INTRINSIC INVESTMENT VALUE
I just attended a economic seminar sponsored by the real estate board which brought in an analyst who used to work for CMHC. Cameron Muir states that BC's economy is much better than the rest of Canada because our U.S. trade is 45% of our total, compared to 80% in Ontario but the BC consumer confidence is rattled, just like the rest of the world, from all the media coverage of the falling stock market and the financial crisis. Our BC economy is mostly made up of the Lumber Industry, Energy Resources, Metallic Minerals, Machinery Equipment and Tourism Industry, etc. The Lumber Industry is being hit hard by the house construction industry in the US and will not recover until US recovers. 55% of our trade export is to Europe and Asia and even China the main powerhouse of Asia has lowered their demand for raw material and energy. Tourism has forecasted a decrease for 2008 and 2009 and hope that our 2010 Olympics will attract tourists back to normal levels. Thursday night on the news had a report that stated a credit union economist forecasts a drop of 13% this year, 13% next year and 5% in 2010. Earlier in the summer we had Merrill Lynch predict a 35% drop in house prices so all these reports add fuel to the fire and will prolong our recovery. Fear is a stronger emotion than greed so the fear factor is driving the emotions of the market down quickly. Listing inventory continue to increase due to the slow pace in sales and until this trend stops we will have house prices continue to drop.
If you plan to sell in this market you must price ahead of the market at a price that seems lower than your competition.
If you are buying, this market offers a lot of choice and value. The INTRINSIC INVESTMENT VALUE I have for any property is, If you take the purchase price and with 25% cash downpayment, the market rent for the property is equal to or greater then the 75% of the financed monthly mortgage payment plus 1/12th property taxes then you have purchased that property at its Intrinsic Investment Value.
For example:
Purchase price is $600,000
25% Downpayment is $150,000
Mortgage is $450,000 @ 5 year term 25 year amortization of 6% = $2880/mth
Property Taxes $3,120 / 12 = $260/mth
Total = $3,140/mth
Market Rent = $3,140/mth or greater.
If you find the perfect home that you'll be happy to live in for 5 years and you can purchase that property at the INTRINSIC INVESTMENT VALUE, then buy it.
