Comparing land rent values to land prices, and when it's time to buy

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If a farm has the capacity to buy land, it’s often stymied by the lack of land for purchase, not an unwillingness to take on the work or the debt. It’s still surprising to learn that about 40 per cent of land being farmed in Canada is being rented, according to Farm Credit Canada (FCC).

“In some of the provinces in central Canada, you would probably find a little bit of a lower percentage of land that is being rented, so it’s a bit more of a Prairie phenomenon [but] it’s been trending up slightly. The available supply of land available in the market is very thin, so that makes sense that this number is actually quite stable,” says J.P. Gervais, vice president and chief economist of FCC.

FCC has published a rental value report, where rent rates are compared to land value and as a percentage of land productivity. Gervais joined RealAg Radio host Shaun Haney dig in to what the numbers really mean, what’s driving rent rates, and if there’s a magic ratio that informs a renter that they’re better off buying. (more below)

There are several trends identified in the report, Gervais says, including the move to longer-term and more concrete land rent deals as compared to one-year, handshake deals.

As the rate of rent price vs land value drops, land owners may find land would be better off sold, as is the case in some Ontario markets. It’s basic investing: if a land owner can only really derive a 2 per cent return on investment, perhaps that money is better invested elsewhere.

Does that spell opportunity for farmers looking to buy? Possibly, Gervais says, as the supply of farmland for sale is still very thin in some markets. Ultimately, though, being able to shoulder the added debt of a land purchase in regions where land values are very high is still a multi-layered decision — regardless of what the rent-to-value ratio is.

Want to read the land rent value report? Find it here.

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