I worry for renters trying to buy property and our children who have little or no earnings power. The U.S. housing market might eventually get as hot as the Canadian housing market. If so, U.S. housing prices easily see at least 30% – 50% upside.
After all, the median home price in Canada is about 50% higher than the median home price in the U.S.. However, the U.S. has stronger income and employment opportunities!
If you think the U.S. housing market is bonkers, you haven't been paying attention to our neighbors up north. Not only is the Canadian housing market more expensive than the U.S. housing market, but average wages in Canada are also lower.
If the world suddenly finds out the U.S. housing market is one of the cheapest in the world, I fear our children will be priced out of the U.S. housing market forever. If enough renters get priced out, there might just be a revolution!
The Canadian Housing Market vs. The U.S. Housing Market
The easiest way to show you how much more expensive the Canadian housing market is compared to the U.S. housing market is by showing you a visual of home prices versus disposable income.
As you can see from the chart below, U.S. disposable income is roughly 10% higher than Canadian disposable income. However, Canadian home prices are roughly 75% more expensive! Clearly, Canada has a housing affordability problem as median income levels are lower than U.S. median income levels.
From the chart above, the U.S. housing market looks perfectly normal. It is not in a bubble. As disposable income rises, so do home prices. One could argue the data shows the U.S. housing market may actually be about 10% underpriced.
However, the Canadian housing market has clearly decoupled from fundamentals. I would not be a buyer of Canadian property today. However, that's what a lot of people have said since 2000 and consequently missed out big time.
If the choice is between buying a comparable U.S. property or Canadian property, I would buy the U.S. property all day long. The U.S. has better weather, better job opportunities, and more entrepreneurial opportunities.
Personally, ~35% of my net worth is allocated towards mostly San Francisco and Honolulu real estate. Although I've been actively diversifying into heartland real estate since 2016. Today, private eREITs, public REITs, and real estate-related stocks make up about 10% of my net worth.
My current contemplation is how much more of my net worth should I allocate to real estate given what I'm about to share.
If The U.S. Housing Market Became As Expensive As The Canadian Housing Market
The median home price in America is around $420,000 in 2023.
If the U.S. housing market got as expensive as Canada's housing market, the median home price would be closer to $656,000, with a range of between $612,000 – $700,000.
And if the U.S. median home price was to rocket higher by 75%, the prices in the more expensive coastal city real estate markets would likely increase by double-digit percentages as well.
Perhaps not by 75%, but increases by an additional 30% would not be out of the question.
The Most Affordable Countries In The World
Let's say you have read my post on why the U.S. property market is so cheap and still don't believe me. Perhaps you don't realize how good you have it because you've never traveled or lived abroad before. Not to worry.
Let's take a look at another affordability chart by Numbeo, the largest cost of living database site. As you can see from the chart below, the United States is the second most affordable country in the world. While Canada is the 17th.
What I like about this chart is that it takes into consideration income, gross rental yield, price-to-rent, and mortgage as a percentage of income.
Canadians spending 49.62% of their income on a mortgage seems to be unaffordable. Meanwhile, spending 7.24X your income on the median price of a home seems too expensive.
In other words, the typical Canadian homebuyer comes nowhere close to following my 30/30/3 home buying rule.
Yet, the Canadian housing market has been booming ever since the early 2000s. Even the 2008-2009 Global Financial Crisis didn't do much to hurt the Canadian housing market.
Why Is The Canadian Housing Market Strong?
I have often wondered what makes the Canadian housing market so special. With such long cold winters and a lack of companies paying high salaries, you would think the Canadian housing market would actually be cheaper than the U.S. housing market.
When was the last time you heard about Americans buying up Canadian real estate? I don't know many Americans who are buying summer homes or retiring up north.
On the flip side, Canadians are consistently the #1 largest foreign buyer of United States real estate according to the National Association of Realtors. Canadians and many other foreigners know how cheap U.S. real estate is. Unfortunately, many Americans are not similarly aware.
If you believe the world is getting smaller thanks to technology, then it is only logical to buy real estate in the cheapest countries with the most stable governments and strongest economies. Clearly, the United States is a top choice with the U.S. dollar serving as an international reserve currency.
