March 14, 2010
Last November Stacey Lynn found herself in Florida pondering whether to buy a condominium in Naples or one in nearby Sarasota. The Toronto woman ended up buying both.
“The prices were truly amazing, especially when you factor in the exchange rate,” said Lynn, explaining her splurge.
Except this wasn’t for a pair of jeans. Cross-border shopping has never been this good for Canadians.
No snow. No nasty bidding wars. And condominiums for the price of a parking space in downtown Toronto.
Canadians jaded by high prices at home are increasingly looking beyond our borders as a much more muscular loonie – and a sense that prices are bottoming out south of the border – has us flexing new-found financial brawn.
Not since the Japanese started snapping up real estate in Manhattan have a group of foreign buyers been as prevalent in U.S. markets.
“There is certainly a greater confidence out there with Canadians. It’s not just economic. There is a sense that we are players on the world stage, whether it’s our banking institutions or more recently at the Olympics,” said Philip McKernan, author of South of 49: The Canadian Guide to Buying Residential Real Estate in the United States.
Developers will be hard at work courting Canadian dollars this week as families descend on Florida, Arizona and other sun destinations for the March break.
According to a U.S.-based National Association of Realtors study of international home buying activity, Canadians were the No. 1 foreign purchasers of property in the United States in 2009. And we have also been looking farther afield in Central America and the Caribbean.
“Canadians are absolutely dumbfounded when they see the prices here,” said Arnold Porter, the Canadian owner of Phoenix-based realty firm Arizona For Canadians. “You have this rare perfect storm in the United States where you have low interest rates, still falling prices and a Canadian dollar that keeps going up.”
Analysts have been predicting prices may never be this cheap again. And they may be right.
U.S. foreclosure filings dropped in February for the second straight month, according to figures released this week, as the backlog of distressed homes is being snapped up by foreign buyers.
Porter and his wife Maureen have sold about 60 homes to Canadians in the last 12 months. Most of those sales were recent, he says.
A favourite neighbourhood with Canadians is in the new suburb of Laveen, about a 20-minute drive from downtown Phoenix.
For instance, a newish 1,702 sq. ft. home, built in 2004, is listed there for $103,000 U.S. A similar property in Toronto would likely fetch more than four times that price.
“That’s just the asking price,” says Porter.
Remarkably, the property, which comes with a pool, will likely sell for less, as opposed to Toronto, where many properties sell for above the asking price.
Analysts say Canada’s stable banking system and real estate market means buyers are feeling a lot more confident. They are also tapping the value of their existing homes to purchase homes south of the border.
In the United States, a combination of lax lending policies and widespread speculation helped sink the market. In Toronto, prices have risen every year for 13 years – even during the recession.
But the biggest reason for going cross-border shopping is the rise of the loonie. It hit 98.2 cents U.S. on Friday, its highest level since July 2008.
Economists are forecasting the Canadian dollar will be worth more than the greenback by this summer. Compare that with the all-time low in 2002 of 61.79 cents U.S.
“The last few months have been like an explosion. People are coming out of the woodwork because of the exchange rate,” said Brian Ellis, vice-president of Brampton-based Florida Home Finders.
“I think the people sitting on the fence are finally realizing that this is crunch time.”
Last year Canadians represented 30 per cent of all foreign purchases in that state, according to Florida Home Finders, overtaking the British for the first time.
And the bargain hunters seem to be back. Existing home sales in Florida increased by 24 per cent in January on a year-over-year basis. Yet with so many distressed sales crowding the market, prices keep falling – median house prices are down by 6 per cent.
Analysts say prices may still fall in 2010, but the bottom is in sight because inventories are down from peak levels.
The distressed sales are having an impact all the way up the food chain, where luxury properties have become white elephants.
The asking price on disgraced financier Bernie Madoff’s Palm Beach home was recently cut to $7.25 million, down from an already reduced price of $7.9 million – a 15 per cent drop in total from the $8.49 million asking price last year.
“Being in Toronto you become jaded at the high prices. There really is a bit of a disconnect to what is happening here and what is happening in the U.S.,” said Toronto buyer Lynn, who works at an agency representing photographers.
Lynn’s first buy was a relatively new one-bedroom condominium in upscale Naples near the beach for $54,900. That’s about what parking would cost at a new luxury condominium in downtown Toronto. (An extra parking spot at the still-to-be-completed Ritz Carlton on Wellington St., for example, costs $55,000 Canadian.)
And for just another $5,000, Lynn could have her condo fully furnished.
While it might be a little unfair to compare a major North American financial centre such as Toronto to smaller cities down south, it’s hard to resist seeing what a dollar will buy in the U.S. versus Canada, especially since prices have fallen so dramatically.
In some places prices are down more than 50 per cent from the peak of the market. During the same time, the Canadian dollar has steadily increased by more than 50 per cent from its lows.
Lynn’s 500-square-foot condominium would have sold for about $169,000 three years ago, according to Florida Home Finders.
Her second property was purchased in nearby Sarasota, a five-minute drive from Siesta Beach, considered one of the best beaches in America. Lynn purchased a 900 sq. ft. condo for $86,000. She estimates it would have cost her more than $200,000 at the peak.
Both her properties were acquired for under $100 U.S. per square foot. That’s an astounding price, considering resale condos in the Toronto area are in the range of $350 per square foot.
The bonus was that there were already tenants in both units. The smaller property gets $700 a month in rent, while the two-bedroom gets $1,000. After taxes and condo fees, Lynn says she now nets $1,000 per month gross before any income taxes on the properties. Plus, she hopes the properties will go up in value over the next five years.
“The worst-case scenario is that I have something to look forward to when I retire,” says Lynn.
Renters are not in short supply either, says Porter, because there have been so many foreclosures. Florida’s unemployment rate hit 11.9 per cent in January, matching the record set in 1975.
“People are out there renting because they either can’t afford a home or they’re forced out of their homes,” he said.
Despite the low prices and the upbeat sales pitches from realtors, author McKernan, the keynote speaker at an international real estate conference in Toronto this weekend, warns buyers not to be “blinded” by the low prices.
“You’re on March break in the sun with your family. Emotions are running high. This is when you should take a step back and consider all the factors,” he said. “You can buy foreclosed homes in Detroit for $20,000, for example, but the unemployment rate in that neighbourhood could be at 50 per cent and you’ll never get your money back.”
Like any other major purchase, potential buyers still have to be careful, says realtor Ellis.
Some projects have extremely high vacancies and their reserve funds might be severely underfunded. If that’s the case, buyers could be hit with a huge bill once they move in if an unexpected repair is needed.
Out-of-state residents, whether from Canada or other U.S. states, also pay higher municipal taxes than those who reside in Florida, under the Homestead Act. Purchasers should check with their tax accountant before placing a deposit.
And of course, property prices can still go down. Both Phoenix and Florida have some of the highest foreclosure rates in the United States, which means distressed properties are still weighing heavily on the market.
“This is not a market where I would advise anyone to buy if they’re going to flip in the next year or two. This is a long-term buy,” said Porter.
“But I think it’s very possible that many years from now we’ll look back and see that conditions were never as good for Canadians looking to buy that place in the sun.”