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Mind The Gap – Spreads Between Low Risk Investments and Calgary Rental Yields January 14, 2008

Posted by DustinRJay in rental yields.
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I thought it would be interesting to compare Calgary rental yields against a suite of safer investments.

For one to invest in real estate, one should desire a higher rate of return than other safer investments.

So, how did Calgary real estate stack up against the safer investments?  As you can see in the graph below, not very well…  In general, Calgary rental yields were less than the safer investments yields like GIC’s, savings accounts and bonds.  Low rental yields have led to high levels of condominium conversions as lessors arbitrage differences between renting and owning.

 Calgary Rental Yields

The following is a rental yield calculation for a two bedroom condo in Calgary:

December 2007 Calgary Condo Price = $304,719
Residential Tax Rate = 0.0054614
Annual Taxes = $1,664
2007 Calgary Two Bedroom Condo Rent =$1089/month
Condominium Fees = ~$150/month

Calgary Rental Yields = (1089*12-150*12-1664)/304719 = 3.15%

This compares against:

ICICI Bank Savings Account (4.25%)
ICICI Bank 1 Year GIC (4.65%)
GoC 2 Year Benchmark Bond Yield (4.25%)
GoC 3 Year Benchmark Bond Yield (4.00%)
GoC 5 Year Benchmark Bond Yield (3.75%)
GoC 7 Year Benchmark Bond Yield (5.00%)
GoC 10 Year Benchmark Bond Yield (4.00%)
GoC Long Benchmark Bond Yield (5.75%)

Rental yields would need to increase by roughly 75% in order to be competitive with other safer investments.  Considering current market conditions, a fair market value of $175,000 instead of $304,719 may be warranted for a condo (a drop of ~$130,000).

I find it unlikely that Calgary rent will increase to make rental yields competitive so much as Calgary real estate prices will continue to drop due to:

  1. Calgary has the highest rent in the nation
  2. For the first time since 1994, Alberta had negative interprovincial migration.  This was likely due to individuals arbitraging regional cost of living differences.
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Comments»

1. BearClaw - January 15, 2008

Also you can save some money in registered GICs tax free and use it for a future down payment. You can put towards a long term GIC and take it out early for first time homebuyers with no penalty.

2. Anonymous - February 6, 2008

In respect to rental yields, Calgary cannot compare to other cities since unlike many cities, there are no rent controls in Alberta so the rents are market based.

3. Benjamin Bach - February 16, 2008

I think you’re using an unfair method to compare the investments – the other securities are likely purchased in cash, whereas it is common to leverage equity into a larger RE purchase – that would magnify the yield (well… or decrease it, depending on financing, and positive/negative leverage)

Interestingly… the disparity between rents and prices is bringing investors from your neck of the woods, to mine (Kitchener Waterloo) !

Great blog!

BenjaminBach.com

4. radley77 - February 16, 2008

Thanks for your feedback Benjamin. It was interesting reading your blog to hear an eastern perspective.

I had a couple points to make to your comments:

1) Take two cases:
a. 100% financed – Interest costs at around 6% are more than rental yield, and therefore the venture would be profitless, except for speculative price increases.
b. 0% financed – No financing costs, and therefore your yields are the largest possible.
It should be obvious that by leveraging the investment it actually makes the investment poorer due to interest charges to the bank.

2) You can leverage stocks and other securities using a margin account, just as you would leverage real estate. Thus, magnifying your returns or losses.


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