Dollar Devaluation To Hurt Real Estate?

Would real estate held in a 401(k) be a good investment during a devaluation? If the dollar were devalued would that make real estate go up or down? It is tempting to think that if the dollar was devalued that foreigners would rush in to buy real estate thus making the price go up in local dollar terms. If a currency is devalued then that may induce a period of low interest rates which will help increase the value of real estate (if people believe the currency has become so undervalued that no more devaluations will occur and if foreign funds flow into the U.S.to buy low cost things). A devaluation would help move toward a full employment economy which would help real estate go up.

However, if investors believe that a country will be perpetually devaluing its currency then the country’s interest rates will need to rise to higher than normal levels to compensate for that risk. If interest rates rise suddenly to very high levels then that will kill off the real estate market. Most real estate is financed by debt and much of it is adjustable rate loans, so a sudden rise in interest rates could be a problem for real estate values. Also commercial real estate even if bought for cash attracts investors when bond yields are low, so if bond yields go way up then new buyers of real estate may think they can make more by investing in bonds, assuming they think that interest rates have peaked and stabilized.

The crucial valuation component of real estate is the rental cash flow. If a devaluation of the dollar occurs the tenant will pay the landlord with devalued dollars and the building’s cash flow will not improve (in international currency terms) and thus it is possible the building will not go up to match real estate values in other countries.

A gigantic mistake would be for real estate investors to use a mortgage denominated in a foreign currency because after a devaluation then the loan balance principle payments would be dramatically higher. This happened recently in Hungary when borrowers used Swiss Franc loans and when the Forint was devalued the borrowers had to pay the loan in expensive Swiss Francs.

In general, a currency devaluation stimulates the economy and will make depressed real estate go up because it creates jobs that enable people to afford to increase their demand for more real estate.

During the coming global recession I expect Europe to be depressed and to do a devaluation of their currency and America will be a relative value safe haven thus funds will flow into the U.S., making the dollar go up. In anticipation of this it has already started. The coming devaluation of Greek currency after they leave the Euro will produce a chance to buy their real estate at a discount. The idea of buying real estate after a devaluation makes more sense if the local economy is dependent on cash based purchases rather than adjustable rate mortgages. If the U.K.devalued, since they are dependent on rapidly adjusting adjustable rate loans, then their interest rates could go way up making their real estate unaffordable, thus permanently pushing down their real estate values. Perhaps a hedge fund could short U.K. real estate and go long Greek real estate, but only at the right time and probably it would be imposssible to hedge these two trades or to do it at the same time.

If an investor holds real estate in a 401k that is risky because they are many tax traps, including lost tax savings opportunities, associated with that. It is far better to hold rental real estate outside of a retirement account. 

Investors should seek independent financial advice.

About the author

Don Martin, CFP®

7 Comments

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  • I think that is one of the so much significant information for me.

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  • Christina, much of what you state as fact is quite the opposite.

    The Mexican peso 10 years ago would get you only 92 cents of a U.S. dollar. Today it will get you 6 cents, and half of that drop was in the last three years.

    You stated the U.S. dollar has taken a hit of .25. Against what ? What period in history are you referring to ? In the last three years, it has strengthened that much against most currencies south of the border…. Central and South America. It has done as well in Asia’s developing countries. It has strengthened 22% against the Eruo in recent years from the the Euro’s peak of costing $ 1.39 U.S. dollars for 1 Euro to costing $ 1.09 today. All this could reverse tomorrow, but your history is not correct.

    You would have been living woefully underinformed for the last three years not to know of the U.S. dollar’s strengthening over virtually all currencies including the Swiss franc.
    If you had moved your dollars from the U.S. to Canada three years ago, you would have lost over 30% of your money by now. That decline started when oil was priced at $ 90 which has dropped today under $ 40. Yes, as you stated, send your money to oil export dependent Canada now if you believe in a rapid reversal of oil prices soon.

    Do take a look at those currency charts at http://www.xe.com. You may have been interpreting the labels backwards.

    Your statement that the dollar is worth .75 means in relation to what ? You didn’t say.

    You state real appreciates when the dollar goes down. We tried that in 2008 -2009. There was a severe drop in real estate prices. Surely you knew that. It was in all the newspapers.

    You state that the next currencies to appreciate against the dollar include the Real (Brasil) and the Euro. Don’t hold your breath. Brasil is in a terrible mess. Europe is in worse shape than the U.S. economically although the U.S. has unfathomable indebtedness and its infrastructure is rated as a grade of D by civil engineers among modern economies. Europe’s political unrest is becoming serious. Europe is threatening to go Quantitative Easing, and that didn’t turn out well for the the U.S.

    My recommendation, Christina, is to make it a habit to daily survey financial web sites like CNBC.com which has on its first tab a choice of Internatinal or U.S. I am familiar with your Porter Stansbury and even sympathetic to some of his views. It is more fun, in my opinion, knowing the facts as you read yourself the current events of a financial mainstream media which will temper your opinion of doom and gloom, at least in the timing of it and make you a more careful decision maker as to how best to protect your financial self.

  • I FORGOT TO MENTION THAT THE NEXT CURRENCIES TO APPRECIATE ARE THE renminbi and the Real(brasil) and the Euro. The Canadian dollar already appreciated .29 cents to the USD 1 so it’s too late to get in. Porter Stansberry and Associates have CIA information about how billionaires make their money off of currency war deals. They sell it as their IMPACT strategy report. In another useful report about China’s Yuan/Renminbi it says that during the dollar depreciation like during the depreciation people want to own real estate, gold, silver, stamps, oil(skyrockets),ect.

  • AMERICANS MUST HOLD ONTO THEIR REAL ESTATE ESPECIALLY NOW. THE USD TOOK A HIT OF .25. AND THIS IS GOING TO GET WORSE. IF YOU NEED TO SELL YOU WOULD NEED TO CONVERT YOUR USD INTO ANOTHER CURRENCY LIKE THE CANADIAN DOLLAR FOR SECURITY. THE PESO IS EVEN GOING UP AS OUR DOLLAR GOES DOWN. THIS IS PART OF WALL STREETS PLAN. IT IS UNAVOIDABLE. THE OTHER MAIN PART OF THE PLAN IS FOR FOREIGNERS ESPECIALLY CHINESE PEOPLE TO BUY AS MUCH REAL ESTATE IN THE U.S. AS THEIR YUAN APPRECIATES.

    I WOULD HOLD ONTO REAL ESTATE. REAL ESTATE WILL APPRECIATE AS THE DOLLAR GOES DOWN AND IT WILL BE A CHINESE MARKET OF BUYERS. IF YOU NEED THE MONEY CALCULATE HOW MUCH YOU WILL LOSE BASED ON THE DOLLARS DEPRECIATION. THE USD IS NOT A REAL US DOLLAR USD. IT IS .75.

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