jump to navigation

Calgary Real Estate Historical Yields March 25, 2009

Posted by DustinRJay in Calgary real estate, rental yields, risk spreads, valuation models.
Tags: , ,
trackback

One way of evaluating assets is to compare them to a safe investment.  Arguably, the safest investment in Canada is Government of Canada bonds.  The biggest risk with holding a bond, is that it is subject to inflation over the term that you hold the bond, but virtually guarantees return of your capital.

The following graph compares the historical rent to price ratio for Calgary against historical long term bond yields.  One of the benefits of real estate over bonds, is that the dividend (rent) can be expected to grow over time, and the asset value will appreciate over long periods of time.  A bond does not offer any upside from the coupon rate.  Therefore, it’s usually irrational that real estate, which has more risks in comparison to Government bonds should yield less.  The following graph helps identify some of the recent price corrections including the 1982, 1991 and 2007 corrections.

Calgary Historical Yield Spreads

[click above for larger view]

One interpretation is that given recent rental increases, lower bond yields, and lower house prices that the current rent to price ratio is more competitive than bonds, and therefore offers fair value.

Data:  UBC Centre for Urban Economics and Real Estate, Bank of Canada, CREB, Bob Truman – First Place Realty

Advertisements

Comments»

1. Perry L - March 26, 2009

I really enjoy this blog, the posts are very informative.

If I am reading this chart right, things are looking good for people who are holding rental properties. But if you don’t have one, it probably isn’t time to buy in just yet (market can still drop a bit). Would you concur?

2. Carioca Canuck - March 26, 2009

Neither Govt of Canada bonds, nor RE, are safe investments right now insofar as capital preservation is concerned.

When rates rise, and they will since they can no longer fall, both assets will devalue accordingly……and dramatically.

Currently the Bank of England was unable to sell it’s sovereign debt at the offered yields yesterday, and the US will not be far behind. When their rates rise, Canada will be left behind unless we correspondingly raise our own.

3. Carioca Canuck - March 26, 2009

Forgot to mention……….what rent increases are you talking about ?

I negotiated a $150 MONTHLY DECREASE for my yearly lease renewal.
There were 2,000 comps for rent……………..

4. BradBender - March 26, 2009

Don’t forget that Equities (ie. Stocks) outperform every asset-class over the long-term. Given the recent 40%+ drop in most major indices, now would be an excellent time to buy _Stocks_ (And no, I’m not a stock-broker looking for a commission). I’m not so sure buying a house in Calgary is wise right now because the decline hasn’t been very severe (yet). Buying Real Estate in the US is probably a smart move because those prices are way down (once in a lifetime opportunity).

Real Estate has traditionally only risen with inflation (roughly ~3% over the last 100 years). You could buy inflation indexed bonds, but I don’t think you can get a $400,000 loan to leverage yourself into them.

5. radley77 - March 26, 2009

I think if you are looking for a rental property, that there are opportunities out there. I have found that mispricing can be 15% or so, so you can get deals that are better than market value if you look for it. Also, there are properties out there that I think are geared towards investment purposes such as duplexes. I really wouldn’t buy a single family home for investment purposes, and that is what this data is based on. I noticed Bob Truman recently sold a duplex with four units for investment purposes that had a rent to price ratio of 7.1%. I think if you have a budget and a plan for investing, then you are in better shape no matter what if you don’t time the market. For example, when I search on MLS for fourplexes there are currently only 19 for sale in Calgary. So the type of property that has the best cash flow, may only present itself once in awhile.

That said, I don’t think there is a reason to be aggressively buying or selling real estate based on investment yield and definitely no reason for speculators to be buying on hopes of quickly flipping a property. People with a short investment horizon are best to look at inventory trends and vacancy rates to determine the best time to get in or out of the market based on housing momentum.

6. hermes kelly bag - July 5, 2010

Don’t forget that Equities (ie. Stocks) outperform every asset-class over the long-term. Given the recent 40%+ drop in most major indices, now would be an excellent time to buy _Stocks_ (And no, I’m not a stock-broker looking for a commission). I’m not so sure buying a house in Calgary is wise right now because the decline hasn’t been very severe (yet). Buying Real Estate in the US is probably a smart move because those prices are way down (once in a lifetime opportunity).

Real Estate has traditionally only risen with inflation (roughly ~3% over the last 100 years). You could buy inflation indexed bonds, but I don’t think you can get a $400,000 loan to leverage yourself into them.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: