Calgary Real Estate Historical Yields March 25, 2009Posted by DustinRJay in Calgary real estate, rental yields, risk spreads, valuation models.
Tags: bonds, Calgary real estate, yield spreads
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.
[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.