Introduction
Alberta’s real estate prices have been hanging in there a lot better than Toronto, and you may hear that the cash flows are pretty good there too.
So with Alberta being in your face a lot more these days with all these Alberta is calling campaigns, you might be wondering how investing in places like Calgary compare to Toronto. So in this video, let’s break down the numbers to see how they stack up.
An Outlook Comparison
Calgary’s property prices are more affordable, and with more people being able to work from home, the thought of living in Calgary might seem like a better idea. More recently, Alberta is benefiting because of the improved outlook for energy and agriculture, which helps hedge against rising inflation and interest rates.
According to the latest RBC report, GDP growth in the Prairies is for sure up this year, and labor markets are almost as strong as in Ontario.
Perhaps psychology plays an important role in supporting their housing market in Calgary these days. Given their stronger short term economy, income growth prospects are strong and this strong consumer confidence helps to prop up their real estate market. And you can definitely see it, since Alberta is actually the only province that’s expected to see positive sales growth year over year in Canada for 2022.
But the reality is that housing is highly dependant on interest rates, and the difference is that Alberta might just see a more delayed reaction. In fact, Alberta’s debt to income ratios are amongst the highest in Canada. And since real estate prices in Alberta haven’t budged much this year, RBC predicts that Alberta will see a 27% dip in sales next year. And even though RBC expects weakness in Ontario as well, it is a much smaller 10%.
Note that this isn’t a price change forecast but sales volume forecast from RBC. usually when sales drop, it usually ends up dragging down prices with it. For example, in Toronto, our 416 house sales dropped by around 36% year over year since April, and that’s why we’ve seen a 24% price drop from the peak.
The other thing to remember is that this recent price support in Alberta mainly comes from its huge reliance on oil. And here’s an interesting chart from BMO that shows the boom and bust of real estate in various markets. What you can see is that once oil prices drop, Calgary real estate prices usually get dragged down too. And because they are so dependent a single economy, the boom and bust cycle ends up lasting longer compared to Ontario, which is more sensitive to interest rate movements but ends up seeing quicker recoveries.
A Comparison Of Fundamentals
When it comes to comparing investment opportunities, we always like to revert back to fundamentals. The economy is more diverse in Ontario, and even more so specifically in Toronto, which means there are more ways to help us bounce back.
And if you look at historical trends, Toronto has seen much stronger appreciation at 7.9% per year compared to Calgary at 5.4% over the past 10 years. And so even if Calgary sees one or two good years, in the long run, the strong market still outperforms.
Of course, we need to look at the full picture with rental income. Rental cap rates in Calgary are higher, but note that vacancies are also higher. Either way, if we strictly add appreciation and cap rates, you’ll see that Toronto historically gives the better returns as a whole.
Now, let’s also touch on future plans. Canada has strong immigration goals. We’re expected to see almost half a million new residents come into our country each year. Half of them come to Ontario, and mostly to the GTA. In contrast, only 10% head to Alberta, so where would you see stronger future price and rent growth?
But perhaps he most important difference comes from the supply side. We have a real housing crisis in Toronto, and new housing ends up being created only through densification. For example, you can now build houses in the backyard in Toronto on single family lots, and the city is looking into allowing up to 4 separate units in each house in Toronto. This will help to increase rental income on existing homes, which ends up giving more upside potential for appreciation too.
Toronto Investment Property Financials: An Example
We may be a bit biased because we love Toronto. We live here, we work here, and invest here, but there is a good reason for that. Honestly, even though investing in Toronto real estate seems scarier in the shorter term, the long term upside in Toronto is pretty awesome. Plus, right now, prices are heavily discounted where you can get 25%+ off and the barrier to entry from the capital side has gone down.
Here’s a quick example: You can buy a property for $880,000, which requires $40,000 for renovations. Based on a 20% downpayment, plus closing costs, plus renovations, you’re looking at an upfront investment of around $250,000. Once you’re done with your renovations , you can rent the house with 2 units for $5,000, which ends up positive cash flowing $300 per month. This is what a strong investment property looks like and remember, higher rates aren’t forever.
How We Can Help
So, if this is something that looks interesting to you, we’d be happy to share more! We’re a real estate sales brokerage that focuses on investing in freeholds in core Toronto, and we search the market every day.
When you work with us, we take the time to understand your needs, teach you the ropes, and help you buy the best investment property for you. But that’s not all. Our team also provides renovation guidance, leasing and property management if you need it. So, just connect with us if you want to learn more about our services!
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