As an alternative investment, U.S. real estate may never look so attractive to Canadians again.
Sunny havens such as Fort Myers, Fla., have seen property values plummet as much as 50 per cent since the start of 2007, while the value of the loonie has soared about 15 per cent during the same period. Add to the mix near record-low lending rates – not to mention the capricious stock market – and you have conditions snowbirds wouldn’t even have dared to dream about just a decade ago.
In fact, parts of the U.S. residential market look so beaten up that investors from emerging markets have begun to snap up properties, with Brazilian buyers particularly interested in Miami recently.
“The basic idea [of buying U.S. real estate] makes sense for Canadians. The dollar is strong and the U.S. market has had a major collapse,” says Scott Baker, portfolio manager at MacNicol & Associates Asset Management, a Toronto-based investment firm.
For the first time since the property market cracked in 2007, some popular markets, such as upscale neighbourhoods in Los Angeles and Miami appear to have bottomed out.
But overall house prices are still falling across the U.S. because of downward pressure from foreclosures, of which there are still approximately 1.6 million in the pipeline today, Mr. Baker says. That means investors need to do their homework.
“Across the U.S. there is still a fair amount of stress,” he says. “The market is in a long process of bottoming.”
House prices across the U.S. have declined steadily since 2007, and the average value has fallen 31.5 per cent over the last four years, according to the S&P/Case-Shiller National Home Price Index. Average home prices across the United States are back where they were in the middle of 2002.
Mr. Baker says there are attractive investment opportunities in U.S. residential real estate for investors who take the time to research local markets. His firm’s MacNicol 360 Degree U.S. Realty Income Fund has holdings in Indiana, Illinois, Georgia and Florida. He favours the southeast over the western U.S. because the prices tend to be lower and the economic and population growth prospects look stronger.
Not only are valuations reasonable by historical standards, but demand for rental properties has risen as families are forced out of homeownership. This situation has created an opportunity for investors to generate income from their investment.
“People still have to live somewhere. They are renting, and rents are rising across the nation by more than inflation,” he says. “Every time there is another foreclosure you can bet that someone will have to rent.”
A Canadian interested in a retirement or recreational property in Florida, for example, would likely be able to generate a small annual return of between 1 per cent and 6 per cent in today’s market, Mr. Baker says.
The low prices have certainly piqued the curiosity of a lot of Canadians. A survey released in March by Leger Marketing on behalf of the Bank of Montreal reported that one in five Canadians are “interested” in buying a U.S. property.
Florida has always been a favoured location of Canadians. And although the region has experienced some of the biggest valuation drops of anywhere in the country, popular areas such as Miami and Fort Lauderdale are beginning to see prices firm up again as money moves back in from Brazil, Venezuela and Europe.
Foreign buyers are doing a lot of the deals in Miami Beach. Andy Katz, of WiseCat Realtors, says 90 per cent of his clients buying local properties come from outside the country, including Canada, Italy, Britain and Dubai. Canadians, he adds, appear to move more slowly than other foreigners because they are searching for exceptionally good deals or hesitant about their financing.
The Miami area has seen home prices tumble as much as 50 per cent off their early 2007 highs. But local activity has picked up dramatically in recent months, with foreclosure and short sales comprising about 16 per cent of deals today, down from 47 per cent at the start of the year. (Short sales are stressed sales where the bank does not actually foreclose on a property).
