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.
Real Estate Economics and Budgeting August 28, 2008Posted by DustinRJay in Calgary real estate, valuation models.
Tags: budget, Calgary real estate, economics, investing
I think having a budget that you are comfortable with is critical to any investment strategy. By laying out the cash flows, and expected asset values you can get a feel for various economic parameters such as:
- Net present value comparison of various strategies
- Rate of return
- Sensitivity to various economic parameters such as interest rates and inflation
- Affordability or liquidity risks
I put together a budget of various shelter scenarios:
- Renting and Investing the Difference
I hope you find this budget useful as I believe having a well laid out plan is extremely important. Having a solid budget in place will create long term value for investors and create a successful financial environment for your family.
I strongly encourage people to come up with their own budgets, and perform due diligence before making any investment decision.
The budget excel spreadsheets that I came up with are here:
Terrain of Calgary Real Estate Valuation – Price To Rent Ratios January 16, 2008Posted by DustinRJay in rental yields, valuation models.
Tags: bonds, calgary house prices, Calgary real estate, price to rent ratios, valuation models
In the previous post, I discussed how Calgary rental yields are less than many safe investments like bonds. I was interested in how the price to rent ratio compared in a historical perspective and what were the valuations like compared to previous real estate cycles.
A price to rent ratio is similar to the price to earnings concept which is borrowed from the equity markets. The idea is that house prices can be compared against the cash flow that can be generated from the property. Ergo, the higher the house price in comparison to the rent, the poorer the value of the asset.
RBC published a report in 2005 called “House Valuations Across Major Cities.” At the time of the report, it stated that price to earnings ratios for Calgary real estate had pushed “significantly beyond” late 1980’s levels.
The following is a graph of how price to rent ratios compare in Calgary. As you can see, rental yields are an underlying fundamental of house prices up until 1998, when house prices started increasing exponentially, but the trend for the rent index stayed at roughly the same as inflation.
The current valuations are roughly double the long term price to rent ratio. This information dovetails with my previous blog entry wherein I came up with a rental yield of 3.1% for Calgary house prices which is less than safe investments like bonds. A comparison against the long run price to rent ratio and the current valuations indicates that a more rational valuation would be 6.2% (slightly above low risk assets like bonds).
Therefore, caution may be warranted if buying, as house prices are roughly double traditional valuations.