Temperatures are on the rise, the snow is quickly melting away, and the spring season is finally rolling in. These are the telltale signs that kickstart the beginning of the peak buying and selling season for real estate in Canada. Many young buyers are already beginning to scour the online listings, hoping to make their first foray into homeownership. Growing families are beginning the search for an upgrade to a bigger home or a home in a neighbourhood with better schools. And realtors are already mining their networks for leads on buyers and sellers ready to pull the trigger.
As if there wasn’t enough competition facing Canadian homebuyers in our largest cities, like Toronto and Vancouver, fuelled by short supply and low mortgage rates, the significant drop of the Canadian dollar vs. the U.S. dollar and other foreign currencies is going to kick that competition up another notch this spring.
A lower Canadian dollar exchange rate makes Canadian real estate so much more attractive to foreign buyers because they effectively get an immediate discount on the Canadian dollar asking price of a property when they’re paying with much a stronger foreign currency. We know that Chinese investors are very active buyers in Canada’s largest cities, especially Toronto and Vancouver, so let’s take this group as an example.
If we look at how the Chinese Yuan has fared vs. the Canadian dollar we see that it has gained 20% in value vs. recent lows seen last summer. So now when a Chinese real estate investor looks at the price of a CAD $500,000 property in Toronto, today it will cost him about 20% less at around CN ¥2,435,000 vs. approximately CN ¥2,920,000 from when it was on-par. You can clearly see how foreign investors would see this as a huge bargain to take advantage of. And with the outlook for the Canadian dollar remaining negative, these foreign buyers are not only seeing an opportunity to take advantage of the better currency exchange on the purchase price, but also on closing costs, maintenance and upkeep costs and even property taxes. Everything about buying and maintaining property in Canada is now 20% cheaper for them.
Similarly in the Canadian vacation property market, we could also see increased competition; likely coming from U.S. buyers whose U.S. dollar has recently gained 20% in value vs. the Canadian dollar. Properties for sale in ski resort regions, such as Banff, Whistler and Mont Tremblant, could get increased attention from U.S. buyers who will now see them priced at significant discounts when converted to U.S. dollars. We may now see these U.S. ski vacation property buyers more attracted to buy north of their border instead of in regions in the U.S. like Colorado. (Another plus for them would be that the skiing in Canada is much better, anyway!)
The impacts of the lower Canadian dollar exchange rate won’t be limited only to foreign buyers, it will also affect Canadian real estate investors. While the Canadian dollar was strong, many Canadians were putting their money into investment properties in the U.S. Now, with the U.S. economy rebounding and the sharp decline in the Canadian dollar, investing in real estate south of the border becomes a much more expensive proposition.
So where will these Canadian real estate investors now funnel their capital previously earmarked for the U.S. property market? A logical place for at least some of it will be to stay in the domestic property market in Canada. Again, this just means more competition.
For Canadian homebuyers, a competitive real estate market is nothing new and an increase in foreign investors vying for properties this year should not alter your approach. Do your homework and understand what the properties you’re making offers on are really worth, set a budget based on what you can afford and what you are willing to spend, then stick to that budget!
Rahim Madhavji is the President of KnightsbridgeFX.com, a company that helps Canadians buy or sell U.S. dollars at better exchange rates than the banks.
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