Canadian homebuilders look south, bet on US housing recovery
By Sweta Singh and Ashutosh Pandey
Aug 27 (Reuters) - Overheating worries at home are driving Canada's homebuilders south of the border where they buy up rural land, betting on a recovery in the U.S. suburban housing market even as many local players remain on the sidelines.
Homebuilders such as Mattamy Homes and Brookfield Residential Properties Inc are buying undeveloped land in Florida, Texas and other states where prices tumbled during the global financial crisis and remain well below pre-crisis levels.
The companies said that by moving now they give themselves enough time to prepare the land and build homes so they will be ready for sale once the U.S. recovery gains momentum in a couple of years.
"We are probably a good two years away before we are at a normalized U.S. housing market and so it is actually a good time to go and buy in the U.S.," Mattamy Homes Chief Operating Officer Brian Johnston told Reuters.
He said the company was focusing on suburban areas, where more and far cheaper land is available than in the cities, allowing to build on a bigger scale.
Mattamy and its peers also expect to hit a sweet spot with retirees and affluent second-home buyers who want amenities like shopping, dining and entertainment, and "snowbirds" -- Canadians who migrate to southern U.S. states for the winter.
Some analysts warn Canadian builders could end up waiting much longer than they expect for returns from those investments and many of their U.S. rivals appear not sold yet on the idea of suburban market revival.
"There is little bit of a timing risk. You can go buy the land now but it will be sometime before demand really bounces back," said Ryan Severino, an economist at real estate research firm Reis.
TALE OF TWO MARKETS
The contrast between the Canadian's vigorous push into the U.S. market and caution of their local rivals largely reflects starkly different market conditions in which they operate.
Canadian house prices have doubled in the past 11 years and household debt to GDP ratio is around the all-time high of 164, fuelling concerns that the market might be overheating. In the United States that ratio is closer to 80 percent according to data published by the St. Louis Federal Reserve and the market is still at early stages of a tentative recovery after buckling in the second half of 2013.
New housing starts bounced in July and the National Association of Home Builders expects a 26 percent rise next year while the nation's realtors' association is forecasting new home prices to rise 4 percent by mid-2015. But new home sales fell for the second straight month in July and just like north of the border there are concerns about affordability of housing in the light of stagnating incomes.
U.S. builders are also working through a backlog of unsold homes, which limits their ability to finance new projects.
Inventory of new houses reached an equivalent of 6 month's sales in July, the highest level since October 2011, according to the U.S. Commerce Department.
"Many of our smaller builders don't have the capital and the banks are reluctant to lend to purchase land," said David Crowe, chief economist at the Washington D.C.-based National Association of Home Builders.
LAND AHOY!
Unfettered by such restraints Canadian builders are pressing ahead with projects in their southern rivals' backyard.
Privately held Mattamy, the largest Canadian homebuilder, with annual revenue of over C$1 billion, made its biggest land purchase ever with a 9,600-acre (38.9 square kilometre) buy in Florida this year. It also operates in Minnesota, Arizona, North Carolina and other parts of Florida.
Landmark Group, one of Alberta's largest homebuilders, has bought land in Phoenix, Arizona, to build its first condominiums in the United States. It plans to expand into Texas, California and Georgia.
Calgary, Alberta-based Brookfield Residential said it will start developing several new projects this year, well ahead of an initial 2016 schedule, thanks to the strength of the U.S. market.
The company expects its U.S. operations to contribute half of its total revenue by the end of 2015, up from 43 percent at the end of 2013, Chief Executive Alan Norris said.
Ironically, part of the U.S. market's appeal is abundance of cheap land. Canada is the world's second biggest country, but most of it is sparsely populated and building activity focuses heavily on big cities such as Toronto and Vancouver.
According to Severino parcels of land in Florida were available this year for as little as $3.50-4.50 per square foot whereas land prices for condominiums in parts of Toronto would fetch $55 per square foot.
"In the U.S., given the affordability and the fact that prices in the suburbs went down more significantly than in the cities you will see more and more options and opportunities outside big cities," said CIBC analyst Benjamin Tal.
(Additional reporting by Sagarika Jaisinghani; Editing by Sayantani Ghosh and Tomasz Janowski)
