What makes a property purchase a good deal?
For some prospective buyers, there is value simply in finding the right home, in the right location, at the right time. Most investors, however, weigh a variety of monetary and economic factors and how they might affect price. Those might include the local tax landscape, any recent corrections in the housing market, the fundamentals of the broader economy, and, of course, the currency.
Right now, the U.S. dollar is cheaper compared to major currencies from its most important foreign buyer markets. Over the last 12 months, it has fallen more than 16% compared to the Mexican peso, nearly 16% compared to the Australian dollar, roughly 12% versus the Canadian dollar, and 9% compared to the Euro, British pound and Chinese yuan, according to figures compiled by the Dow Jones Market Data team, which measured the change from April 30, 2020 to April 30, 2021.
Of course, few real estate investors will make a final decision based solely on recent—or predicted future—foreign exchange moves. But currency is nonetheless an important consideration, and the weak dollar could make U.S. property more palatable for foreign buyers in the year, or years, to come.
Why the Dollar Has Less Value Now
Usually, the U.S. dollar is seen as a safe haven in times of crisis. That has what happened when the pandemic took hold last year. So part of the depreciation in dollar value we see today versus a year ago is simply the reversal of that trend, as vaccines are rolled out, lockdowns are lifted, economies revived, and the crisis subsides. It is simply money moving away from that safe asset again.
Another contributing factor is the fiscal stimulus provided by the U.S. government. In March, President Biden signed into law a $1.9 trillion rescue package, and he is now working on a $2 trillion infrastructure investment plan. Fiscal stimulus essentially puts more dollars in the market, driving the supply and demand of the currency.
Plus, according to Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors, that recovery funding is being financed, in part, by quantitative easing.
“We are raising the budget deficit level to heights America has not seen,” Yun said. “The weakening of the dollar I think is saying that some people are feeling uncomfortable about the U.S. debt, and the financing of the debt, the printing of money.”
Zoltan Szelyes, chief executive officer of Switzerland-based Macro Real Estate AG, echoed that sentiment.
“Certainly, with the whole increase in government debt in the U.S., a lot of people think the dollar will continue to depreciate because lots of people are now buying crypto and losing faith in the U.S. dollar,” Szelyes said. “People were buying gold after the last financial crisis, now they are buying crypto—it is a loss of faith in the monetary authorities.”
The depreciation has been compounded by monetary stimulus. The Federal Reserve cut interest rates last March, which undermined the dollar’s yield advantage. According to James Malcolm, head of FX Strategy in Global Research at UBS, the dollar had previously been relatively high-yield compared to other G10 currencies, but fell to “pretty much the bottom of the pile.” So what does that mean for housing?
“Just simple economics would say that real estate is cheaper in the U.S. from a foreigner’s perspective because of those currency changes,” Yun said. “This implies that foreigners have more financial incentive to consider the U.S.”
Liam Bailey, global head of Knight Frank’s research department, said that, while other economic factors are at play, the difference in foreign exchange is significant.
“At the end of the day, if you can save 5%, 10%, 15% on entry price because of currency movements, that is a significant change in the calculation,” Bailey said. “If U.S. housing prices continue to rise in line with average earnings (roughly 2% to 3% a year), you are lucky if you can save 5-10% on purchase price—that is a significant amount in terms of your total returns.”
How Long Will It Last?
For prospective investors, a central question is when the dollar will begin to increase again in value. Currency markets are difficult to predict, but that is exactly what those interested in holding U.S. assets on the assumption that the dollar will eventually rise must do.
In Mr. Bailey’s view, they won’t have too long to wait.
“We know the U.S. economy is set to perform strongly this year and probably strongly next year—it is likely to lead the global recovery—and therefore…for anyone thinking about buying in the U.S., there is a risk that you might see the dollar outperforming the next few months,” Bailey said. “It possibly does point to acting sooner rather than later if you are considering a purchase and currency is part of the story.”
Mr. Malcolm, of UBS, has the opposite view.
