Wednesday, March 28, 2007

Some thoughts on Renting in Alberta

One of the most common arguments made by those feverishly bullish on Alberta real estate is that rents in Alberta will keep on rising. More like "To Infinity.....and beyond".
But those with more subdued opinion on Alberta's real estate know that it ain't going to happen. It hasn't happened anywhere else, even in the preposterously expensive locations such as NYC and London, UK.
Rents can't generally keep pace with the housing prices in a period of extreme price increases. In the last two years, while the average property has doubled in prices, the average rent has not. It's as simple as that. Our own rent, for example, has gone up by no more than 10 per cent in and this includes our experience in both Calgary and Edmonton in the last two years.
A typical non-neo-landlord (sorry for the phrase) accommodation has gone by no more than 30% or so. On the other hand, we see numerous rental listings as if Edmonton and Calgary have indeed become Manhattan.
This house in Edmonton for example. It is the second time this house has been listed after the expiration of the first listing. My belief is that in life you don't get what you want but what you deserve. Similarly, in the rental market, some of the neo-landlords are soon going to find out that what you get for your new house or condo is not what it takes to pay your mortgage/property tax/maintenance and other expenses (yes Virgina, there are other expenses too!). It is simply what typical renters in your location can afford to pay.
Unlike the dream of 'owning your house', having a roof over your head is a fundamental necessity. We all keep on hearing about the strong growth and new jobs and similar blah about Alberta. It's all true. But we don't have no very many jobs other than McJobs.
So what if someone offers $15 for a McJob? If the rent of a typical one bedroom apartment does go up to $1400 (as this flipper sure hopes), who will be able to afford it? We don't have an army of executives making $80k (even with that $1400-around 35% after tax income- for 1 bedroom is very steep and those moving here will have to very seriously consider the implications of their move).
So people do simple calculation-can they pay their rent, clothe themselves and put food on table-and still live in Calgary or Edmonton. If they can, they stay here, but if they can't, most will leave the province.
We have not seen too may egregious examples of these so far, because the rents have not gone up that steeply.
Plus, there is the strong competition from incumbents. Take these two town houses for example. This is a typical townhouse from a company that probably paid around $50k for it several years ago. It now rents for around $1000-1100. 2 years ago, in a very high vacancy market, similar units rented for around $700-800. This is based on our first hand experiences. This company knows its business and is simply milking the business based on strong market conditions.
Take this other townhouse.
Most probably acquired recently by a flipper for around $250-300k. Who is going to pay more than a $1100 premium for living in a newer building, especially when we live in a world when money paid in rent is considered 'wasted'.
Those acquiring properties purely for becoming 'landlords' will soon discover that even though rental market may not be very elastic till rents reach a certain value, it does become fairly elastic if rents do go beyond a certain point. People will show their 'elasticity' and move to cheaper locations. Or the wages will have to rise steeply, to keep up with the prices.
So if you are counting on minting money by acquiring a $300k condo and hoping it to rent it out for $1800 per month (and hoping for 5% perpetual increases in rent or 50% increase in prices), the end result may not be very pleasant.
The US is already waking up to this, and the sooner we do the lesser the damage. Is anyone listening here?

Update on anonymous comments: Although I'm not a huge fan of enforcing strict controls over speech, requests from those who contribute on this blog and incidents like these helped me change my mind. You'll now need to be registered to post comments on this blog. Thanks for your feedback and discussion.
blog comments powered by Disqus
Real Estate Blogs - Blog Top Sites