So, the dollar is on its way down again following more unhealthy economic data and statements by the Federal Reserve suggesting recession is virtually unavoidable now. Whilst this is going to make property in the US - such as that Florida villa you've always been promising yourself - a lot cheaper you do need to think through all the implications of the currency risks and benefits you are exposed to.
Don't forget to hedge
Hedging will be familiar to any banker or investor. It has nothing whatsoever to do with green fingers or property boundaries but everything to do with managing risks. Basically, when you hedge something you pay a (generally) small fee to remove the risks in a transaction - a little like insurance. In the big world of international finance it can get a lot more complicated - buying different types of asset so that price rises in one are cancelled by falls in others - but for most of us it involves fixing interest rates or exchange rates now rather than leaving it to chance.See a previous piece I wrote for an example of the costs of not planning ahead when buying abroad in a foreign currency.
So, is now the time to buy?
The problem with making property purchase decisions based around currency values is that the two are entirely different asset classes and behave in utterly varying ways. Property is a long-term investment - even if you hold it for a mere 12-18 months this is long-term in currency speak. Currencies fluctuate by the second - remember poor Norman Lamont on Black Wednesday? He couldn't change things fast enough to keep up with the movements in currencies on one day so how can you expect to do so over months or years?If you have decided you want a property abroad, say, in the US, then a beneficial swing in the exchange rate may make it more affordable or leave you a bit more to spend on the extras. But be careful - if you are paying for the mortgage in US$ or receiving rent in US$ then the exchange rate needs to be monitored carefully. It's always best to "match" your incomings and outgoings in such circumstances as then you don't have to worry about the exchange rate to the same extent - have your rent paid in US$ and pay your property taxes, mortgage and upkeep costs from that source.
Will I make more money if I buy now?
Again, don't try to second-guess the currency markets when dealing in property - do all your calculations in the same currency (preferably the one you are going to have to use to make the purchase and receive any income) and only hedge the bits you cannot match yourself. If the dollar does strengthen again later this year or, indeed, at any time between when you buy the property and when you sell it, you could make a substantial gain even if the value of the property has remained fairly stable. But the converse can also be true - gains in property value can easily be wiped out by currency movements. Your reasons for purchase should always be currency-free. There will be plenty of vendors of all sorts of goods, not just property, screaming at you that the low value of the dollar makes this the time to throw money at the US. The truth is that it is the perfect time to do so if you had already determined you wanted to buy something there - the currency movements now mean you can get more for your money. But just because the dollar is cheaper doesn't make the investment decision clearer - some might even say it muddies the waters more.....
