the real estate world.”

Lower interest rates will be a welcome balm to those who bought with variable-rate mortgages since spring 2020. Many cottagers have seen their monthly payments nearly double. Thake says the added financial pressure of rising interest rates, inflation, and the cost of cottage maintenance could prompt some first-time buyers to sell—he’s already noticed a few “For Sale” signs around his cottage in Perth, Ont. But don’t expect a rush of defaulted mortgages.

When a buyer takes out a mortgage from a lender, they have to pass a stress test. “With the stress test, a buyer would have qualified during the pandemic at 5.25 per cent,” says Thake. “So, for example, if someone was getting two and a half per cent on a five-year fixed rate, they would have been evaluated on whether they could pay 5.25 per cent,” he says. “The stress test pre-screened everyone to make sure that if rates went up, they wouldn’t be in an unaffordable situation.”

This doesn’t mean owners won’t feel the burden of higher payments. But, says Thake, it also doesn’t mean that it’s a bad time to buy. “Right now, you might pay a few thousand dollars more in interest with higher rates, but you’re not paying extra tens of thousands of dollars by competing with a dozen other people for the same cottage like you were during the pandemic,” he says. “Buyers have more strength right now.” But if you wait until next spring, you may find yourself in a cottage bidding war.

Has the short-term rental market finally peaked, then?

For owners who bought during the pandemic, renting out their cottage was an easy way to pay the mortgage as year-round bookings became the norm. But now, they’re navigating increased monthly payments with a drastic decline in fall, winter, and spring bookings. 

“I did a lot of my own social media and marketing, and I was still able to pay a significant amount of our mortgage this year,” says Sarah Etherden, who rents out her cottage on Kennisis Lake near Haliburton, Ont., which she bought in September 2021. “Many people I know barely got any bookings. You can’t just throw a property up on Airbnb anymore and expect bookings to come in,” she says. “I think there’s a lot more competition in the market as people try to offset their mortgage rates. I also cut my prices, which a lot of owners were not willing to do.”

In addition, cottage rentals are being buffeted by new legislation. While some rental owners remain unaffected, townships, such as Seguin in Parry Sound, Ont., Goderich in Huron County, Ont., and the Municipality of Lakeshore in southwestern Ontario, have banned certain short-term rentals because of noise and party complaints. And others, such as the Township of Tiny in Simcoe County, Ont., require short-term rental owners to pay a licence fee. Meanwhile, B.C. is introducing province-wide regulations, and the federal government is, reportedly, contemplating country-wide limits on short-term rental numbers to free up housing stock. It remains to be seen how any federal and provincial legislation will have an impact on cottage properties specifically, but would-be buyers looking to become hosts should keep their eyes on these potential changes.

With pressure from interest rates and tighter legislation, the short-term rental market is where you could see some cottage inventory shake free. It likely won’t be owners like Sarah Etherden selling; she uses her cottage with family and sees it as an emotional purchase. It’s the rental businesses with several cottages that we could see shed some of their properties.

Sharon Burlacoff and her husband, Mark Coutts, are an example of a mom-and-pop rental business that decided to sell. The couple started renting out their newly built Lake Muskoka, Ont., cottage in the summer of 2020. It proved so successful that, over the next three years, they bought three more Muskoka cottages and launched their own rental business, Lakeside Cottages Muskoka.

The properties were booked most weekends during the first few years, but as Covid dissipated, bookings outside of summer grew quiet. With interest rates rising on their lines of credit, Sharon and Mark made a tough decision. In June 2023, they sold one of their properties near Gravenhurst, Ont.

“It was a larger cottage, and as soon as you go above eight guests, renting during a shoulder season becomes much harder,” Sharon says. “Couples or a family of four don’t want to rent a cottage that accommodates 12 for a weekend. It’s too big.”

Christopher Alexander, the president of Re/Max Canada, says this could easily happen with other rental businesses next spring. “If people took a shorter-than-five year mortgage, they’re coming out of their contract in 2024,” he says. “If they’re on a fixed-rate home equity line of credit, which is a good chunk of the market, it’s highly likely that interest rates will push them into selling because the short-term rental market fell out this summer.”

Can we expect to see more cottage inventory on the market in the spring?

The biggest change to the cottage market over the last year is the disappearance of buyers. Folks who were clamouring for a cottage during the pandemic are now waiting out high interest rates. Diana Walker, a realtor with Royal LePage ProAlliance Realty in Ontario’s Land O’Lakes region, says their sales were down 10 per cent in 2023 compared to 2022.

Cottage prices are adjusting to decreased demand, but they remain level. The average cost of a waterfront property in the Land O’Lakes area sits at around $800,000—35 per cent higher than it was pre-Covid—still buoyed by lack of inventory. “During Covid, we went up to 78 waterfront properties for sale in our region, and now we’re down to 39 properties at the end of 2023,” Walker says.

Some sellers cut prices this fall to attract buyers, but Walker says she’s advising her clients to hold off on any price drops. She explains that the market has returned to a more traditional sales cycle where it grows quiet during the winter before a flurry of activity in the spring as buyers try to secure properties for the summer. With interest rates holding, Walker’s optimistic that more buyers will be lured back into the market for spring 2024.

But those buyers may be fighting over listings. In its 2023 Recreational Property Report, Royal LePage noted that 57 per cent of its realtors reported lower inventory than last year. This trend was consistent across the country. 

This could be because owners are more interested in holding onto their cottages, Christopher Alexander explains. Gen Xers have usurped Baby Boomers as Canada’s top cottage buyers, and, for many of them, their priority is to keep it in the family. According to a Re/Max report, 47 per cent of Gen Xers want to buy a cottage so that they can pass it down to the next generation.

“When it comes to succession planning, recreational properties are always a good addition to any real estate portfolio, especially given the long-term ROI that they typically yield, making them an excellent opportunity for inheritance aspirations,” Alexander says. (If you are one of those cottagers looking at succession planning for your place, head to cottagelife.com/succession to sign up for Family Matters, our five-part newsletter on the subject.)

But keeping cottages in the family will limit inventory, increasing competition around available listings. Buyers will need to be smart when bidding on these cottages, planning out their purchasing strategy. This could involve working with a local realtor, having a loan ready to go, and monitoring listing sites. It could also be as simple as putting in offers during the off-season when there’s less competition. These are the kinds of things buyers need to think about to secure their dream cottage deal in 2024.

This story originally appeared in the Winter ’23 issue of Cottage Life magazine.

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