Currency Matters

by Taimur Khan

 In global prime property markets currency shifts, even in small percentage terms, can have significant monetary implications.

Knight Frank’s latest Global Currency Report assesses the impact of currency movements for international investors purchasing luxury residential properties in key cities around the world.

Currency, ownership costs and taxation are becoming increasingly important considerations for investors, particularly as some global cities have seen price growth moderate in recent months. However, the volatility observed in currency markets over the last 12 months underlines why individuals need to be conscious of the risks, as well as the opportunities, surrounding such currency movements.

Does currency matter? 

Fluctuations in currency markets can impact demand for residential property from international buyers.

To judge the strength of a country’s currency relative to its peers we have looked at effective exchange rates, rather than simply measuring one currency against another. This allows us to see in which direction a particular currency is moving in comparison to a weighted average of a basket of other major currencies.

Between June 2014 and January 2016, the US dollar appreciated by 21%, making it more expensive for international buyers to purchase in the US and data from the National Association of Realtors shows that this coincided with a 25% fall in non-resident property purchases in the US over the same period. Purchases by US residents increased by 10% over the same time period.

Such data needs to be viewed from two standpoints. Whilst appreciation can be costly for those from abroad looking to buy, for overseas investors who already own an asset in the US a strengthening currency can be viewed as an opportunity to enhance returns by selling and repatriating capital.

Time to act

Investors may look to hold out for the most optimal time to buy or sell in an attempt to maximise purchasing power or potential returns. However, this strategy can prove a risky one.

The trading volume of the global forex market is estimated to be over 25 times that of global stock markets; this naturally leads to volatility and therefore carries risk when deciding whether the exchange rate has reached a peak or trough.

Interventions by Central Banks and policymakers can also have far-reaching implications on a currency’s performance and appeal.

The Swiss National Bank’s decision to peg and depeg the Franc from the Euro is a case in point. In 2009 the Franc was pegged to the Euro at CHF1.2/Euro. This resulted in the Franc depreciating by roughly 7% against the majority of currencies from its pre-peg low.

On 15th January 2015 the SNB depegged the currency without warning, causing the Franc to fall by 14.5% on the day. However, over the next two months the Franc recovered, falling by roughly 8% in comparison to the CHF1.20 peg; a stark reminder that waiting for the bottom of the market can be a high risk strategy.

To hedge against the impact of such devaluations buyers may look to invest in currencies which have a negative correlation to their local currency.

Download the Global Current Report 2017 for the full analysis.