the mexican pesos and your real estate

purchase - march 2016

by cheryl miller, broker, baja realty and investment

By Cheryl Miller 
Since June 2014, the Mexican peso has suffered a whopping 40% decrease in value against the American Dollar.  Compare the peso at 12.84 : 1 in June 2014, to a sad average last month (February 2016) of 18 : 1.  At one point in February, the pesos hit an all time low of 19.13 : 1. Some experts think by June 2016, the pesos will be at 20:1, while others think the worst is over and the pesos will slowly increase in value. Who is right?  We will have to wait and see.  

But Mexico is not alone. In fact, most of the world’s economies have suffered against the dollar, including Russia has suffered 128% less buying power in the same period, Brazil at 81%, Canada at 40%, the Euro and all of its nations at 27%, Iran at 22%, South Korea 20%, the British Pound at 19%, India at 15% and China at 10% less buying power.  Another disaster was in Argentina who had a 22% change as of December 2015, and then overnight lost 74% of its buying power against the dollar.  A true economic disaster.














The reality is that most of the world’s economies have suffered some loss in buying power against the US Dollar.  Why? Well one reason seems to be based in oil related commodities and the plummeting price of a barrel of oil.  As of January 14, 2016 prices of crude fell from $100 a barrel in late 2013 to $30 a barrel.  Some experts, as of the end of 2015, believed the price of oil will rise again to $50/barrel by mid-2016 and slow down the downward trend of the world’s economies, but that is yet to be seen.  In fact, once a downward trend is sustained for a period of time with all of the resulting responses, such as inflating prices, it is very difficult to reverse.  A discussion on “oil based economies” is worthy of additional and thorough discussion, for obvious reasons, as shown in the above statistics, but it is not for this article.  However, it is cited as one of the reasons for a plummeting peso value.

Mexico, for the first time in decades, now has higher fuel prices at their nationalized gas stations than the United States.  Despite a slight adjustment downward, spurred on by the Mexican Government’s recent bolstering of the pesos by selling off some of their dollar reserves, gas prices still remain high compared to the United States.  Mexico, a major producer of oil with a relatively low national debt, the practice of propping up the pesos must be limited, as Mexico’s US dollar reserves are also limited.  In the fall of 2015 Mexico allotted $8.6 billion USD to support the peso through the Bank of Mexico.  That number now totals $26 billion USD since that time to prop up the peso. To put this in perspective though, the peso’s trading volume is $135 billion a DAY, so the total of $26 billion is in reality, a drop in the bucket. And Mexico’s US dollar reserves are limited.

Gas prices affect every other commodity.  Food, clothing, imported goods, locally produced goods, services… literally everything, so the costs do get passed on. And sooner than later you will see this in the stores, service charges, restaurants and bars, if you have not already.  Some merchants in the resort areas, are pricing in dollars because of the DAILY change in the exchange rate. Why? Here in the Baja, in particular, almost everything you buy, eat, drink is imported to the peninsula from the mainland or a foreign country.

Now what about Real Estate?

After the worldwide economic crisis at the end of 2007, prices took some time to adjust after the “bubble burst”.  But here in Los Cabos, since that fateful time, the overall average downward adjustment in real estate prices was between 35 to 60% of 2007 prices, depending on the type of property. There are exceptions, both lower and higher, but overall, prices did adjust drastically, as they did in many parts of the United States during that period.  Prices seem to be fairly stable now and we can report that 2016 seems to becoming a record sales year.






Here in resort areas in Mexico, prices are quoted in dollars for the benefit of foreign buyers.  So, it is unlikely to see further adjustments stemming downward due to the peso devaluation.  But, be advised that all real estate transactions are registered in pesos at the official exchange rate of the day, per Mexican law, after all, the peso is the national currency.

For a buyer, that means your transaction will be registered relatively high as compared to 2014.  Example, if you buy a house for $100K USD and the exchange rate is 18:1, then your purchase will be registered at $1,800,000 pesos, compared to 2014 when the exchange rate was 12:84 (average) or $1,284,000 pesos. For a buyer, when the pesos goes down, this will mean when you resell, you will have an automatic cushion against Capital Gains, if the pesos stabilizes lower than the present amount.

For a seller though the situation is in reverse.  If you bought 100K USD at 12.84:1 or a registered value of $1,284,000 pesos, and sell now for the same USD amount, your sale is registered at $1,800,000 pesos or a “paper gain” of $516,000 pesos, which is subject to the capital tax.

For a buyer as well, you must understand that the Mexican buyers are now in a holding pattern. (Never underestimate your property’s appeal to the national buyer. Los Cabos has local buyers and buyers from all parts of Mexico, and the world.)  Since most prices are quoted in dollars, that price represents to the Mexican National an increase in price of 40% plus the cost at the bank to buy dollars.  In addition, the cost to register and to pay the 2% acquisition tax which goes up according to the price converted to the official peso rate of the day.  Since Canada has had a pretty similar devaluation of their Canadian dollar, this affects the Canadian buyers as well.   I have had many Mexican and Canadian buyers tell me that they will wait until their currency is in a stronger position to buy.

So, there are benefits and disadvantages to the high exchange rate of the peso for real estate purchases and sales.  For the most part, our market remains a BUYERS MARKET, especially the US Buyer.  And for you buyers, now is one of the best times to realize your dream of purchasing a home or land in Baja California Sur.

 

Cheryl Miller, Broker of Baja Realty and Investments, 624-122-2690, www.forsaleinbaja.com, info@forsaleinbaja.com. So if you are seeking this dream, contact us!  We can help you fulfill your dream and guide you through the steps!