“If we look at the dollar back 50 years or so, it fluctuates around a more or less stable mean, but it has very large cycles, and these last up to 10 years in either direction,” Malcolm said. “So when you talk about what has happened the last year, it is very important to contextualize that within the overall dollar cycle.”
He believes March 2020 marked the effective peak in the current cycle, with the low being in July 2011. He thinks the new cycle will continue for seven to eight years and that, during the first two to three years, the dollar will likely drop in a “fairly linear” fashion.
“Because the U.S. is the most liquid financial market, people tend to borrow in dollars and invest in other things,” Malcolm said. “During extreme shocks to the system, people unwind that leverage, which pushes the dollar into a spikey peak like we saw last year.”
Then the dollar starts to drop, usually as a result of monetary and fiscal stimulus, which drives U.S. consumer spending.
“Because the U.S. is a fairly unbalanced economy—it has a current account deficit; it imports more than it exports—if you stimulate the system, what happens is the deficit gets a lot worse,” Malcolm said. “The U.S. deficit of 2.1% of GDP in 2019 grew to 3% of GDP last year, and is set to come close to 4% of GDP this year. So simply the current account worsening means that there is more demand for other currencies than there is for dollars, in terms trade and services transactions.”
Then there is the capital account. As risk appetite picks up, U.S. investors will begin to reinvest in foreign securities, while American companies pursue outbound mergers and acquisitions.
“You get this kind of twin deficit phenomenon, where the dollar is being pushed down both by the current account—the trade deficit worsening—and also by capital outflows because risk appetite is improving,” Malcolm said. “So the dollar tends to have a counter cyclical relationship with the global business cycle. In other words, the depreciation could last for some time. For real estate investors, assuming the dollar will continue to slide for the next three or so years, the longer you wait, the better off you will be.”
Currency Is Not The Whole Story
For most investors, foreign exchange is, of course, only part of the calculation. The underlying investments themselves also matter.
“You are buying a relatively illiquid investment when you are buying property—it is expensive to trade—so you are probably holding for the medium- to long-term,” said Knight Frank’s Mr. Bailey. “Therefore, the fundamental decision is actually, ‘Is the market you are going to invest in going to suit your lifestyle requirements?’ Or, if it’s an investment, do you believe the backstory to the economy you are buying into? The U.S. has outperformed over the last 20 years compared to most developed markets, and its incredibly strong economic story presents a positive long-term rationale for investment.”
That said, there could be some nervousness around taxation policies.
“The question is, could Biden change the environment, and actually, could taxes rise in the longer term?” Bailey said. “I think it is quite clear the U.S., like Europe, like elsewhere, will need to raise revenue to pay for the pandemic response, and property is going to be in the firing line.”
“Taxes are a particular concern for investors in the luxury market, said Macro Real Estate AG’s Mr. Szelyes. “Some investors are beginning to look for more speculative investments based solely on the potential for capital appreciation, rather than income returns through renting properties out.”
Then there are specific market conditions to consider.
“People do not want to buy a depreciating asset,” said the National Association of Realtors’ Mr. Yun, who expects U.S. house prices will rise 7% to 9% this year, and 3% to 5% next year. “Luxury real estate in particular has remained hot the past year, despite the minimal foreign participation, due to strong domestic demand—even in cities like San Francisco. The one exception has been Manhattan. Given, at least in Manhattan, prices have softened a bit, it may provide a chance. Maybe in the past people thought, ‘Oh it’s way too expensive.’ It’s a second-chance opportunity.”
“Some luxury condos in New York City are trading at a 25% to 30% discount,” Szelyes said
“New York prices have been soft the past two to three years, since even before the pandemic sent citydwellers running for the suburbs,” said Knight Frank’s Mr. Bailey. “Inventory levels are relatively high at the moment, so there are deals to be done. Miami prices as being off their peak levels from a few years ago.”
Meanwhile, at the moment, there is something else keeping foreign buyers away.
“I think the big wild card is this pandemic—global travel—the vaccine passport or what will be required,” Mr. Yun said. “So that is the major hurdle, but the financial incentive is clearly there.”
Source: Mansion Global