Canada's Housing Bubble

Jul 28, 2010 Garth Turner GreaterFool.ca

Since the spring of 2006, US real estate prices have steadily eroded while confidence in housing all but evaporated. Thus ended the greatest property boom in American history, which took prices to new highs. Easy credit and a casino mentality helped fuel it.

But all booms end badly. This, no exception. In fact the bust was so pivotal its impact was felt around the world, which continues to this day.

The contrast with Canada is stark. Our housing market began bubbling in 2007, was briefly derailed in 2008, then rekindled as emergency interest rates dropped mortgages to 2% in 2009. Today this boom is also busting, but prices will remain at record levels for some weeks to come before the inevitable occurs. Our path ahead may well trace that which Americans have walked.

Two days ago I wrote, sell Canada, buy America. The logic was obvious. The asset of housing here is at its zenith and will fall. The same asset there is cheap and unloved. Take profits here. Position for recovery there. Especially now, with a dollar near par.

How can you really go wrong, I asked, selling a Vancouver bung or a North Toronto lot for $700,000, investing $600,000 to yield $3,000 a month for a luxury rental in the same hood, and using the last hundred to buy a nice vacation home in the sunbelt, at 50% off?

Some argue this is foolhardy.  America’s a country in decline, they say. Or, the obstacles to US property ownership are so large there’s no point doing this. Or, who wants to buy a foreclosed shack in a mold state made of Chinese drywall?

Let’s talk details. I quickly selected four properties currently listed for around $100,000 in two communities Canadians like to spend time in: New Smyrna Beach on the east coast of Florida, and Phoenix. For ease of maintenance and stable ownership costs, I chose only condos. I also picked decent neighbourhoods with promising demographics. You could substitute Scottsdale or Naples or Stockton or Miami, and find similar.

Built in 2006, just as the housing boom was ending, this townhome is in a gated community in Phoenix has three bedrooms, two-and-a-half baths and 1,700 square feet. Just minutes to the downtown, it includes a double garage, stucco exterior, stainless appliances, balcony, private yard and low maintenance fees. Listed at $100,000.

Close to the beach in New Smyrna and backing on a golf course, this villa has a large Florida room, renovated kitchen two bedrooms and two baths, eat-in kitchen and condo fees which include cable TV, grounds care and a sprinkler system. The lot is 45 by 75 on a quiet cul-de-sac, and the home includes all appliances, central air, carport and 1,200 square feet. Listed at $91,900.

This urban, one-bed, one-bath condo apartment has stainless appliances, granite counters and is within walking distance of downtown Phoenix’s Chase Ball Park and Orpheum Theatres. Built in 2005, the loft-style unit has 710 square feet, an in-building pool, parking and a prestigious address. Listed for $100,900.

Built in 1981 and renovated in 2009, this villa is within walking distance of two New Smyrna golf courses and has a bay window overlooking a pond. The 1,060 square foot bungalow contains a new kitchen, stainless appliances, new tile flooring, vaulted ceiling, mature trees, screened porch, two bedrooms and two full baths. The lot is 55 by 74, with carport. Listed at $99,900.

So, obviously there is value to be had – whether you like downtown, suburban, golf club or beach living. Now, how about the hassles of buying and owning?

There are some, to be sure. For example if you buy a Florida home you could pay more property tax than the locals, since they can apply for a Homestead Exemption, and you can’t – unless you move and get a state driver’s license. And if you’ve been dreaming of getting one of those 4.4% mortgages guaranteed for 30 years, forget it.

In fact, financing a US purchase is probably the biggest issue for most Canadian buyers. If you need a loan, an American subsidiary of a Canadian bank is a good bet, but the best option is to arrange your financing here, then just buy the property with cash. That could mean a line of credit, a secured HELOC, a few ounces of your depreciating gold or part of the windfall profit from selling your inflated house in Calgary. Of course, with a cash offer you’ll also probably get a better price.

Now, how about US taxes?

If you buy a house and rent if out, then 30% of the gross rent will be withheld as tax. That sucks, but you can get around it by filing a non-resident US tax return and claim the rent as income, which then lets you deduct all costs associated with ownership. Then you are taxed on the net (in this case you elect to pay your landlord-generated taxes in the States rather than in Canada).

If you sell, 10% of the selling price will be held back for taxes. But by filing a tax return you can claim this against capital gains tax. Better still, if you sell for less than $300,000 and the buyer intends to move in full-time, you get the full amount of the sale. The only tax liability – in the US as in Canada – is on the capital gain.

As for buying, well, be reasonable. Don’t buy anything off the Internet. Get a local realtor. Research property tax rates, insurance premiums and condo fees. Rent for a month while you shop the market. Get the house inspected prior to making an offer. Knock on neighbours’ doors and see if they shoot at you. The same stuff you’d do in Toronto.

Finally, why buy in an America on its knees?

Ever see Rocky?