Lower Risk Outside The US?
Welcome to the Real Estate Espresso podcast. Your morning shot of what’s new in the world of real estate investing. I’m your host Victor Menasce. On today’s show, we’re talking about a major reversal in foreign exchange markets. Over the last two years, we’ve experienced a rising US dollar, and countries all over the world who depend on purchasing commodities in US dollars have suffered in multiple different ways.
Foreign exchange markets represent one of the few escape valves in financial markets when things fall out of balance. The conventional wisdom is that when the value of a currency falls relative to its trading partners, its exports become more competitive in the global market. It’s no secret the Trump administration is aiming to bring more manufacturing back to the US.
Global flows of capital have changed since the start of the year. While the Trump administration wishes to bring increasing levels of capital investment to the US, many of the policies are in fact having the opposite effect. President Trump has stated publicly that he wishes the US dollar to fall compared with other currencies including the Japanese yen, the euro, the Chinese yuan, and the Canadian dollar.
An increasing number of investors are looking for a safe haven for their capital outside of the US. The US dollar has fallen about 10 percent since the beginning of the year against most of the major currencies. Indications are that its forecast will fall even further when measured against major currencies. Even with interest rates in the US remaining significantly higher than other major currencies, we’ve seen a flight of capital outside of interest rates much slower.
The ECB set its benchmark rate at 2 percent, compared with the Fed funds rate of 4.25 percent. Rates in Canada are much slower. Canada’s 1 and 2 year bonds are hovering around 2.6. We’ve seen the price of gold increase from 2,600 ounce to 3,400 an ounce in just the last six months alone. But of course, gold doesn’t cash flow. It’s a safe haven investment and usually makes up a small percentage of an investor’s portfolio. If you truly want to invest, then you need assets to generate income and cash flow.
This is where we think that you need to look at all of the moving parts, and we think that real estate investments in Canada represent a better risk adjusted proposition right now. This is based on the following observations. Number one, the slowdown in new construction we’ve seen across the U.S. is also present in Canada. That means labour rates in Canada for new construction are moderated. We’re seeing extremely competitive bids for right now.
Number two, immigration to the U.S. is down significantly since the start of the year, and demand for new housing will decline as a result. The U.S. has pretty much closed the door to refugee claimants, for example, refugees from Afghanistan, many of whom were U.S. allies. They’re stranded there now, and they have no path to entering the U.S. A lot of those folks are coming to Canada. Immigration to Canada remains in extremely high-demand. The Canadian government has reduced its immigration targets slightly, but the numbers remain extremely high, especially when compared to the U.S., as a percentage of the population. Interest rates in Canada are much lower for borrowing. For example, a five-year Canada mortgage bond is trading around 3.1%. That means new construction and permanent financing, that could price below 4%! Rates are nowhere near that in the U.S.
Number five, Canada is not waging a trade war against the rest of the world. World prices for certain construction commodities like, say, electrical equipment, they could be impacted by tariffs in the U.S. and we’re not seeing the same impact in Canada. For example, many U.S. manufacturers have manufacturing set up in Mexico. Those goods can flow into Canada free of tariffs under the USMCA.
Number six, even with new apartment supply having entered the market, vacancy rates in most Canadian cities are far below their comparable U.S. And then number seven, if the U.S. dollar falls further, as we’ve seen the Trump administration wishing, then any investment outside the U.S. goes up in value on a relative basis. Now, of course, investing is not the same as speculating on foreign exchange rates. That alone should not be a reason for investing outside the U.S. It’s just one of many factors to consider when you look at all of the probabilities in aggregate.
So when we put all of these factors together, we see a compelling case for investing in Canada, even for U.S. investors. We find that in fact, our firm is extremely active in both the U.S. and Canada. We like both countries and we’re active on both sides of the border. And we recommend strong opportunities in both countries. But when we look at the risk adjusted factors for all the reasons I’ve just mentioned, Canada’s worth a closer look.
Now, some U.S. investors are hesitant to look at investing outside the U.S. because of worries whether the investment will be tax efficient. The U.S. and Canada do have a tax treaty, and the structures that follow our accountant’s recommendations are indeed tax efficient. We have projects in Canada that have seen substantial investment from folks in the U.S. These are in fact covered by U.S. offering memorandum, which is compliant with the U.S. SEC regulations. They are open to U.S. accredited investors.
So, to learn more, come visit waschiocapital.com, register for our investor portal. We’ll be happy to share some of our Canadian projects with you. As you think about that, click on the link in the show notes, and have an awesome rest of your day! Go make some great things happen! We’ll talk to you again tomorrow.
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