Photo: Michelle Hofstrand/Flickr
Many Canadians who bought property stateside after the US housing bubble burst must feel pretty good about that investment now.
“You might recall us harping a while back… something about a generational opportunity for Canadians to buy U.S. real estate,” writes Robert Kavcic, a BMO economist, in a note sent this week to the bank’s clientele. “Well, that ship has sailed faster than even the biggest bulls could have imagined.”
Kavcic tells BuzzBuzzHome News that ship left port “probably sometime in 2014, and that would’ve been pretty late, too.”
Spelling this out, Kavcic has converted the Case-Shiller home price index readings based on 20 major US markets into Canadian dollars, using estimates for the past three months for lack of up-to-date figures.
Chart: BMO Economics
At the turn of this century, the index price for a US home was $145,400 in Canadian currency. As of January, Kavcic has the index value at $259,500, above its pre-crash height of around $240,000.
By Kavcic’s count, there’s been a 70 per cent spike in US home prices (in Canadian dollars) since 2012’s close, which works out to annual surges of 21 per cent.
If would-be Canadian investors experienced FOMO in 2012, they’re likely kicking themselves now.
Although the Canadian Real Estate Association’s November index price for a Canadian home is $456,186, substantially higher than the most recent Case-Shiller index price of $182,830 (or $262,700 in Canadian funds) for US homes, Kavcic says he doesn’t think it makes sense for Canadians to invest in stateside property right now. His advice: hold off until the Loonie recovers.
“When we had a currency that was either 90 cents or around parity, it made a lot of sense (to buy a home in the US) because you had a fundamentally strong US housing market, but you were also buying into that market with a currency that was probably 20 cents over valued.”
“Now, it’s just the flipside. You still have the fundamentally strong housing market south of the border, but you’re now moving into that market with a currency that’s probably 10 to 15 cents undervalued.”
So given the dollar’s freefall to 70 cents US (and forecasts that it could drop another 11 cents this year), will Americans make a splash in Canadian markets, then?
“You can make that case, and on a currency-adjusted basis our home prices just got 20 or 30 per cent cheaper,” says Kavcic in an interview.
“The difference is that the perception towards the Canadian housing market is a lot more negative globally than the perception towards the US housing market was for Canadians back then,” he adds.
Kavcic says investors over the past several years have considered the US market as being on the upswing. That isn’t the view they share of big Canadian markets.
“The sentiment here in Canada, especially for foreign investors, is that markets like Toronto and Vancouver are much too hot and extremely overvalued,” he explains, adding he doesn’t “necessarily agree with that” evaluation.
This perception among investors could “temper the enthusiasm a little bit, even if (US) investors are getting more bang for their dollar now,” Kavcic adds.
“But all of that considered, you probably will see those inflows pick up at least a little bit.”