Currency Changes And The Price Of Property

In global prime property markets even small percentage changes in currency can have significant monetary implications. Currency, ownership costs and taxation are becoming increasingly important considerations for investors, especially as the rate of price appreciation slows in some global city markets.

New research by property consultancy Knight Frank suggest that individuals need to be conscious of the risks, as well as the opportunities, surrounding these currency and associated factors. The volatility seen in foreign exchange markets over the last 12 months is a case in point.

Does currency matter? Fluctuations in currency markets can affect demand for residential property from international buyers.

To judge the strength of a country’s currency relative to its peers Knight Frank looked at effective exchange rates, rather than simply measuring one currency against another. This shows in which direction a particular currency is moving in comparison to a weighted average of a basket of other major currencies.

Between June 2014 and January 2016, the US dollar appreciated by 21%, making it more expensive for international buyers to purchase in the US. In recent years the strong US dollar, has had a notable influence on non-resident purchases in the US.

This link between currency and cross-border transactions is underlined by data from the National Association of Realtors in the US which shows that the appreciation in the US dollar between 2014 and 2016 coincided with a 25% fall in non-resident property purchases across the US. Purchases by US residents increased by 10% over the same time.

This data needs to be viewed from two standpoints. While appreciation can be costly, for those from abroad who already own an asset in the US a strengthening currency could be viewed as an opportunity to enhance returns by selling and repatriating capital.

Investors may look to hold out for the most optimal time to buy or sell in an attempt to maximise purchasing power or potential returns. However, this strategy can be risky.

The trading volume of the global forex market is estimated to be over 25 times that of global stock markets; this naturally leads to volatility and therefore carries risk when deciding whether the exchange rate has reached a peak or trough.

Interventions by Central Banks and policymakers in currency markets can devalue currencies.

The Swiss Franc’s pegging and depegging against the euro is a case in point. From 2009 the Swiss National Bank (SNB) pegged the franc to the euro at CHF1.2/euro. This resulted in the franc depreciating by roughly 7% against the majority of currencies from its pre-peg low.

On 15 January 2015 the SNB depegged the currency without warning, causing the franc to fall by 14.5% on the day. However, over the next two months the franc recovered, falling by roughly 8% in comparison to the CHF1.20 peg; a stark reminder that waiting for the bottom of the market can be a high-risk strategy.

To hedge against the impact of such devaluations buyers may look to invest in currencies which have a negative correlation to their local currency.

Currency shifts in markets are underpinned by several factors, the most significant being economic fundamentals, political and geopolitical risks and future expectations. From a stuttering global economic recovery to elections and referendums, 2016 provided numerous events of influence.

From the perspective of an investor looking to exit a market, British and Turkish homeowners abroad have seen the most significant returns over the last year, as a result of currency movements.

Sterling-denominated buyers who bought a prime property in Berlin in Q4 2015 and sold in Q4 2016 would have seen a 26% return and Turkish lira-denominated buyers a 27% return. A Euro-denominated buyer would have realised a 9% return over the same period.

While currency shifts can be significant, it is important to keep in mind the fundamentals which underpin property markets, these can be the most significant drivers of performance.

Taking Berlin’s five year returns as an example, of the six currencies that have outperformed the local market over the last five years, all have experienced sudden political or economic upheaval. The imposition of sanctions on Russia and the recovery in the price of oil has influenced the ruble. Uncertainty underpinned by political instability (Malaysia and Turkey) and referendums (Turkey and the UK) have led to depreciations in these countries’ currencies.

After these sharp depreciations, buyers denominated in these currencies have been subject to a material fall in their buying power. On the other hand, existing investors who are looking to repatriate their capital could use these deprecations as a method to enhance their returns.