The real estate sector has long been a favorite of investors seeking stability. Nowadays, it has become even more rewarding due to the ease of buying and holding properties overseas. However, one thing that international real estate investors must be wary about is the currency exchange rates.
In this market, investments are all focused on long-term rewards. Meaning that your monthly yield won’t be all that big, but it will add up to a steady stream of income over time.
But because it’s not overly abundant in the first place, currency exchange rates might “eat up” a large portion of it. That’s because they make you lose some money when you make mortgage payments, or pay your property management company, or make any other transfers necessary for property maintenance. A faction of your returns is lost as well because it needs to be exchanged from the tent’s currency to the investor’s.
This is something that needs to be considered along with all of the other typical real estate investment questions to ask.
What Affects FX Rates?
Those things considered, currency exchange rates matter significantly for any real estate investor. Therefore, you need to understand how they are formed and what affects them. The factors that play a part in the formation of FX rates include, but aren’t limited to:
Countries’ monetary policies
GDP and its changes
Balance of payments
Trade relationships between nations
To get some idea of just how important these factors are, you can check how the US-China trade war affected the forex market. This situation has strengthened the US dollar, so it reached the highest value in years.
The complicated relationship between China and the US has only gotten worse instead of resolving. Also, it’s affected a variety of other currencies as this trade war both created and destroyed many trade opportunities for other countries.
Smaller developing nations, in particular, are experiencing lots of volatility at the moment. The Chinese Yuan has gotten extremely weak, which affected the entire country’s economy and its position in the global market.
The disruptive impact of the pandemic on the entire world was so huge that forex trading has all but gone into meltdown. Volatility reigns everywhere now. The USD is one of the few exceptions. Being the reserve currency of the world, the dollar actually managed to strengthen in the face of this new global economic crisis.
Upcoming Changes on the Real Estate Market
For a foreign investor, changes in the global economy and their effect on USD rates matter because they literally determine whether buying and holding properties in the US is worth it. Consider the numbers; today's currency transfers from Australia to the USA are cheap due to the services of money transfer companies. Therefore, you don’t have to worry about losing up to 7% of the transfer on bank fees. However, the AUD to USD rate at the end of May is around 0.65. This means that you’ll get roughly $655 for a thousand Australian Dollars. But in the middle of March, you would have gotten around $570.
The US housing market forecasts looked good in 2019, and the market lived up to the promised growth. However, the COVID-19 pandemic and the global recession it caused made it impossible for the market to grow as it was expected to in 2020.
One might think that the strengthening of the USD would help. But the truth is the opposite. With all the havoc that the pandemic wrecked on forex markets, it’s become much harder for foreign investors to buy US properties. Moreover, it’s even hard for them to hold the properties that they have at the moment.
All this leads to one outcome, the US real estate market contracts. Technically, it’s growing still, but the rate of its growth has dropped to almost nothing. And it might go down even further as the coronavirus recession settles in.
At the moment, experts warn that this recession might be long. This means that the real estate market will take a while to recover. If the USD value is high, the recovery will take all that longer.
In Conclusion: What’s in the Future for Real Estate Investors?
With how the situation stands now, the housing market will keep getting slower. No amount of staging tips and other tricks can help one sell their properties fast today. People simply don’t have the money to do this. The consumers’ buying capacity won’t be back until the planet starts recovering from the recession.
That said, one also needs to bear in mind that the market might soon be flooded with foreclosed properties that can be bought. Now there are government programs in place to help people avoid foreclosure during the period of lockdown.
However, lockdowns are slowly being lifted. In the meantime, the unemployment rate keeps growing. This means that when government security is gone, many people will still have no chance of making mortgage payments.
It’s impossible to predict how exactly this will affect the housing market. On the one hand, this should cause a drop in prices. Therefore, cash-heavy investors will have a chance to buy. It's important to remember that all real estate is local so the market could go down in one location but thrive in another.
On the other hand, USD exchange rates might prevent many international investors from taking this chance.
The exact future might be murky, but it’s still a fact that the real estate market is one of the safest investment opportunities. This particular factor matters the most during a global recession. With the stock market crashing and forex markets not far behind, real estate has fewer risks. However, only investors with a lot of cash on hand will be able to benefit from this situation in any way.
Lending has almost ground to a halt globally. Therefore, one can’t count on getting good mortgage terms to become a real estate investor with minimal resources.
About the author: The above article on how currency exchange rates affect real estate investment was written by Jane Koval. Jane is a freelance writer who's interests range from the latest e-Commerce trends to traditional folk culture and adventurous traveling. She always stays open to new ideas and expertise to make her writings handy and captivating for the readers.