'Euro' Outta Here! Foreigners Lose Purchasing Power

Posted by urbandigs

Tue Apr 13th, 2010 09:53 AM

A: Okay so my headline could be a bit better. The reason I have fewer real time reports from the field is that most of my clients that intended to purchase a new home, already have. I have nine deals done in the last two quarters, five of which sold and four of which are still pending. Currently I have two active negotiations ongoing with a third on its way. But my schedule is no where near as hectic as it was for the first three months of 2010. That means, I am not out there viewing property and submitting offers as actively as I was for the past 6-8 months or so - as many of my clients are aggressively looking for months before ultimately signing a contract for their new home. However, I thought it would be interesting to see how the dollar's rise might affect a foreigner who might be looking to buy in our market over the past few months. The findings may intrigue you.

Lets go back in time exactly 5 months: HOW HAS CURRENCY TRENDS AFFECTED PURCHASING POWER FOR BUYERS IN EUROZONE AND IN THE UK?

First Step: Put the currency moves into perspective! To do this, all you need is to show how much less house the Euro/Pound can now buy over here compared to only five months ago by doing some reverse math. How many US dollars could 1 Euro buy today compared to only five months ago? Here is a chart showing the decline in the Euro/Pound against our almighty US dollars (I cant believe I said almighty).

euro-pound-manhattan.jpg

November 13th, 2009 - 1 EURO buys $1.4892 US dollars

April 13th, 2010 - 1 EURO buys $1.3571 US dollars (updated 10:15am)

Next Step: Take an example and convert the currency! Here is how the math works out for a buyer with say E1,000,000 (Euros) to convert to US dollars and buy real estate in Manhattan.

November 13th, 2009 (5 months ago) - E1,000,000 BUYS $1,489,200 worth of US real estate

April 13th, 2010 (today) - E1,000,000 BUYS $1,357,100 worth of US real estate

Based on currency trends over the past five months, look at how much less house an investor with Euros can buy right now of US assets - including Manhattan real estate! In this case, the foreign investor can buy $132,100 LESS HOUSE! All this because of the rising value of the US dollar! If it were British pounds and the same time period, the 1M pound investor would see a $124,000 reduction in purchasing power. All on currency trends alone.

Now, most will ask why I stopped short at five months? Did I cherry pick that time period? Why not go further back? Fine. If you want to go back two years ago, the EURO was at $1.5954 against the US Dollar and to compare to today would mean a 1M Euro-investor would lose more like $230,000 of purchasing power compared to where the dollar is today. A one year trend would show a slight increase in purchasing power to today's rates.

I stopped at five months because that is where the most recent dollar rally started and the move was noticeable and sustainable thus far. In other words, a trend could be in place and we should keep our eyes on if it continues. We are at now now and buyer psychology tends to absorb market forces over the very near term, say for the past few months both behind and what may lie ahead of us - markets are future discounting mechanisms and investors love to place bets on recent information and trends. Certainly buyer psychology is nothing like it was if we go further back in time, say 12 months or 18 months ago. Those fear days are looong gone. So here we are today, in the midst of a 4 1/2 month rally in the US dollar, and wondering how foreigners might be viewing our markets?

My opinion has to be that investors savvy enough to put money to work in foreign real estate markets certainly should have a pulse on currency trends; stronger dollar = less purchasing power of foreign investors. My next opinion would be that foreigners that already bought Manhattan property on currency trends alone, would be more willing to sell the investment now that the asset has risen in the local currency. If the current trend continues, both these opinions may start to mean something.

Brokers have a tendency to spin everything positive explaining how its always a good time to buy - typical of any commission based industry. Which is why I was stupefied by this MSNBC article in late March, "Foreign buyers return to Big Apple real estate: Dollar’s rally prompting some to jump in before property gets too pricey":

The dollar's recent rally, rather than putting off foreign buyers, is encouraging them to jump into the market before it rallies further and drives up prices, insiders say.

"People are thinking it might run away from them because there are these predictions the dollar will even go further," said Richard Martin, specialist at DE Capital Mortgage. "We are talking a lot about foreign borrowers lately."
Ummm, ok. So I guess the spin goes something like this:

Manhattan property prices rally as US Dollar weakens and entices foreign demand
Manhattan property prices rally as US Dollar strengthens and foreigners fear runaway prices
Foreigners flock to US dollar based assets before its too late: Manhattan property benefits

Anyone else confused by this? Now Im not saying foreigners are fleeing our markets; that is to mis-interpret this discussion. The reality is the reflation trade mentality and boost in confidence as all asset classes benefit from a fed engineered carry trade environment, is in play both for local buyers and foreign buyers. Tons of money was made in the last 12 months and will be put to work in our market. What I'm saying is that the purchasing power of foreign dollars has declined noticeably in the last 4-5 months: and its worth a discussion!

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