From my CBC radio national column, September 17, 2009:
As we anticipate another chilly winter, Canadians may be tempted to play let's make a deal on U.S. real estate. Should you play or walk away?
We've all heard the reports. The Canadian dollar continues to climb toward parity with the U.S. greenback, while American real estate is stuck at rock bottom. So with winter approaching, who could blame you for thinking it's the perfect time to swoop in on some property in the sunny south. But before you do, here's some words of advice for would-be buyers.
We've heard this week that home prices are up in many parts of Canada. What's the U.S. real estate market looking like these days?
There have been huge dips in U.S. home prices over the past couple of years-especially in the south.
Home prices in Las Vegas for example have dropped by more than fifty per cent from their August 2006 peak. Prices in Phoenix are down just about the same amount.
With numbers like these, it's no wonder some Canadians are taking note. It's tempting, especially with our strong loonie allowing a buyer to get more bang for their buck than in the past, but there's certainly more to the story.
The head of the U.S. federal reserve, Ben Bernanke, said this week that the recession may have come to an end south of the border. Some might think that's a signal to buy now, before prices start to climb again. What's your take?
Although there have been recent reports of modest increases, the U.S. real estate market is still volatile.
According to the Wall Street Journal, home prices could drop again as job losses drive foreclosures higher. Mortgage defaults and foreclosures aren't likely to peak until unemployment ebbs.
Even when the U.S. economy starts to grow again it will take a while for job creation to kick in. That's why many experts say it really is too soon to see this juncture as a turning point.
Recently, I spoke with Canadian real estate expert, Don Campbell, president of the Real Estate Investment Network www.reincanada.com. He warns that people must look at the precarious financial situation of many U.S. homeowners.
Close to a quarter of mortgage holders in the US are upside down on their mortgages. That means they owe more on their mortgage than the property is worth. That was as of the second quarter of 2009. So they're very recent numbers.
And according to Deutsche Bank this figure could double, with almost 50 per cent of mortgage holders being under water by the first quarter of 2011.
Finally, a Globe and Mail article a few weeks ago, said that $3.4 trillion worth of US houses are at risk of default. So prices could drop still further.
That's a strong cautionary note. What else should potential buyers be aware of?
Three additional considerations: residency, health care and taxes should be other major considerations.
1. First, you can't simply up and move to the US.
There's a 183 day rule for visitors. Non citizens can't be in the U.S. for more than six months of the year.
So, what will do with that property the rest of the year? Rent it out, pay someone to maintain it? Consider the utilities and up keep needed.
2. Then there's the fact that you'll need health insurance when you're there. And what if you have a health issue that stops you from visiting your property at all?
3. And then last but never least, there's the tax issue. A Canadian who owns US real-estate will face capital gains taxes in both countries, when they eventually sell. Individual states also levy taxes of their own, and then there are estate taxes to consider, if the place as to be sold after a death.
All these issues depend on your personal tax rate, the state in which you buy and the cost of the property.
Added together, these factors add up to a complex buying decision.
What about trying to arrange financing in the US. What should people be aware of there?
If you're looking to the US, you may well have to come up with your own financing from Canada - don't expect to get a loan down there.
Final words of advice
Here's another thing to consider. Whenever you buy in another country, currency risk come into play. If our dollar continues to rise against theirs, you'll need to earn much more on your actual investment to get ahead.
Here's some additional words of wisdom from Don Campbell. He points out with no health care issues here at home, low interest rates, some deals still to be had on real estate here, and with better fundamentals in place, Campbell urges those interested in investing in real estate to look here first before ever being tempting to do so down south.
If, after all this is taken into account and you're still eager to escape the Canadian winter, you might consider renting. After all, it's a great deal with no risk.