How Does Exchange Rate Affect the Real Estate Market?
Foreign exchange rates or anything remotely related to it may not figure into your property buying decisions if you’re only hunting within the local real estate market. But if you are contemplating of extending your reach overseas, you would have to deal with currency exchange rates.
For some people, foreign exchange rates are a cringe-worthy subject, what with all the numbers you need to deal with, not to mention, fluctuations in the market. Unfortunately, they affect the property market and will also have an impact on your real estate investment portfolio once you start building it.
Understanding Exchange Rates
These refer to the price of one currency in terms of another. It’s the price of a US dollar against the Japanese Yen or the Australian dollar against the South African Rand. Although there is a list of currency exchange rates that you can refer to day in and day out, its effect on the property market is not readily evident. This is because currencies fluctuate due to supply and demand.
Exchange Rates and the Real Estate Market
In the property market, the home you want to buy or sell is the supply, while the currencies are the demand in the supply-demand relationship. When the supply decreases due to overwhelming interest and the demand for currency goes up, the currency value increases. If it is the opposite, then the currency value drops.
It is when the currency is weak that you should snap up the best property you can find. Whether you want a sprawling mansion or one of the double story homes on the market, you have better chances of buying a property if you can pay in the stronger foreign currency. Think of an undervalued domestic currency as a Black Friday sale in the real estate market.
If there are other foreign buyers like you scooping up cheap assets and outbidding the local buyers, expect rental rates to go up, which will also work to your advantage if you venture into properties to let.
But there is a downside to this.
If a country’s central bank holds interest rates at a record low as a means to stimulate their economies, currencies could experience multi-year lows. Foreign and domestic buyers may be able to enjoy low housing prices, but the global currency could be at risk of a currency war.
Assess your overall currency risk
Because exchange rates will affect not just the purchase price but also the property market, you should evaluate your overall currency risk if you plan to buy or sell property in a foreign currency. What do you need to consider?
- Currency being used in the transaction
Properties can be traded in dollars and in the local currency. If the former is used in a foreign property transaction, the exchange rate will have little to no direct effect on the sale or purchase price. However, if the local currency is used, the strength of a dollar will have an impact on the transaction. It is best to buy a property in the local currency with a strong dollar and to sell with a weak dollar because the local currency’s price will buy you more dollars back home.
Say you have a property in Australia that is valued at about US$200,000. If the dollar gains 5% over the Australian dollar, your property value will drop by US$10,000.
- Cost of living
If you plan to live or spend a significant amount of time in the country where your property is located, the exchange rate will have an impact on your cost of living. This is because the effect is the opposite of the property value. That is, a weak dollar will raise your cost of living, while a strong dollar lowers it.
- Rental property management
How exchange rates affect your cost of living is similar to a rental property’s operating expenses. As the dollar strengthens, your operating expenses will go down and anything you pay for homeowner association fees, utilities, and taxes will cost less in terms of dollars. But, as it weakens, you get a pay cut.
Exchange rates where property sale and acquisition are concerned can be confusing. But you can avoid currency risk if you purchase a property in a dollar-based market, such as the British Virgin Islands, Ecuador, El Salvador, Panama, or Turks and Caicos, or those that trade properties in US dollars.
It would also help if you educate yourself about foreign exchange rates. Make Forex trading content your new best friend. Read news and check out analysis data. You will come out victorious if you get into the foreign property market well-armed.