Dollar parity keeps Canadian buyers in U.S. real estate
April 06, 2010 | Tania L. Haas
TORONTO (MarketWatch) — As the Canadian currency reaches parity with the U.S. dollar, more of that country’s residents, like the bird represented on its coins, are flocking south to find a second home in the sun and sand.
Lawrence Yun, chief economist at the National Association of Realtors (NAR), says about 27,000 Canadians bought vacation homes in the U.S. last year, and that it looks like the Canadian influx is slated to continue through 2010.
Experts expect the currency known as the loonie to continue to appreciate over the next several months, sending Canadian buyers on a shopping spree in Florida, California and Arizona.
The Canadian dollar hit parity Tuesday morning, then slipped away, after oil prices rose to the highest level in nearly two years.
“We have almost all the stars aligned for the Canadian dollar,” said Camilla Sutton, director of foreign exchange at Scotia Capital in Toronto. “We have oil and a whole host of commodities at 18 to 20 month highs. Sentiment is very, very strong. And one of the most important things is relative sovereign risk, and on that note, Canada stacks up very well.”
Another factor contributing to the loonie’s climb: rising interest rates. The Bank of Canada is positioned to be raising interest rates before the Federal Reserve.
“We see the Bank of Canada raising interest rates in July and in September while the Fed, facing a much wider gap in U.S. unemployment, could be quite a bit more patient,” said Avery Shenfeld, chief economist at CIBC World Markets in Toronto.
The Canadian dollar reached its peak at $1.10 (U.S.) in November 2007. The last time the loonie danced with parity was back on July 22, 2008, when it hit $1.0001 US.
“It was a very violent drop through parity, and we didn’t stay there longer than a few months. And then we hovered on either side of parity for a few months before the financial crisis hit. So in many ways we are just retracing the steps back towards parity, but at a slower pace. Canada has been dealing with a strengthening currency for almost 10 years now,” said Sutton.
Sun, sand and savings
With the appreciating dollar, more and more Canadian home seekers look south to get more value for their dollar.
The NAR found that Canadian buyers led all foreign clients in 2009, approximately 154,000, beating home seekers from the U.K., Mexico, and India.
“I anticipate an even greater number of Canadians will be purchasing U.S. real estate in 2010,” said Yun.
Many Canadians, spooked by the volatility of the stock market, are looking to invest their money into property, according to Wayne Levy, with Toronto-based real estate firm Florida Home Finders of Canada. Levy attributes Florida’s appeal to its proximity to Eastern Canada, easy access to the ocean from anywhere in the state, low maintenance fees and inexpensive taxes. Also at play: the nostalgia factor.
“So many of our clients have been there as kids,” said Levy. “They went to Disneyland with their parents, or spent the odd Christmas with their grandparents down there. You’re going for the temperature, but you are also rekindling some of your childhood memories.”
Most Canadian buyers, about 22,000, used cash for their U.S. property purchase in 2009.
Mark Borg, a realtor with Prudential Real Estate based in Bonita Springs, Florida, has seen an increase in Canadian clients with the rising loonie.
“My Canadian clients feel that the price point is extremely great and it’s a wonderful time to buy. Primarily they are looking for foreclosures, and there are plenty of them to choose from,” said Borg, a native Torontonian who moved to Florida in 1999.
Borg said in his area, which is located between Naples and Fort Myers, the majority of residential sales are foreclosures and short sales. He said the nationalities of his clientele change with fluctuating currencies.
“During the boom time with the regular market, it was primarily foreign nationals from Europe. Now the only foreigners that I deal with are Canadians,” said Borg.
Levy and Borg’s experiences should come as no surprise. According to the National Association of Realtors 2009 Profile of International Home Buying Activity, Florida was a top state destination for buyers from Canada and Europe.
Commercial market is bird of a different feather
While Canadians may be dominating the American residential scene, they remain minor players in the commercial market. Dan Fasulo, managing director at Real Capital Analytics, said changes in currency rates overtime have less of an impact on decision making in institutional commercial property.
“For most major international investors, real estate is just one arm of a larger operation that usually includes investments in stocks and bonds. All of the currency risk usually gets hedged at the more macro company level for the different investment targets,” said Fasulo. “It’s not as big an issue in the commercial sector as it is in the residential sector, where it does have a significant psychological impact.”
Still the Canadian dollar’s rise has made some waves in commercial real estate. Toronto-based Brookfield Asset Management (US:BAM) said in a note earlier this week it will invest $2.625 billion in equity to fund recapitalization of bankrupt General Growth Properties Inc. (US:GGP). While retail property developer RioCan said earlier this month it plans to spend at least C$500 million on acquisitions this year, with a particular focus on the U.S. market.
While Fasulo keeps his eye on Brookfield, RioCan, and other property managers like Dundee (D-U), he said the loonie’s race toward parity has little impact on commercial transactions.
“At the end of the day it’s a smaller market, and there’s only so much capital that flows through Toronto, versus to London and New York, where it’s basically aggregating the most amount of capital to invest in commercial property around the world,” said Fasulo from his London desk.
But in Florida’s residential market, “sold” signs keep popping up on the lawns of luxury foreclosed homes with new Canadian residents. For Mark Borg, a Canadian migrant himself, it’s a no-brainer.
“In two 12-hour drives,” said Borg, “you’ve got golf, ocean, and an extremely inexpensive home.”