Does A Weaker Dollar Accelerate Foreign Demand?

Posted by urbandigs

Fri Nov 16th, 2007 11:22 AM

A: A great discussion and purely my opinion on this topic. As the US dollar continues to fall against other major currencies, people mis-interpret the trend to mean that X number of additional buyers are pouring into Manhattan real estate! In my opinion this is an incorrect assumption! It is not that cut and dry and to dismiss macro economic events, confidence, and near term expectations as part of this currency trade equation is a mistake. There is no anecdotal evidence to support a re-acceleration in foreign demand; its mostly theory and we are left to ask the brokers what they are currently seeing for a clearer picture. In my opinion, confidence trumps the weakening dollar in the mindset of foreigners.

falling-dollar.gifThere is no real evidence of a re-acceleration of foreign buyers RIGHT NOW, as the US dollar falls further against international currencies. Forget what happened already and the foreigners that already put their money to work because of currency trends; that is old news. In order to dig deep into this topic, we need to figure out what is happening right now, as the dollar continues to weaken at the same time that a credit crunch is going on. I wonder:

a) does the credit crunch and uncertainty that comes with it affect the mindsets of foreign buyers even as the currency trade for Manhattan real estate gets more attractive?

b) is there a re-acceleration of foreign demand in terms of NEW MONEY coming in right now, as we enter an uncertain wall street bonus season?

UrbanDigs Says - NONE of my buyers are foreign investors! I get a constant stream of buyers asking me to work with them and I can only recall 2-3 requests in the past year or so of foreigners inquiring to use my services. I'm not even seeing any foreign demand for my sales listings. If I had to put an estimate on it, I would say 10-15% of the entire Manhattan buyer pool is comprised of foreign demand. I think new foreign money is being somewhat affected by the credit crunch as caution negates and acceleration that may have taken place with a further weakening dollar in an environment without credit issues. However, foreigners still have a currency trade here and can get significantly more bang for their Euro, Pound, Kroner, Bhat, whatever, right now. Additionally, I think foreign demand is more focused on the higher end product.

Many foreigners already made their purchases here in Manhattan as the weak US dollar is not a new story! Every media outlet, blog on NYC / Manhattan real estate, and TV segments on the topic have been discussing the weak US dollar as one piece of the puzzle in keeping the market here so strong, even as the nationwide housing market floundered. We should be grateful that we had this element on our side, helping to push inventory levels lower as nationwide inventories soared! So, what has really changed?

As the US dollar weakened further in the past 3-4 months, so did the macro environment! Here is what has changed:

  • Credit Crunch - Bear Stearns starts it in early August

  • Eurozone Housing Market has been slumping*

  • Major write-downs in brokerages, banks, & lenders; Northern Rock is Europe's version of Countrywide Financial

  • Investor Confidence has clearly dipped a bit going into an uncertain bonus season


    • *According to Forbes article, "Credit Crunch Hits UK House Market":
    The impact of the global crunch is being felt by the British housing market. House prices in the country have fallen at their fastest rate in nearly two and a half years, according to data from the Royal Institute of Chartered Surveyors released Tuesday. "Interest rate rises, the recent credit crunch and subsequent tightening of lending conditions have all had an impact upon demand," said the institute on Tuesday.

    It added that a shortage of housing supply could help support house prices. "The housing market is seeing the awaited slowdown that many had been expecting, with modest falls reported across most U.K. regions," said RICS spokesman Ian Perry.
    To say all of this had NO IMPACT on foreign demand / confidence for Manhattan real estate is crazy. To say that foreign demand for Manhattan real estate has accelerated because each Euro now buys $0.05 more US dollars, is crazy! As the US dollar falls against the Euro, it is more THEORY than REALITY that demand will accelerate when so much surrounding the macro environment has changed towards the negative! In short, there is no evidence that for every penny the US dollar loses against the Euro, 'X' number of additional buyers will pour into our marketplace.

