Property Investment Blog by Stuart Law

Currency Exchange Rate Views for Property Investors

21 January 2009

Updated 31/1/09

As regular readers will know, I occasionally post macro views of probable currency direction and its effect upon property investors.

First a few pointers. Buying a property overseas with no or low deposit means you have not transferred any capital at the current exchange rate so it is only any profits in the future that you bring back that will be affected by exchange rate. Property investment is long term, so it's unlikely you can predict where exchange rates will be at the time you sell. Therefore highly leveraged overseas property purchase is not too significant from a currency exchange rate point of view. If you're buying for cash overseas then you want to be buying when the overseas currency is weak in order to get as much overseas currency as possible for your pound. If you're a cash buyer and the overseas currency is strong, such as the euro at present, then just buy it with a very large mortgage and transfer the cash to pay off the mortgage later on when the overseas currency is weaker. For this reason it is not essential to be too concerned about the strength or weakness of a currency when buying overseas, as long as you get your plan right.

The second thing to consider is the mortgage and the rental income, if any. Having both a mortgage and the rental income to pay that mortgage in the same currency helps a lot as swings in currency exchange rates will not affect the mortgage being paid by the rental income. What it will affect is the excess profit on the rental, or any subsidy you are paying to top up the rental income from sterling. At the moment, with mortgage rates dropping, we are very often seeing property investments with very substantial positive cash flow. Buying property in Euroland, for example, at present is an extremely good idea if it is cash positive after mortgage costs because you are currently getting a currency exchange rate of around €1.10 to the pound.

It's a similar story in the USA. The exchange rate collapsed during January to well below $1.40 to the £ as the £ has lost strength in the last few days. It's gone way beyond our original prediction of $1.61 to the pound and although it has bounced above $1.40, as I will say later, we expect the weakness of sterling against the dollar is set to continue. This means that investments in the USA that are cash positive will yield substantial income in pounds sterling at these relatively strong dollar levels.

Euro Forecast

The euro nearly hit parity against the pound recently but the euro weakened sending it back up from €1.02 to around €1.13 to the pound twice now. What is driving this temporarily is the world currency trader view that the UK was in a worse position than Europe. Not so. There was a bit of a realisation about this on 31 December as the euro began to weaken following news that all was not well in Euroland. The euro made it up to €1.13 to the pound but overextended itself and, following the government announcements of huge additional capital injections, guarantees and lifelines international currency traders changed their view again and decided that the UK was in a worse position instead. Not so. We're going to see the euro rate fall back to between €1.06 to the pound and parity . Over the next month or so it is pretty likely that the traders' consensus will change 180° again and we will see the euro weakened dramatically and I expect to see it up at €1.2 to the pound or even €1.3 to the pound later this year - the overall target is around €1.35 to the £ as per the chart below.



Irish and other euroland investors moving their cash over to the UK recently (or right now if they have not already done so) or so should do pretty well as they are not only buying at the best possible moment in the distressed property market but also probably the strongest moments of the euro. Once the euro weakens and the UK market begins to firm up, the combined effect for a euro buyer purchasing in the UK will mean that they are a long way from the best buying opportunity. The UK will come out of the credit crunch sooner and stronger than Europe. Europe has always been weak and the effect of the credit crunch will be to suppress its growth massively for years to come leaving the UK with its flexible currency to power ahead. Watch for some countries getting close to leaving, or actually leaving, the Euro ! Those at greatest risk would specifically be Spain, Greece and even possibly Ireland if its credit rating gets downgraded - Italy and Portugal as outsiders. That weould see the Euro at maybe €1.60 or greater to the £.

There is a last chance of the euro strengthening to parity again but I would not hold out for that - I got out of the euro at €1.785 and now expect new levels of weakness.

Dollar Forecast

We still hold the view that the dollar will weaken significantly in the medium to long term for the reasons previously discussed. However in the short term the US has acted firstly and strongly in the credit crunch and will be the first to come out of recession. We are going to see the dollar strengthened significantly against a weak pound and a weak euro. The recent government announcements in the UK on banking support led to one of the largest currency drops on record when the dollar strengthened to $1.42 to the pound and carried on to around $1.37 to the pound. It has weakened again to $1.45 for now but we expect another sudden rise in dollar strength very shortly - if you are buying in dollars in the near future move now your currency now could see you taking advantage of a rate not to be seen for some time. We see the dollar going to $1.20 to the pound relatively quickly and staying strong for some considerable time to come - perhaps until early 2010 or later. This is of great benefit to recent buyers on the American schemes that we secured exclusively for our clients recently as it had a huge government tax back of $74,000 that is due shortly - a great bonus for our hundreds of investors who bought in. Phase 2 of these great American schemes is coming shortly under different terms so don't miss out this time.


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