Top 5 Foreign Buyers Of U.S. Real Estate From April 2020 – May 2021
- Canada (8% of foreign buyers, $4.2 B)
- Mexico (7% of foreign buyers, $2.9 B)
- China (6% of foreign buyers, $4.5 B)
- India (4% of foreign buyers, $3.1 B)
- United Kingdom (4% of foreign buyers, $2.3 B)
Foreign real estate investors are coming with billions to buy U.S. real estate now that COVID is largely over. I believe there is over $200 billion in pent-up foreign demand that will be unleashed in 2023, 2024 and beyond.
Here are the main reasons why the Canadian housing market is so strong.
1) High Demand For Single Family Homes, But Not Enough Built
Apparently, between 2011-2020, Canadian builders built more apartments and not enough detached homes. However, nearly 60% of home sales in 2020 in 18 communities in and around Toronto, Montreal, Vancouver and Ottawa were for single-family detached houses.
During the pandemic, demand for detached single-family homes skyrocketed, which helped drive prices up by double-digits year over year. Canadian home builders need to build more detached homes, especially as institutional investors are buying more homes.
2) Running Out Of Land
Canada is roughly 3.9 million square miles large, 0.18 million square miles larger than the United States. However, most Canadians are clustered in a handful of major cities not far from the U.S. border. Most of the jobs are in Montreal, Toronto, and Vancouver. Then there are cities such as Brantford, Ottawa, Kelowna, Quebec City, Calgary, Saskatoon, Abbotsford, Halifax, and Victoria where job growth is considered promising.
With the United States below, the Pacific Ocean to the west, the Atlantic Ocean to the east, and mountains to the north, Canada doesn't have as much livable land as one might imagine.
However, one must continue to wonder why the best job markets in Canada are all so close to the United States? There has to be some type of economic pull from America. If so, it would be more logical for more Canadians to try and get jobs in America, which tends to pay higher wages.
3) Relaxed Foreign Buying Rules
Canada is relatively well-known for having an open-door policy for immigration. Therefore, it is no surprise Canada also has a relatively open-door policy for foreigners looking to buy property. Non-residents have the same ownership rights as residents.
Unfortunately, this open-door policy has really squeezed locals. With more Americans looking to immigrate to Canada to see on healthcare and college tuition costs, it's natural that demand for homes will increase.
Liberal Party MP Adam Vaughan, publicly acknowledged Canada has become “a very safe market for foreign investment.”
But, Vaughan added, it is “not a great market for Canadians looking for choices around housing.”
Then he went on TV Ontario with host Steve Paikin and said that attracting foreign capital is the key to building more housing supply in Canada.
“We have a very good system of foreign investment creating a lot of new housing in Canada as we add immigrants and grow the population,” said Vaughan, a former Toronto city councillor who is now parliamentary secretary for families, children, social development and housing.
I'm not sure Vaughan makes much sense. Foreign investors are competing with locals to buy homes. Foreign investors can only help build more housing supply if they are funding builders or building homes themselves.
At least in April 2017, the Government of Ontario introduced the Non-Resident Speculation Tax (NRST), a 15% tax on the purchase of residential property.
A part of me has to believe Canadian politicians are getting paid off in some way by the foreign buyer.
Canada Bans Foreign Home Buyers!
In 2022, Prime Minister Justin Trudeau finally announced a two-year ban on foreign home buyers to help cool down the housing market! This is a surprise. The unintended consequences may be that foreign home buyers focus their home buying capital more squarely on U.S. property.
The pandemic has essentially throttled foreign real estate investors for two years. As a result, U.S. property looks even more likely to continue doing well.
4) Easier To Launder Money
Perhaps one of the reasons why the Canadian housing market is so strong is because there is a lot of money laundering going on.
Global Financial Integrity, a Washington D.C.-based anti-corruption organization believes a significant amount of illicit funds is laundered in Canadian real estate.
From 2015 to 2020, the news media ran stories about US$626.3 million of real estate being bought with laundered cash. Over 88% of it was on residential real estate. What's more interesting was that the $626.3 million was over only 35 cases. Think about how many more undiscovered cases are out there.
The study revealed 48.6% of cases involved Canadian sourced funds being laundered. Since Canada has an open-door policy for foreigners buying real estate, Canada has become an excellent place to launder funds as well.
The largest international source was China, representing 22.9% of cases — about half as many as Canadian sourced laundering. The US was the third with 11.4%, half the size of China.
