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 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®


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