Performance figures for each account are calculated using time weighted rate of returns on a daily basis. The Composite returns are calculated based on the asset-weighted monthly composite constituents based on beginning of month asset mix and include the reinvestment of all earnings as of the payment date. Composite returns are as follows:

Investing in U.S. Real Estate: Too Good To Be True

By James Kwantes

Source: The Vancouver Sun

There’s a gold rush going on that has nothing to do with the yellow metal.

The “gold” is U.S. real estate and the rush is the influx of salespeople flying north to tout U.S. properties as the investment opportunity of a lifetime.

Now Canadians can buy U.S. REAL ESTATE at 70 per cent off! screamed one recent advertisement, with a vacation getaway thrown in just for attending a seminar.

And it’s not only travelling salesmen promoting the idea that now is a good time to get a piece of America. A weekend Wall Street Journal article headlined Why It’s Time To Buy cited low mortgage rates, increased affordability and a glut of homes as reasons to purchase U.S. property.

Don Campbell has a slightly different perspective.

The Vancouver-based real estate author said speculation by investors, not economic growth, is propping up many real estate markets in the U.S. That increases the risks for Canadian investors drawn to low house prices in a country reeling from high unemployment and anemic job growth.

“Canadians have to understand the reason we’re getting offered this stuff is because they can’t sell it locally,” Campbell said.

The three factors that support real estate prices over the long term, Campbell noted, are job growth, population growth and rising average incomes. “If you don’t have those three things, inevitably the music has to stop.”

An even more pessimistic outlook came Thursday from Robert Shiller, the economist who co-founded the S&P/Case-Shiller index of U.S. home prices. Speaking at a conference hosted by Standard & Poor’s in New York, he said a further decline in property values of 10 per cent to 25 per cent in the next five years “wouldn’t surprise me at all.”

“There’s no precedent for this statistically, so (there’s) no way to predict,” he said.

U.S. home prices plunged 33 per cent in 20 cities through March from their 2006 peak, reaching their lowest level since 2003, according to a Case-Shiller report on May 31. The decline signalled a “double dip” as the index fell below its previous post-housing-bubble low set in April 2009. Prices more than doubled from 2000 to July 2006.

Sunbelt cities were particularly hard hit, the Case-Shiller report said. As of October 2010, Las Vegas had seen a decline of 57 per cent from its peak, Phoenix a decline of 53.4 per cent, Miami 48.7 per cent and Tampa 43.2 per cent. On a relative basis, only two markets – Dallas and Denver – had not seen their total decline fall below 10 per cent.

A backlog of foreclosures poised to hit the market means prices may stay depressed, dissuading builders from starting new construction. Unemployment, which rose to 9.1 per cent in May, and stricter lending conditions are signs that any recovery in housing may take years.

Even so, Canadians continue to flood into the U.S. housing market, according to the National Association of Realtors. Twenty-three per cent of all U.S. homes sold to foreigners in the 12-month period ending March 31 were purchased by Canadians, compared to 11 per cent just three years ago. Sales to Chinese buyers were a distant second at nine per cent of foreign sales.

Potential buyers should also factor in the political risks of a revenue-hungry U.S. government that is grappling with a high debt load, Campbell warned. France just implemented a tax on non-citizens who own property there, and he predicts a similar measure south of the border.

“They need the money, and Canadians who own down there don’t vote, so it’s an easy tax source,” said Campbell, who doesn’t own U.S. real estate and expects that the market won’t bottom until 2014.

American real estate might make more sense for long-term buyers who are purchasing strictly for their own use and enjoyment, Campbell said.

For those in search of cash flow, one way to get a piece of the U.S. market is through an American real estate pool such as the one launched by Nicola Wealth Management a year ago.

Several of Nicola’s clients researched buying U.S. properties but decided the “hassle factors” were too troublesome, said Nicola president David Sung.

Those can include emotional risk, tax implications such as the U.S. estate tax, property management fees and the politics and restrictions sometimes associated with being a non-resident property owner.

Nicola’s investment pool includes a Seattle office building and eight mid-market residential rental properties in Texas and the southeastern U.S., Sung said. The targeted annual yield is seven to 10 per cent.

“Our clients are getting immediate exposure to hard-asset U.S. real estate, but it’s in many different properties, so it reduces the risk,” Sung said.

Nicola’s high-net-worth clients typically have about 15 to 20 per cent of their portfolios in real estate other than their primary residence, he said.

“The bottom line is, ‘What percentage of someone’s wealth would this represent as an investment?’ ” he said.

As for taking advantage of cheap U.S. real estate, renting a U.S. vacation property is a better way of doing that, Campbell said. In February, he flew out of Bellingham and got a great deal on rent at a large condo outside Waikiki.

Because of the glut of U.S. homes, including vacation rentals, many owners are willing to rent them out at bargain-basement prices in order to generate a bit of cash flow, he said.

[email protected]


Twitter @jameskwantes