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Sunday December 17 2017
Loonie Strenght: Results in a Shopping Paradise
Author:
2009
Jim Scherrer
pvjim1@gmail.com


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The loonie, nickname for the Canadian dollar coin that replaced the former Canadian paper dollar bill, is a hendecagonal (eleven sided) bronze plated nickel coin that has been minted in Canada since 1987. It displays Queen Elizabeth II on one side and a common loon, a well known Canadian bird, on the reverse side.

For about five years prior to 2008, the Canadian dollar rose steadily from less than $0.70 US to more than $1.00 US; however in 2008 it plummeted from par with the US dollar back down to around $0.80 US. Since its rapid fall in 2008, it has slowly crept back up to $0.85 US. This rapid devaluation in the Canadian dollar caused concern for all Canadians because their purchasing power seemed to have been reduced by approximately 25%.

We say "seemed" to be reduced because all too often foreign currencies are only compared to the US dollar. This comparison might not always be pertinent because in the case of Canadians, there is always the possibility of travel to or retirement in countries other than the US; thus, their spending power might not always be based solely on the strength of the US dollar. As an example, Mexico is a frequently selected vacation destination for Canadians due to its warm winters, beautiful beaches, and close proximity. Now, more than ever, Mexico has become a premiere retirement haven for them.

When Canadians consider visiting or retiring in Mexico, it's only logical that they compare the Canadian loonie to the Mexican peso; this is where it gets interesting! Viewing the graph below, you'll clearly see that the loonie has strengthened versus the peso every year for seven consecutive years as it has risen from 5.8 pesos/loonie in early 2002 to 11.8 pesos/loonie in early 2009.

This more than doubling in the value of the loonie translates into much stronger Canadian purchasing power in Mexico today than seven years ago. Even though resort real estate prices have historically been closely tied to the US dollar, the costs of most other commodities in Mexico will seem to be a bargain to Canadians when comparing them to prices in Canada.

For the sake of comparison, the US dollar versus the Mexican peso held firm at around 10.5 pesos/US dollar for many years until the past year when the peso slipped to 13 pesos/US dollar, resulting in a 25-30% devaluation of the peso relative to the US dollar. As a result, what we find during the past seven years is a 25-30% strengthening of the US dollar during the same time period that we find a 100% strengthening of the Canadian dollar relative to the Mexican peso.

Armed with this little known or commonly overlooked currency conversion data, Canadians should feel wealthier than ever when considering a visit to Mexico. For those Canadian baby boomers thinking about retirement destinations, Mexico has never offered more attractive opportunities for investing than it currently offers. During the past decade of explosive growth, there have been tens of thousands of new condos built. In fact, in Puerto Vallarta alone, there are currently approximately 7,000 new units available.

Due to the recent mortgage crisis and the stock market related recession in the US, Americans have severely cut back on all investments including foreign real estate purchases. To compound the situation, the Mexican economy has suffered unfairly from negative press releases concerning drug related violence on the US border and the swine flu epidemic. Consequently, there is currently a serious glut of new real estate properties in Mexico, and has therefore become a genuine buyer's market in resort destinations such as Puerto Vallarta.

Another item of interest to Canadians is that of real estate mortgages in Mexico. Until recently, such mortgages were virtually nonexistent; however, today 20-30 year real estate mortgages are readily available to Canadians. Mortgage companies normally charge about 2 points above the going rate in the US and require at least a 20% down payment.

Due to the reasons addressed above, there may never be a better time for Canadians to explore the opportunities in Mexico. The loonie, even though on the surface may seem weak compared to the US dollar, is at its strongest point ever when it comes to shopping in Mexico. This, combined with the fact that many developers have overbuilt in many Mexican resort cities presents a virtual shoppers paradise for all Canadians holding loonies.

Hopefully, all of you fortunate Canadians holding your strong loonies will now have a better appreciation for the unique position that you're in and will be more inclined to take advantage of it. The loonie is not only at its strongest point in seven years relative to the peso but also will likely strengthen even more relative to the US dollar as inflation creeps into the US economy over the next few years. Holding a Mexican mortgage with a fixed interest rate of about 7% on a bargain basement priced new condo in paradise could prove to be the investment of a lifetime. So, why hesitate? Pack up your bags, head south of a couple borders, and you'll witness firsthand how the loonie has strengthened for seven consecutive years in Mexico.

 

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