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23 Jun

Canadians sizing up purchasing in the US

General

Posted by: Angela Calla

When sizing up Canadian markets alongside their U.S. counterparts we often hear that what’s happening south of the border is sure to make its way north. Given that approach, there has been a lot of talk lately about the Canadian real estate market heading for an implosion.

 Statistics Canada has reported a steady price climb with its new housing price index rising 1.9 per cent since last April. And Scotia Capital reported that Canadian real estate prices had increased five per cent in the first quarter of this year compared to the same period in 2010.

Taking what may look like healthy growth a step further,  CIBC warned last month that 17 per cent of Canadian homes are overvalued. A five to 10 per cent price correction is likely to take place in the next two years, the report added. The report went on to say that homes in B.C. are overvalued by 20 per cent, 17 per cent in Alberta, 13 per cent in Manitoba, Saskatchewan and Quebec, 11 per cent in Ontario and 8.6 per cent in Atlantic Canada. 

And this week, Bank of Canada chief Mark Carney issued concerns that fear and greed in the Canadian housing industry is driving real estate prices through the roof.

If these predictions suggest the Canadian real estate bubble is about to burst, Toronto broker Peter Powers thinks otherwise.

“People are reading about the U.S. market and thinking this correlates to the Canadian market and nothing could be further from the truth,” says Powers of Royal LePage’s Johnston and Daniel division in Toronto. “The more likely scenario is that home prices will stabilize giving incomes a chance to catch up. The Canadian real estate market is on solid footing.”

Preceded by a boom in the housing market for the past decade, Powers believes the Canadian housing market is at or near the top of a cycle and that it will normalize, not by means of a major correction in house prices, but instead by a softening of the market and more stable prices.

“Generally, Toronto’s housing prices have been increasing at five per cent,” Powers said. “If the market starts increasing at 15 to 20 per cent, I’d be nervous.”

The concept of a Canadian real estate market or an American real estate market is simply too broad to paint with one brush, says Canadian real estate author Don Campbell.

“That is the equivalent to taking the temperature of everyone in the hospital,” says Campbell, “taking the average of those temperatures and using that  ‘average’ to determine the health of one specific patient.”

Investors need to look at specific local markets, he says. For example, hot U.S. markets right now are in the sun-belt states yet they have low economic forces so inevitably those markets cannot be sustained. On the other hand, Houston and Dallas have great job and population growth and as a result will continue to do well as they are supported by healthy economics and job growth. In Canada, the same can be said. In Windsor, for example, the economy struggles and so does its housing market. However, in other cities such as Edmonton, Surrey and Kitchener, where job creation is prompting population growth, increases in real estate prices are being supported.

Interest rates, banking, mortgage styles don’t really matter, says Campbell, if there isn’t some sort of underlying strength to the job market and the population growth. Without these, you only have hope and speculation, he adds. 

Campbell also questions why so many are concerned about foreign investment propping up the Canadian housing market while they aren’t at all worried about plunking their cash south of the border in markets that are fully supported by foreign investment.

“There is a lot of hullabaloo and media coverage around the danger of foreign investor funds propping up Vancouver and Toronto – yet zero coverage on the dangers of this occurring in these hot U.S. cities,” says Campbell. “I wonder what the coverage will be when the U.S. dip takes another ride downward, taking Canadian profits with it.”

People need to be reminded that cheap doesn’t mean good when buying real estate. Growth in what you buy only comes from GDP and job growth. With those two factors come population growth, increased rental demand, higher rents, property purchase demand, which eventually leads to a hike in property prices.

“As boring as that may sound, it is the underpinning of all real estate markets,” Campbell says. “By the way, the reverse of the formula is also true – no job growth leads to lack of long term demand on property, so what looks like a deal today will look like an even better deal two years from today - and that is the sad fact we are witnessing come true.”

Before considering investing in foreign markets, do your homework, advises Campbell. Know the economics of the region you are investing in and if you don’t know, learn all you can about it.

Tom Burk helps Canadians buy in the U.S. As a realtor who does business on both sides of the border, Burk, who is president of CanAm Properties in Calgary, says the U.S. market is far from tanking.

“It’s dangerous to say prices are crashing in the U.S.,” Burk says. “Prices are not falling everywhere. In Seattle and better parts of Phoenix and Scottsdale Canadians are paying more. The real premium properties are in high demand and there is much less supply than a few months ago. We’re seeing prices rise.”

Burk also stresses that it’s important to look at the local or regional market you’re interested in. There are still a lot of good U.S. markets and many uncertain ones – ones that have the potential of dipping down further. Canadians should not look at the national U.S. figures, he says, because that simply makes everything look bad, which is unfair and wrong.

Because Burk has been buying U.S. real estate for 25 years for Canadians, he recommends Canadians be vigilant about a number of potentially scary and damaging details when purchasing south of the border.

When it comes to titles, for instance, a good realtor will explain that a title search will not always reflect what’s on a title in the U.S., which is very different from our system in Canada. To protect the buyer from potential liability, title insurance, which is essentially unheard of here, should be purchased.

The other point that throws Canadians off buying in the U.S. is how they handle conditional sales. Often U.S. banks don’t approve or reject funding based on conditions on offers until mere hours before closing which can invariably lead to a postponed closing and much frustration especially for buyers not prepared for that uncertainty.

Another constant problem Burk encounters centres around the way contracts are written. If you have a condition that is contingent on, for instance, a spouse’s approval you have to send a waiver to the listing agent to act on the condition. In the U.S., if the listing agent doesn’t hear from the client, it’s assumed the deal is on.

“People are getting confused and they thought they were killing the contract because they did nothing and, in fact, they were moving it forward,” Burk says. “Americans don’t realize that closing a real estate deal in Canada is a different process. There’s nothing wrong with buying in the U.S. But you need a realtor who understands what you understand about the process.

Often and understandably so, they think you understand the whole process.”