I just attended an economic seminar sponsored by the real estate board featuring speaker, Cameron Muir, previously the Chief Economist for CMHC and now the Chief Economist for The Real Estate Board of Greater Vancouver. Cameron Muir states that despite the financial crisis initiated in the U.S. which has extended globally, BC's economy remains in better shape than the rest of Canada.This is due to our U.S. export trade business at 45% compared to the 70% to 80% for provinces like Ontario. Still BC 's consumer confidence has been rattled plus the persistent media coverage on the falling world stock markets and the bankruptcies of Investment Banks only adds fuel to the fire.To understand the affects the U.S. economy will have on us we need to know that our BC exporting business is made up of the Lumber Industry(39%), Energy Resources(19%), Metallic Minerals(10%) and Machinery Equipment(10%).The Lumber Industry is being hit hard by the housing construction in the U.S. and will not recover until the U.S. rebounds which may take 2 to 3 years. Our Energy Resources are relatively strong and continue to have strong employment but with oil prices falling it will lower oil company's revenues. 50% of our trade export is with Europe and Asia with China being the main powerhouse. Even China has lowered their demand for metallic (building) material and energy demands.The 2010 Olympics has and will continue to support strong employment in B.C. with hope that the Olympics will attract tourists back to normal levels. On October 23rd the news report stated a credit union economist predicted a 13% drop in house prices this year, 13% in 2009 and another 5% in 2010. Earlier in the summer we had Merrill Lynch predict a 35% drop in house prices. Fear is a stronger emotion than greed so the fear factor is driving the market and buyers are scared. Listing inventory continues to increase due to the slower pace in sales. Prices have dropped and will continue to weaken but by how much and for how much longer? When should you buy?
If you are a Buyer, this market offers a GREAT OPPORTUNITY. Look to buy at the INTRINSIC PROPERTY VALUE. The intrinsic property value is what the property is worth from an investment point of view. Investors try not to give much emotional value. They are purely interested in what capitalization rate or return on investment the property can produce. Most Investors in today's market (with prime rate being between 4-5%) want to see a minimum 5% to 6% return. Simply put, if they purchased a property for $600,000 they would want to obtain a minimum net income of $30,000 to $36,000/year. ($600,000 x 5% =$30,000, $600,000 x 6%= $36,000/year).
In October I purchased another small investment for $180,000. It nets $10,000/year which will give me a 5.5% return. I plan to keep it for my grand kids.