May 2011


Title: Is it time to buy US real estate?

Subtitle: US house prices are in the pits. Maybe it is time for Canadians to take advantage of that.


One of the advantages of living in a globalized economy is that it’s relatively easy to draw lessons from events in other countries. For Canadian housing sector stakeholders, the ideal reference point is the United States, where current residential real estate trends shed light on what is happening here in Canada.


During the past five years housing prices in the two countries have gone in dramatically different directions. The most recent data supplied by the Canadian Real Estate Association show that the average price of homes sold in Canada by its members during April was $372,000, up 35.3% from the $277,000 average price during 2006 as a whole.


On the other hand, the median price (which is slightly different than the average price) of homes sold in the United States fell by 41.7% from $281,000 (in Canadian dollar terms) to just $163,700 during the same period. In short during the past five years Canadian and US residential real estate prices have moved in completely opposite directions. So what does this all mean?


Why the change?

The difference in US and Canadian house price trends boils in large part down to the very different way that both countries emerged from the recent financial crisis and recession. For example both job creation and economic growth have been far stronger here in Canada than south of the border. The US is further hampered by its involvement in three costly foreign wars in Libya, Iraq and Afghanistan, which leaves it with less money to provide social assistance to those hit by economic travails.


Canada also weathered the financial crisis better than did its southern neighbour. For example no major Canadian financial institution went bankrupt or went through major restructuring. That meant mortgage lending here, while tighter than pre-crisis levels, has not tightened nearly as much as it has in the United States.


On top of it all, Canada’s housing sector was not nearly as overbuilt as it was in the United States, which continues to suffer from significant inventories of unsold houses. House price declines have hit US households hard. For example as of the first quarter of this year, 23 percent of US mortgage borrowers owed more money on their houses than their properties are worth. Worse, 8 percent of the volumes of negative equity homes are currently in the foreclosure process. This will put further downwards pressure on prices during the coming months. There are no comparable downward pressures in Canada, though National Bank Financial economist Mark Pinsonneault does expect housing starts here to taper off slightly this year.


Sadly, the situation down south is unlikely to get better anytime soon says one expert. “So far we are not seeing any indication that the US housing market is about to start a sustainable recovery,” says Benjamin Tal, an economist with CIBC WorldMarkets. “In fact, given current trends, we do not see the market clearing before 2013-2014, with house prices falling.”


Is it time to buy US real estate?

So what does this all mean? Anytime there are such broad divergences in the prices of assets in Canada and the United States and Canada, there are investment implications.  Despite their many differences, the two countries are broadly similar in many respects. Both are rich western nations, with substantial natural resources and comparable per capita incomes. So if home prices more than twice as high in Canada as they are in the US, it may mean that real estate there may be bottoming out – or that price here are getting out of hand.


True, for most families real estate is not a good speculative investment. However for those Canadians who are thinking about buying US property, either for vacation purposes or because they are thinking of moving there, the coming months may not be such a bad time to jump in, into some regional markets.


That said, the high spreads between real estate prices in the two countries also tell us a lot about Canada, which, by many accounts is becoming frothy, particularly in markets such as Vancouver.


Experts say that this does not necessarily mean that houses here are overpriced, just that future gains are unlikely to be as strong as they have in the recent past.



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