Will New US Real Estate Correction Benefit Canada?
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Could a new correction in the US real estate market be a good thing for Canada?
Some American real estate markets could already be peaking in this cycle. What will this mean for international real estate investors? What other factors could be at play and bode well for the Canadian real estate market over the next 18 months?
American Real Estate Hits New Highs
The US real estate market has hit a variety of new highs in the last year. That includes new record home prices, and $150B plus in international home purchases.
Hot housing markets have been growing again since around 2011. Zillow reports that some of the hottest big cities may already be peaking. Sales have been constrained due to shortage, or throttling of inventory, and the combination of high prices and rising interest rates is expected to slow growth ahead. Some cities like San Francisco, California are reportedly already seeing rental rates decline.
The net effect for investors is that some of the most robust markets of the last decade may be ready for a correction. They are transitioning to buyers' markets. Asset prices and cap rates may dip for a while before they improve. Investors may see this as a good time to cash out and begin investing in other destinations which may offer more value and growth opportunities.
Additional Factors Spurring Changes in Capital Flows
The Need for Yield
Compressing cap rates and yields in the US are already sending some investors abroad. Other closer options such as Costa Rica, Belize, and Panama no longer offer the value or protection they once did. A rebounding economy and retail sector in Western Canada could offer a great combo of investment returns, safety, and proximity for US investors.
Intense investment in America over the past few years has led to strong portfolio grow, but little geographic diversification for many real estate investors. The above factors could provide the extra nudge many need to begin building in more diversity in new property types and locations.
Strong appreciation, and great liquidity means lenders, funds, and private capital is eager to make loans and invest in debt. LA alone is believed to have over $700B in captive residential property equity. Lending conduits are marketing aggressively to encourage owners to tap and liquidate this pent up capital.
The American real estate market is still a popular choice for investors, though may already be peaking in this new cycle. All hopes are for slowing growth, with a minimal downside. Though, aside from Canada, no other country has really managed a €˜soft landing' yet. These factors could result in diverting a significant amount of capital to Western Canada in the next couple of years. This would be great news for current asset owners in the area.