Globalization offers international real estate investors the opportunity to create wealth from real estate investments around the world. Despite the continuing uncertainties caused by the coronavirus outbreak, the real estate sector remains one of the most attractive sectors for investors around the world seeking financial stability. When investing in a foreign real estate market, there are several factors that you should be aware of. These include the development of supply and demand for residential properties in the target market, rental taxes, interest rates (if you want to borrow in a foreign currency), and mortgage rates. In this article, we will focus on exchange rates and how they affect your real estate investment decisions.

Understanding exchange rates

The simplest and most accurate way to define the term “exchange rate” is to say that the value of one currency is when it is transferred to another. For example, the price of the US dollar is against the Australian dollar or the Japanese yen. Exchange rate fluctuations are due to many economic factors such as inflation, monetary policy, consumer confidence, the balance of payments, and GDP dynamics. In most cases, this fact seems to be important for people planning a trip to a foreign destination. However, the indirect effects of exchange rates and their fluctuations are much greater.

Exchange rates, or anything related to them, may not influence your investment property purchase decisions if you only research the local real estate market. On the other hand, if you are planning to expand your reach overseas, you will have to contend with exchange rates. While there is a list of exchange rates that you can refer to daily, their impact on the housing market is unclear. Here you can find all the information on the relationship between the 2020 exchange rate and the real estate sector.

# 1. Foreign real estate investors

The first thing you need to understand is that exchange rates primarily affect foreign real estate investors. This volatility can have a significant impact on the number of foreign investors buying into the market. The question is, which currency is growing? If the foreign currency rises, there is usually an influx of foreign investors into the real estate market. When the value of foreign currencies starts to rise relative to a destination country, foreign investors have more purchasing power and therefore can buy more assets.

Imagine a situation where you are investor A, a US real estate investor, and investor B, a foreign investor. In this case, you both have the same amount of resources (in their respective currencies). If the foreign currency realizes when the US dollar falls, investor B suddenly has more resources. This increases their purchasing power and makes real estate investments in the US real estate market much more attractive to them.

On the other hand, currency devaluation can also create problems for foreign investors. The problem: If a rental property is located in an area where the currency has been devalued due to exchange rate fluctuations, the value of the rental income can be significantly reduced during the conversion. This means that their return on investment may not be as good anymore. Keep in mind that exchange rates affect not only rents but also utility costs and the cost of living. This is a concern for potential tenants and can affect their decision-making.

# 2. Real estate values

The value of your real estate investment is affected by several factors. In general, the most critical factors are the location, the neighborhood, the condition of the property, and the age of the property. However, if you are planning a foreign real estate investment, you should include exchange rates on this list. Investors can trade real estate in dollars or foreign currencies.

If the real estate transaction takes place abroad, the strength of your local currency determines the value of the property.

When you do business in a foreign currency abroad, the exchange rate has a little direct impact. However, if you use your currency, the strength of your local currency will affect the real estate transaction. In short, the strength of your home’s currency is one factor in determining the value of a property. So if you have the option to use either currency, it is best to buy a foreign real estate investment in a foreign currency if your local currency is strong.

# 3. House prices

Another reason you should keep a close eye on the value of your currency when considering investing in an overseas property market is that exchange rates affect property prices and rental income. For example, if the foreign currency is strengthening against the dollar, consider using more dollars to buy rental property overseas. This implies that property prices will rise and investment returns will fall as the property becomes more expensive to maintain. In these times, selling is more profitable than buying real estate. Therefore, the best time to buy investment property overseas is when your local currency is strengthening against the foreign currency.

Foreign buyers have pushed house prices higher in countries with weak currencies. The weak or undervalued currency attracts foreign tourists, which could be good for the economy. However, it attracts overseas buyers looking for cheap rental properties by buying them from buyers. However, these overseas owners are at risk of currency weakening as this will reduce their rental yield when converted into a stronger currency.

# 4. Inflation and mortgage rates

A weak national currency could drive up inflation and raise interest rates. High-interest rates make homes cheaper and lead to higher mortgage payments. This reduces the demand for loans and housing. Conversely, a strong currency reduces inflation and lowers interest rates. Exchange rates therefore indirectly affect the interest rate you pay on your mortgage. Remember that the value of a currency is sometimes an indicator of a country’s economic stability. In other words, the value of money and real estate can grow at the same time.

With the spread of the coronavirus and economic uncertainties, historic mortgage rates in the US real estate market has fallen to a minimum. Even so, the US dollar still has favorable exchange rates for most other countries currencies. One reason for this is that the United States maintains its position as the reserve currency for much of the world. In addition, the US dollar is still seen as a haven in an economically insecure world. This factor is important in maintaining the relative value of the US dollar.

The baseline

You now have an understanding of currency exchange rates and how they affect the real estate industry. However, you should keep in mind that the 2020 exchange rate is predictable. So if you are planning to buy real estate overseas, you should pay attention to the value of the currency in the overseas market. The same applies to foreign investors who play a major role in the local real estate market. Of course, there is nothing you can do about the value of your currency, but knowing this will help you make better investment decisions.

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