Are we nuts?

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By Elli Davis, October 17, 2009

Real Businesses Have Curves by Kevin Dooley

Business journalist Garth Turner has been calling to vultch the USA real estate market in several of his articles as have many other economic advisors. The US real estate market definitely offers a multitude of excellent bargains, but are the arguments for this always bullet proof?

Garth returned to this topic in his latest article. He compares Toronto real estate market and Jacksonville (Florida) market, coming to conclusion: “People in Toronto and Vancouver are as nuts as those in Jacksonville and Phoenix. But the outcome is radically different. In the north, danger. In the south, opportunity."

However, I do not doubt there is an opportunity on the Florida real estate market. But Garth admits he uses “his populist, commonsense, sometimes kick-in-the-pants style of writing,” and I believe this is the case.

First, he is comparing the incomparable. Toronto is the main business centre of Canada, three times bigger than Jacksonville, which can’t get rid of the ‘leisure Florida’ label so easily, even though it’s the biggest city in the state. Buyers looking for properties in Toronto will hardly be from the same group as buyers searching for homes in Jacksonville.

And he continues: “In Canada, as witnessed by today’s CREA numbers, another kind of delusion – an urban myth that real estate values will rise continuously and, despite stagnant incomes, rising unemployment, economic uncertainty and the inevitability of higher taxes and interest rates – people who do not buy today will forever be locked out. Buy now, or never.”

Of course most people can remember better economic times, but again, it’s completely different from the situation in the Florida and the USA! While our real estate market drop lasted for only a few months, the American one has lasted two years and rebound is still uncertain. No investment in this world has 100% risk free appreciation, but there are solid grounds for investments into Canadian real estate. Average property values in Canada grew by 366% in the last 30 years, while inflation reached 156% during the same period. There have only been three real estate recessions in that period and the last one was the shortest.

Jacksonville unemployment rate is higher than in Toronto. Is it economic uncertainty? Compare the latest news from Ontario and Florida, or just the general GDP prognosis for Canada and the USA. Is it the inevitability of higher taxes? Compare the Canadian budget deficit versus the American one. Is it higher interest rates? Both FED and BoC have a 0.25% interest rate.

Prices in Toronto and other places around Canada are rising quite fast because of pent up demand, which has been waiting since last autumn, however, it will calm down within a few months. In the USA you can also find good incentives to buy now as well – its $8,000 tax credit, which will last only another 45 days (while Canadian incentives don’t have exact end date). And still, even with this incentive, the Florida real estate market is waist deep in mud.

People who pay for houses and condominiums in Toronto are not nuts. They know the situation in Toronto is much calmer and safer than somewhere in Florida, no matter how many degrees of Celsius or Fahrenheit there are. And they are not alone – experts prefer to invest into Canadian real estate rather than the American market.

US real estate market offers great opportunities. But with the struggling economy, serious fiscal problems and millions of foreclosed properties, it won’t be such a gold mine in the next few years as Garth Turner and some others are trying to convey.