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).
"A lot of buyers come in expecting great discounts today. But those days are gone. 2009 was the best time to buy," Mr. Katz says. Foreclosure properties were regularly selling with 50-per-cent discounts. Today, they sell at discounts of between 20 per cent and 28 per cent, he said.
At the moment, the best deals in the Miami area are in South Beach, an area where the properties on average are older. There are currently 172 properties listed under $150,000 and 50 per cent of them are within walking distance to the beach. Generally, these are small, art deco-style, low rises. Their monthly maintenance fees run $320 or less and the sizes range from 240 square feet to 440 square feet.
Mr. Katz strongly advises that buyers who want to rent out their property use a local management service, which charges about 20 per cent of annual rental income. Not only does it remove the headache of trying to oversee tenants from thousands of kilometres away, but it allows owners to navigate local bylaws. Miami Beach, for example, has restricted rental policies, limiting the number of times most condos can be rented out to just twice a year. That makes it very hard to generate short-term income.
Some local management firms will actually walk renters in and out of a building to present them as "friends" of the owners, he says.
Financing U.S. housing purchases has always been a challenge for Canadians, and conditions became exceptionally tough during the recession. Laura Parson, a mortgage specialist with Bank of Montreal based in Calgary, suggests clients take equity out of their Canadian homes through a second mortgage – essentially a line of credit. The bank will also facilitate pre-approval status for clients with its U.S. subsidiary, Harris Private Bank.
U.S. banks had closed their windows to foreigners looking for mortgages, but they have begun to realize that if they want to get the market cleaned up they have to support these buyers. They are increasingly willing to provide mortgages in cases where a foreign buyer puts down a minimum of 40 per cent to 45 per cent, Mr. Katz says. His advice to any Canadian shopping in the U.S. is to find a local mortgage broker who will work with at least half a dozen banks, otherwise, he says, the broker is unlikely to be able to negotiate a deal.
U.S. banks are "coming out of their cave and lending money" again, says Dale Walters, chief executive officer of Keats Connelly, a cross-border wealth management firm in Phoenix. In recent months, some have developed lending processes specifically for Canadians, realizing that they are generally a good base of customers.
He suggests Canadians look at using the U.S. operations of the Royal Bank, National Bank or Desjardins Group. By borrowing from a U.S. institution, investors remove the currency risk that comes with having their loans in Canadian currency and any rental income in U.S. dollars.
Mr. Walters, author of the recently published book Buying Real Estate in the U.S.: The Concise Guide for Canadians, warns that investors in U.S. housing need to protect themselves from litigation by forming limited liability partnerships. An LLP would shield Canadian assets from any law suit arising from an accident on the property, he says.
The Canadian love affair with Florida
8: percentage of all resale homes in Florida bought by Canadians, 2010
$2.1-billion: value of homes, in U.S. dollars, bought in Florida by Canadians, 2010
$50-billion: estimated maximum total value of Florida residential real estate owned by Canadians
$150,000: median price of homes purchased by Canadians, 2010
89: percentage of Canadians who paid for their Florida real estate purchases in cash, 2010
500,000: estimated number of Canadians who own a home in Florida, including timeshares
62: percentage of snowbirds who own a property in Florida
59: percentage of Canadians who use their Florida property as a vacation home
18: per cent of Canadians who rent their property as an investment
Source: National Association of Realtors, Florida Association of Realtors, Americas Market Intelligence, Consulate General of Canada in Miami