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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.
Tags: , , ,

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.