Canadian residential real estate (performance) mirrors SA
05-02-2007
If you invested in a rental unit in Toronto, Canada, you can expect an income return of about 4% in the first year, assuming the investment is not financed. After taking into account maintenance and inflation running at between 2 and 3% in Canada, the after-tax real income yield is about 0%.
Capital growth can be expected over the long term at about 3% p.a. Thus the long-term real total return would be about 3-4% — which is about the international rule of thumb.
This is the assessment of the Rode team of the Canadian house market.
The problem is that these averages do not reflect the whole picture. Certain cities, such as Vancouver and Alberta, for instance, have shown much higher growth in real estate for different reasons – in Alberta it is because of the oil boom and in Vancouver it is due to the lack of expansion space since they won the rights to the 2010 winter Olympics.
Another variable is that certain areas in a city could suddenly become trendy and desirable, resulting in a much larger increase than the average gain on residential properties in that area. In the long run you will always gain, but this gain might not be as much as you could have received from alternative investments — albeit at the cost of higher risk.
Maintenance is a big problem when it comes to investing in rental property in Toronto. If you get a good tenant, then all is fine, but so many places are trashed by tenants, and then the properties require much higher than average repairs, sometimes resulting in negative returns.
Another problem is that in Toronto currently many residential rentals stand vacant for some time with some landlords giving rental inducements such as one month free rent in some apartment buildings.
In Vancouver, the initial costs of investing in a residential unit are higher than in Toronto, while the rentals are about the same or even lower than in Toronto. This tells you something about the economy of Vancouver.
“I do not know how investors get any return in that market. People are buying investment properties expecting further big price increases, which I don't see happening in the near future,” one commentator remarked.
“If 75% of your investment is financed”, he concludes, “you cannot cover your carrying costs during the first 3 to 5 years of your mortgage.”
Commenting on this summary of the Canadian market, Erwin Rode says he gets a sense of déjà vu. “Just about the only difference to current residential property market conditions in South African, is the lower inflation rate of Canada.”
