Attention Canadians: The Time is Now and the Place is Mexico!
16 Oct 2009
by: Jim Scherrer - PVNN
For
more than 50 years, the de facto world currency has been the US dollar
with many of the world currencies being pegged against it (some
countries have even eliminated their own currencies in favor of the US
dollar).
As
an example, Canadians feel a sense of wealth when the Canadian dollar
is on par with the US dollar; the opposite when the Canadian dollar
devalues to .70 US dollar, i.e., when the Canadian dollar will purchase
only 70 cents worth of US goods and services.
The
following graph shows how the Canadian dollar has strengthened from
$.77 US to $.96 US or by 25% during just the past seven months.
Currently,
the global economy is changing and as the US dollar continues to erode,
many foreign currencies have strengthened significantly relative to the
green back. Consequently, savvy Canadians should now be looking at
currencies outside of the US and evaluating their own newfound
purchasing power in those foreign countries.
For
instance, the Canadian dollar has virtually exploded in value recently
relative to the Mexican peso. The graph below depicts how the Canadian
dollar has risen in value from an equivalent of 7.1 Mexican pesos in
2003 to 12.6 pesos today in 2009.
Now,
let's compare this increase in the purchasing power of the Canadian
dollar to the increase in purchasing power of the US dollar, both
relative to the Mexican peso. The graph below clearly shows that during
this 6 ½ year time frame the US dollar increased in value by a bit more
than 20% relative to the Mexican peso whereas the Canadian dollar
increased by a whopping 75%!
It's
quite understandable, that toward the end of 2007 when the Canadian
dollar reached par with the US dollar, the Canadians were major buyers
of real estate in Mexico. However, by March of 2009, the Canadian
dollar had slipped to a low of $.77 US and Canadian buyers were
virtually eliminated from the Mexican real estate market.
Next,
let's closely review the Canadian and US dollars relative to the
Mexican peso during the past year. Because the recent strengthening of
the Canadian dollar has far outpaced the US dollar relative to the
Mexican peso, you'll see that during the past year, the US dollar has
barely appreciated in value over the Mexican peso while the Canadian
dollar has exploded in value by nearly 25%.
The ramifications that this phenomenon has had on the Canadian purchasing power in Mexico are addressed below.
During
the past decade many tourist zones and retirement havens in the resort
areas of Mexico experienced exponential growth. Along with this growth
came significant real estate price appreciation; so much so that real
estate prices in many Mexican resort cities were no longer within reach
of many Canadian retirees, especially when the Canadian dollar
plummeted in value in 2008. Well, we have good news for you fortunate
Canadians holding those wonderfully strong Loonies; that's no longer
the case!
In
Puerto Vallarta, real estate prices of recently built condos have
dropped by anywhere from 20-35% during the past year alone. This
reduction in value was caused mainly by the global recession, however
the swine flu scare and the media hype over the border town drug war
(1,200 miles away!) were also contributing factors.
With
the tremendous glut of unsold new condos recently introduced to the
market by developers combined with the many condos that were purchased
at pre-construction prices by speculators now just trying to recover
their investment, PV is a true buyer's market.
Last
year you could buy a $400,000 condo with all the amenities and
breathtaking views for 10% off list price or for $360,000. Today,
you'll have no problem finding that same condo offered at $300,000.
Okay, that seems like a pretty nice savings of nearly 17% but remember,
these Mexican condos are all priced in US dollars; Canadians must now
evaluate these costs in terms of Canadian dollars!
A
year ago when the Canadian dollar was worth $.77 US, $360,000 US
dollars was equivalent to $468,000 Canadian dollars. Today, with the
same condo selling for $300,000 and the Canadian dollar worth $.96 US,
it will cost only $315,000 Canadian dollars. That's a savings of
$153,000 Canadian or 32.7% (as opposed to the apparent 17%) in just one
year!
Until
as recently as 4 years ago there were no mortgages available to any
North Americans buying resort property in Mexico. At that time, a
number of US based mortgage companies introduced mortgages to US
citizens buying property in Mexico but not to Canadians.
That
all changed a couple of years ago when the major mortgage companies
finally made the same mortgages available to Canadians. These fixed and
variable rate mortgages require at least 20% down and can have terms
for as long as 30 years at rates generally about two points above those
in the States or at approximately 7% at this time.
It
is the opinion of many that the Canadian dollar will continue to
strengthen. After all, the Canadian banks didn't make all the foolish
sub-prime no-doc loans that were made in the US, the Canadian
unemployment rate is somewhat less than in the US, and Canada is rich
with natural resources with worldwide demand. Knowing this, it seems
only logical that having a mortgage in Mexico based on US dollars would
be a very wise investment; it would be paid off with ever strengthening
Canadian dollars.
Let's
assume we bought that condo for $300,000 US ($315,000 Canadian) and
made a down payment of $100,000 US ($105,000 Canadian). A 30 year fixed
rate 8% mortgage of $200,000US would result in payments of $1,467/month
US ($1,528 Canadian). Of course, if and when the Canadian dollar again
reaches par with the US dollar, your payments will be reduced from
$1,528 to $1,467 Canadian.
Now,
let's get a little aggressive and assume the Canadian dollar will reach
$1.05 USD. At that exchange rate, your monthly mortgage payments would
drop to $1,397 Canadian. It's not too far a stretch to predict an
annual savings of $2,000 Canadian or more based solely on the exchange
rate differential. Of course, if the Canadian dollar were to plummet
for some unforeseeable reason, these mortgages can be paid off after
2-5 years (depending upon the loan) with no pre-payment penalty.
Finally,
let's evaluate the cost of living in Mexico. For starters, let's assume
that a year ago we were considering a lifestyle in Vallarta based on a
budget of $10,000 pesos per month. With the annual inflation rate in
Mexico of 5%, the same goods and services in Mexico will be $10,500
pesos this year.
A
little more than a year ago, when the Canadian dollar would purchase
9.5 pesos, $10,000 pesos was equivalent to $1,052 Canadian. Today, with
the favorable exchange rate of 12.7 pesos per Canadian dollar, the
$10,500 peso budget will cost a mere $827 Canadian, i.e., a savings of
$225/mo or a 22% reduction in the cost of living in just one year!
In
summarizing, it's obvious that the time has never been better for
Canadians to explore the opportunities that exist in Mexico today.
International monetary circumstances are ideal for Canadians
concurrently with the condo supply and demand equation in Mexico
heavily tilted in favor of the buyer. In terms of Canadian dollars, you
can expect to find incredible condos at 30-35% lower prices than just a
year ago and your cost of living will be 20-25% less than it was a year
ago.
Of
the nearly 50,000 expats living in Vallarta, we estimate that close to
30% of them are Canadians. Needless to say, the winter weather in
Puerto Vallarta is more conducive to most outdoor activities (excluding
snow boarding and ice hockey!) than anywhere in Canada.
So,
why hesitate? Come on down this winter and have some fun in the sun
with your fellow countrymen and while doing so, save a significant
portion of your nest egg on your retirement residence in Paradise.
It's
now certainly well within your financial reach and as they say, "if you
snooze, you lose"; you'll never find a better time or place to invest
those Loonies than now in Mexico!
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