You have to wonder, if Chinese households can only withdraw $50,000 out of the country every year, how do mainland Chinese buyers afford to buy $2+ million dollar homes in Canada? You only have so many relatives and friends to pull resources together.
The government knows what's up, but is choosing to look away.
The majority of money laundering is done through company structures, used in 51.4% of the cases. Third-party processing (45.7% of cases), and mortgage schemes (34.3%) round out the top three. The fourth is private lending (17.1%). Private mortgages are also not subject to anti-money laundering rules.
5) Stronger Bank Of Mom And Dad Culture
As Americans, we strongly value independence. Whereas Canadians seem to emphasize interdependence. Subsidized healthcare and subsidized college tuition are great examples of a more communal Canadian culture where nobody gets left behind.
Contrast the “we're all in this together” mantra of Canadians with the “every man for himself” mentality of many Americans.
Our government seems OK with its denizens going bankrupt due to egregious medical expenses. U.S. universities continue to charge exorbitant tuition prices without any accountability. In fact, maximum profitability is encouraged by the government via its massive federal loan program. Once students graduate, all they really get are a “good luck” and a “goodbye.”
However, with Joe Biden as president, we are slowly moving towards the Canadian ideology. Among real estate circles, The Bank of Mom & Dad is also growing in generosity. It is no longer uncommon for an adult child's parents to come up with the down payment or buy them a home outright.
Instead of competing against another buyer with one balance sheet, we are slowly having to compete with a buyer with two or three balance sheets (individual + mom and dad or a couple + mom and dad). As a result, this growing phenomenon will likely continue to put upward pressure on U.S. real estate prices.
The U.S Housing Market Could Revalue Higher
Instead of the Canadian housing market correcting downward to the United States housing market level, I see a greater chance of the United States housing market rises to the Canadian housing market's level.
Let's put the potential at 60% within the next 10 years and 75% within the next 20 years. For my 2022 housing market predictions, I firmly believe foreigns will come rushing back to U.S. real estate.
With President Biden in charge, we have a relatively more open-door policy for foreign real estate investors. With every new home that is built, we are also slowly running out of land. Further, I suspect foreign investors will rush back to the United States once the pandemic subsides.
Dollar volume for U.S. real estate by foreign buyers peaked in 2017 at $153 billion. It has been on a steady decline partly because China clamped down on capital outflows. Chinese citizens can technically only buy $50,000 worth of foreign assets per year. However, due to various controls, the actual amount is less.
There is pent-up demand for U.S. real estate by foreign investors. If the United States does indeed reach herd immunity sometime in 2022, I expect foreign buying volume to reach over $100 billion again. That's a 50% increase from 2020 levels.
If such a scenario occurs, foreigners will squeeze out American citizens from the real estate market just as foreigners are squeezing out Canadian citizens from the real estate market.
Realize How Cheap U.S. Real Estate Is
As I conclude this post, I hope everyone realizes now how cheap U.S. real estate really is. Although prices have been surging higher recently, from a global, international perspective, prices are still very affordable. Also, with mortgage rates higher and the global economy slowing, the frenzy for real estate has faded.
Long term, if you believe the world will continue to get smaller due to technology and stronger international relations, then staying long U.S. real estate is a wise move. I'm mainly a buyer of rental properties, REITs, and real estate crowdfunding in the heartland.
I understand it's hard to buy real estate after significant double-digit gains in only one year. Prices will inevitably slow. However, if the U.S. housing markets ever starts resembling the Canadian housing market, today's prices will seem like a bargain.
When it comes to valuing real estate, do not forget the income side of the equation. The labor market is strong, which is causing wage inflation. More people are quitting their jobs than ever before.
By the time the U.S. Census Bureau comes out with the 2021 median household income, real estate prices will likely be even higher.
Real Estate Suggestion
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Another great real estate investing platforms to consider is CrowdStreet. CrowdStreet focuses on individual real estate opportunities in 18-hour cities. 18-hour cities tend to have lower valuations, higher growth, and higher cap rates than 24-hour cities.
With the growth of work from home and solid demographic trends to lower cost areas of the country, CrowdStreet's offerings are positioned very well. Just make sure to thoroughly review each sponsor as you build your select portfolio.
I've personally invested $953,000 in real estate crowdfunding to diversify my exposure and earn more income passively. As a father of two young children, time is everything now.