Maybe It’s Time to Invest in Canadian Real Estate

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The world has been watching Canada this year. Not because the winter Olympics were here, but because Canada escaped the global economic crisis with minor cuts and bruises while many other countries are still being hit hard. We’ve become the example for other countries to learn from. And some of the world’s most influential economic thinkers and leaders have been visiting Canada to learn about our financial sector and our banking industry.

For years, my husband and I didn’t feel like the example to behold. As we offered up our proverbial first born child to get a mortgage we cursed our stringent banking rules and challenging lending climate while watching our American neighbours get mortgages with as little as proof of a pulse. It was tough to appreciate our banking system in those days. But today we are now grateful for those rules. The discipline and regulation our banks operated under largely kept our economy out of the big troubles felt in many other parts of the world.

While many smart people are expecting the tough times to continue for the US housing markets, and while the economies in many European countries collapse Canada has, for the most part, emerged from the recession. Houses that had dropped in value in 2008 have begun to recover and in some markets, surpass their previous peaks. Rent rates are beginning to climb up again and the banks continue to lend money to home owners and real estate investors – albeit even more cautiously than before.

I don’t think it’s all good times ahead for every housing market in Canada but there is another compelling reason for US investors to consider putting some Canadian property in their portfolio: the Canadian Dollar. The Canadian currency continues to gain strength against the US dollar and could provide some shelter against the inevitable challenges the US dollar will face in the coming years.

While many of my Canadian investing colleagues head south in search of deals, we’re content to continue investing in our own backyard because we watch the indicators and see some very positive signs. So if you’re considering putting some money into Canadian houses what do you look for? Well it’s not any different than what you’ll look for in any other part of the world but I will share a few key indicators to learn and give you some resources to research that information.

Good Indicators a Canadian Housing Market is Looking Good for the Future

  1. Employment levels:
    As a real estate investor, it doesn’t matter where in the world you’re investing, if people don’t have jobs they aren’t going to have money to pay rent or to buy homes. In other words, there will not be much of a foundation to support a strong rental and housing market if it’s full of people without sustainable income. So before you put your money into any market figure out where people are currently working, where they are likely to work in the future (any changes in the major employers in that area) and whether there are likely to be more (and better) paying jobs in the future or not. Most city websites have pretty good breakdowns of where people are working in a city and any major infrastructure development plans for an area (which will be a good source of jobs during and after development usually). Just do a quick search in google for “city of _____” and you’ll usually get directed straight to an official city website with lots of great local information.
  2. Population Levels:
    Determining whether an area is increasing or decreasing in population is pretty important but even more important than that is understanding why that number is trending the direction it’s trending in. You want to make sure an increasing population is sustainable and not just temporary for an event as big as the Olympics for example. If it’s because a new major company has relocated to an area, or transportation in and out of an area has been dramatically improved that influx of people might hold steady and possibly continue to increase in the future. And that is a very good thing for the future health of the housing economy because people need places to live. Unfortunately population is a tougher number to learn about because census data is only collected every 4 years or so in Canada and is almost always out of date before it’s even released but you can watch the trends and sometimes get more specific City information from local city websites.
  3. Health of the Housing Economy
    Look at:

    • Total home sales,
    • Active listings,
    • Average days on the market, and
    • Trend of the average sales price.

    What direction are these indicators moving? Good signs include increasing sales, decreasing listings, decreasing days on the market and increasing sales price. But keep in mind that the trend line can vary depending on what season it is. For example, it’s not uncommon for active listings to go down in January but that is not because a whole bunch of houses sold and there’s a sudden demand it’s because most people take their house off the market for Christmas time unless they really need to sell. So look at the trends over a period of time to really try to understand what direction it’s heading overall not just because it’s July and house sales always drop in July because people are more interested in summer vacations than buying a new house. Then you want to look at rent rates and vacancy rates. The best resources for this data in Canada for home sales are found from realtors in the specific market areas but you can get some stats from the Canadian Real Estate Association. For vacancy rates and rental rates CMHC has some pretty good and current market information. Local property managers can also give you a very good idea of the specific rent rates for smaller market areas within a city and the general vacancy rates for basement suites vs. entire homes because numbers like that will vary from the data collected by CMHC.

There are certainly many other factors to consider before you invest in a market but these three big ones will give you a good comfort level with the health of the area you’re looking at. If an area continues to have employment strength, attract new residents and show many positive signs in its rental and housing economy then it should be well poised to handle whatever storms the world economy will throw it’s way.

someecards.com - I like my job enough that I sometimes go minutes without checking how many hours are left in the workday.

But like any investment consideration I really believe you need to go and check out the area you’re looking at buying in. Walk the streets in the neighbourhood where you might buy property, speak with the local experts including real estate agents and property managers, and get a feeling for where the local residents work, send their children to school and what they do for fun. And trust me, there is no better time to visit any part of Canada than right now! The sun is shining and the people are smiling. Summer is a gorgeous time in Canada – and with the sun peaking out from behind the clouds on our economy as well, it might be a great time to leave some of your money behind in our country for some safety and security in the coming years.

Image Credit: Istock Photo Ulga

About Author

Buy and hold real estate investing in Canada since 2001, Julie Broad is now a full time real estate investor and investing educator.

20 Comments

  1. Wade Graham on

    Many Canadians ask me if I invest in US Real Estate. And the answer is always “We have it so good here!” Our cash flows are good, are values are on steady sustainable upward trend and management is so much easier! We do very well investing in Canada and specifically Calgary why would we want to take the risk of many US markets.

    Great post guys! Keep up the good work!