    I'm not saying there is not an attractive trade here. There is, and there has been for some time. Thanks to foreign demand, many of our new development inventory has gone into contract, in addition to many existing resales; especially the higher end. The element of foreign demand has helped keep Manhattan inventory at such tight levels, which in turn helped keep our marketplace shielded from the nationwide housing slump. But there are other elements at play here helping to support our market:

    a) tight inventory**
    b) rising rental prices**
    c) trend towards living closer to where you work
    d) strong economy / strong jobs**
    e) years of very strong bonuses**

    Notice the asterisks? I put those next to the elements that can easily be effected by the current macro environment; which is why I discuss macro on this site! Do you really think foreigners don't know this? They do, and they have been exposed to the same headline shock that we have been exposed to, resulting in a dip of confidence. That dip in confidence can very easily turn an investor cautious, and in my opinion that is more powerful a force than the currency gains the Euro has enjoyed over US dollars since the credit crunch hit the media back in early August.

    Am I alone in this way of thinking? I asked a few brokers their opinion on the topic, some agreed, some didn't:

    Douglas Heddings of TrueGotham.com    :
    This is hard data from my current transactions...the one condo that I have in contract is being purchased by an investor from Spain for his daughter. The other condo I have has been viewed by several foreign buyers with none making offers. The rest of my properties are co-ops so they don't appeal to most foreigners. Yesterday I received a call from another investor from London who is coming into town to purchase a "positive cash flow" investment property for $1.5M to $2.5M (good luck with that right!). Having said all of this, I just don't see the masses of foreign investors pouring into the Manhattan market like I've been reading in the press. One thing that I would add is that the information that I'm getting from new development projects that I visit is that as many as 20-30% of the projects are being purchased by foreigners either as pied a terres or investment properties. Who knows how accurate that info is if you know what I mean?

    Peter Comitini of Comitini.com at Corcoran    :
    I haven't been working with many foreign buyers personally which is not unusual for me. But most agents in my office can cite a recent deal that involved overseas money. On the listing side, of 10 offers I've received on an $8.5M exclusive for sale, 8 have been from overseas buyers. These buyers have tended to be in very strong cash positions as well. I think that this is typical of investment caliber properties right now in the $3M to $10M range. I also think that the foreign investment market is more about smaller buildings than condos, as there is more opportunity to bring value to the real estate by design or repositioning. Condos rarely have positive rental cash flow on NYC investment purchases. On an international scale NYC is still well-priced compared to cities like London or Hong Kong. Anecdotally, the market for pied-a-terres is quite strong and I think foreign money is driving a portion of the luxury new development condo market at the high end.

    I think one must be cautious in drawing too many inferences from the world of Wall Street investing to real estate. A tiny fraction of the NYC residential business is a pure investment play. Finally, I just wouldn't get too spooked about the Wall Street executive who's bonus is off 15% over consecutive record years. He still makes a very healthy bonus. People buy real estate because they need it as much as because it's an amazing investment.
    Louise Phillips Forbes of Halstead:
    All I can say since November 1st of 2007 I have received signed contracts and/or sent contracts out to seven New York residents who are making an ordinary life change and buying another home in comparison to the 13 foreign nationals that in three weeks have stepped up to the plate to buy in my conversions or other real property. In their minds they are buying a piece of the rock at a huge discount!!!!

    Jacky Teplitzky of Douglas Elliman    :
    I do see a pick up in demand now from foreign buyers. During the crisis of the credit crunch the foreigners were calling me to find out how this situation was affecting the New York market and I kept saying that it was not affecting the market. They were a bit nervous as they are not that familiar with our specific market and they hear the news from overseas and think of the US as one market. Now that the storm has passed they see that I was right and feel more comfortable. I just finished a 3 day intensive work with a foreign buyer and we could not find the right property because of lack of inventory so that proved my point of a stable market here in the big apple.

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