Lower Risk Outside The US?

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The conventional wisdom is that when the value of a country'scurrency falls relative to its trading partners, its exports become more competitive in the global market. It's no secret that the Trump Administration is aiming to bring more manufacturing back to the United States.Global flows of capital have changed since the start of the year. While the administration wishes to bring increasing levels of capital investment to the United States 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. The US dollar has fallen by 10% since the beginning of the year against most of the major currencies. Indications are that it is forecast to fall even further when measured against other major currencies.

We think that real estate investments in Canada represent a better risk adjusted proposition right now. This is based on the following observations:

1) The slowdown in new construction that we have seen across the US is also present in Canada. This means that labor rates in Canada for new construction have moderated and we are seeing extremely competitive bids for new work.

2) Immigration to the US is down significantly since the start of the year and demand for new housing will decline as a result. The US has pretty much closed the door refugee claimants. This includes countries like Afghanistan where many US allies are stranded and have no path to enter the US.

3) 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 US as a percentage of the population.

4) Interest rates in Canada are much lower for borrowing. The 5 year Canada mortgage bond is trading around 3.1% which means that a new construction and permanent financing loan could price below 4%. Rates are not that low in the US.

5) Canada is not waging a trade war against the rest of the world. While prices for certain construction commodities like electrical equipment and air conditioners will certainly be impacted by tariffs in the US, we are not seeing the same impact in Canada. Many manufacturers have operations in North America including Mexico. These goods can flow into Canada free of any tariffs under USMCA.

6) Even with new apartment supply having entered the market, vacancy rates in most Canadian cities are far below comparable US markets.

7) If the US dollar falls further as we see the Trump administration wishing, then any investment outside the US goes up in value on a relative basis. Investing is not the same as speculating on foreign exchange rates. That alone should not be a reason for investing outside the US. It’s just one of many factors to consider when looking at aggregate probabilities.

When we put all of these factors together, we see a compelling case for investing in Canada, even for US investors.

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Episode Transcript

(00:01):
Welcome to the Real Estate and Special podcast, Your morning
shot of what's new in the world of real estate investing.
I'm your host, Victor Minash. 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 U.S. dollar
and countries all over the worldwho depend on purchasing
commodities in U.S. dollars havesuffered in multiple different
ways. Foreign exchange markets

(00:22):
represent one of the few escape valves in financial markets when
things fall out of balance. 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

(00:44):
the year. And 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 default 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

(01:05):
haven for their capital outside of the US. the US dollar has
fallen about 10% since the beginning of the year against
most of the major currencies. Indications are that it's
forecast to 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 the US

(01:25):
dollar. Interest rates in Europe are
much lower. The ECB said its benchmark rated
2% compared with the Fed funds rate of four and a quarter.
Rates in Canada are much lower. Canada's one and two year bonds
are hovering around 2.6. We've seen the price of gold
increase from 2600 an ounce to 3400 an ounce in just the last
six months alone. But of course, gold doesn't cash

(01:47):
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 generateincome 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 #1 the slowdown in

(02:10):
new construction we've seen across the US is also present in
Canada. That means labor rates in Canada
for new construction are moderated, and we're seeing
extremely competitive bids for new work right now #2
immigration to the US is down significantly since the start of
the year, and demand for new housing will decline as a
result. the US has pretty much closed the door to refugee
claimants, for example, refugeesfrom Afghanistan, many of whom

(02:33):
were US allies. They're stranded there now, and
they have no path to entering the USA.
Lot of those folks are coming toCanada.
Immigration to Canada remains inextremely high demand.
Canadian government has reduced its immigration targets
slightly, but the numbers remainextremely high, especially when
compared to the US. As a percentage of the
population, interest rates in Canada are much lower for

(02:55):
borrowing. For example, A5 year Canada
mortgage bond is trading around 3.1%.
That means a new construction and permanent financing that
could price below 4%. Rates are nowhere near that in
the US #5 Canada is not waging atrade war against the rest of
the world. World prices for certain
construction commodities like, say, electrical equipment and

(03:16):
air conditioners, they could be impacted by tariffs in the US
and we're not seeing the same impact in Canada.
For example, many US manufacturers have manufacturing
set up in Mexico. Those goods can flow into Canada
free of any tariffs under USMCA number six, even with new
apartment supply having entered the market, vacancy rates in

(03:37):
most Canadian cities are far below their comparable U.S.
markets. And then #7 if the US dollar
falls further, as we've seen theTrump administration wishing,
then any investment outside the US 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

(03:57):
US. It's just one of many factors to
consider when you look at all ofthe probabilities in aggregate.
So when we put all of these factors together, we see a
compelling case for investing inCanada, even for US investors.
In fact, our firm is extremely active in both the US and
Canada. We like both countries and we're
active on both sides of the border and we recommend strong

(04:19):
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 US investors are
hesitant to look at investing outside the US because of
worries whether the investment will be tax efficient. the US
and Canada do have a tax treaty and the structures that follow
our accountants recommendations are indeed tax efficient.

(04:41):
We have projects in Canada that have seen substantial investment
from folks in the US and these are in fact covered by US
offering memorandum, which is compliant with the USSEC
regulations. They are open to US accredited
investors. So to learn more, come visit
ystcapital.com. Register for our investor
portal. We'll be happy to share some of
our Canadian projects with you as you think about that.

(05:04):
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.