    • Hey Wade –
      I know you’re doing really well in your market – and Alberta is certainly a province I think outside investors would be very smart to consider!! Half the real estate investors I meet in BC own in Alberta!! 🙂

      Thanks for your comment. I appreciate it!
      Julie

    • Hey Jeff –
      Honestly I am not sure. I believe that in general it’s subject to the usual capital gains tax (so 50% of whatever gain you have is taxable at your income tax level). There is a tax treaty between Canada and the US and there are definitely going to be some things covered in that treaty that you would need to be aware of. It also depends on what you did with the property. If the government can show that it was an active business (development, rent to own, flipping) vs. a buy and hold rental property they can tax everything as income versus a capital gain. Once again though that might be covered under the treaty.

      I do believe there are ways to indirectly hold the property in a corporation and avoid or minimize the taxes though. For example, if you sold shares vs selling the property.

      Once again – it’s not my area of expertise at all. My advice to anyone crossing the border with their investments is to speak with a lawyer and an accountant that is well versed in cross border buying BEFORE you put a penny into any market. There are ways to really minimize the taxes you pay – but I really am not well versed in that stuff at all.
      – Julie

  2. Jeff Brown

    Thanks Julie — very much appreciated. U.S. investors would want to ensure their buy and hold properties, when sold, wouldn’t taxed beyond their ability to rationalize the investment in the first place.

    • Hey Jeff –
      I checked with Bill Walston who is my go to guy for US tax questions and this is what he said:

      When a US citizen sells property in Canada they are immediately assessed a 33% withholding tax on the capital gain. (I think it is still possible to eliminate the withholding by paying an estimated tax of 25% of the gain in advance of the sale.) He/She must also file a Canadian income tax return for that year. The last I checked, Canada only taxes 75% of the capital gain at a rate of 17 – 29%. The withholding is applied to the tax due and the overage is refunded. Still not sure why there is a 33% withholding when the max capital gain rate is 29% – but I digress

      The sale of the property must also be reported on the seller’s US tax return in the year of the sale and is subject to all US taxes as though the property was located here in the US. Taxes paid to Canada can be claimed as a foreign tax credit.

      ————–

      The only thing is that I believe that it’s only 50% of the gain that is taxed not 75%. But I guess that is why you have to talk to someone who is an expert in cross border transactions!! 🙂 But yes – I agree you have to make sure the tax implications don’t take away from the benefits you might realize by investing up here!! Thanks Jeff.

  3. I have to say that if you are looking at the fundamentals then there is a great selection of cities across Canada where you can invest in real estate. You have to work hard to get the right properties in the right areas, but looking at some of the toughest areas of Toronto, it seems nothing like the toughest US cities. There are great properties to be had with excellent numbers, you just need to work hard to find them.

  4. Although I am not from the US (I’m Canadian), I have invested in several real estate properties in BC. I think the trick to investing wisely is to do it during times when everyone else is running away from real estate, and to invest in areas outside the beaten path.

    For example, there are many small towns just outside of Vancouver where you can pickup real estate at amazing prices, but most investors are too lazy to look into anything outside of Vancouver central where prices have been overinflated due to the Olympics.

    Even just 50 km outside of a major town you can pickup real estate at almost half price compared to downtown. The other thing to also consider is Canadian real estate income trusts. Income trusts fell out of favor after the finance minister changed the tax rules a few years ago, but many REIT’s still offer a great investmet.

    -Paul

  5. Great piece Julie. Love your blog and your energy. I see that the June YoY volume of single family housing sales in Vancouver fell about 30% and the YoY decrease for Calgary was about 42%. I know you’re not in either of these cities but watch the volume for your area. All I’m saying is be careful.

    Thanks for your great writing and keep blogging!

    • Thanks Melinda! I really appreciate your kind words!!

      There’s a quote I love even though I don’t know who said it:

      Most people use stats like a drunkard uses a lamp post – more for support than for illumination.

      I am not saying disregard such numbers totally … but it’s a lot more important to look into the numbers and figure out WHY you see what you see. A number like year over year sales volume doesn’t mean much unless you look at what is driving it. That’s why it’s so important to understand the employment, population and entire housing market health … not just look at one stat.

  6. Julie, I have to say that I absolutely love having you around here on the BP blog to represent Canadian real estate. Awesome post! I prefer investing in my own backyard as well but I love reading about the options available.

  7. Hi Julie, sorry for not commenting sooner. Great article! You cover the bases really well, and I can say from my experience at Davies Management that we have a number of US investors who have held properties up here for a while. I’m only familiar with the withholding taxes on the cashflow, but the ability to reliably make money with Canadian real estate without the risks of most US areas just about outweighs the rough tax implications. I’d rather actually make money and have it taxed than lose money….

  8. Thanks so much Chris!! I think a good accountant &/or tax lawyer can help folks set things up to minimize the tax burden. I know that is the case for Canadians buying in the US … if you take a few extra steps there are fewer issues where money is withheld and the process is a little easier. I’m glad you liked the article.

    Best regards,
    Julie

    p.s. I love the subject line of your blog post “The man your real estate investments could smell like” I assume it’s about the Old Spice ads everyone is talking about!! Clever!

  9. The US certainly has pockets of strength, such as Texas or Georgia, with low prices and high levels of employment and in-migration.

    Our apartment building 1/2 north of Dallas, TX is running at 90%+ occupancy and rising rents/less incentives compared to last year. However, all is NOT WELL in the US.

    Too many homes are in foreclosure, too many homes are vacant, too high a debt level on all 3 (!!!) government levels (feds, states, counties/cities) and a high unemployment. It will be a long time recovery.

    Also, given the state and federal taxes on income and gains on sale a US asset, for Canadian investors, must produce a higher ROI than a Canadian asset to allow for similar after tax returns, plus it has to allow for a potential currency erosion against the US $ as the chance is high that the Canadian $ will be stronger than the US $ given Canada’s lower debt and stronger resource base !

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