Is the Strong Dollar Good for Real Estate or Not?

The world is turning to the U.S. dollar. What does this mean for real estate?

Much of the rest of the world economy is in a crummy funk—Europe isn’t recovering and the euro’s in danger again, for instance, and China’s not surging the way it used to—so the world is turning to the U.S. dollar. Among other effects, that’s driving the value of the dollar up—it’s nearly at parity with the euro for the first time, for one, and stronger a lot of other places too (just as a Brazilian)—which might change the complexion of real estate investment here and abroad. In theory, a stronger dollar should make it more expensive for overseas investors to land U.S. properties, while U.S. investors ought to have more purchasing power in overseas markets. But it’s never quite that simple.

For one thing, the largest foreign property investors are already trading in dollars, since it’s the de facto currency of the world and widely used in investment transactions. Besides that, sophisticated investors who use other currencies adjust their strategies to account for currency fluctuations, especially the gradual kind that the recent rise of the dollar represents. A slowly rising currency might eventually put some foreign investors off as their currency declines, but in the short- to mid-term, investors make the small adjustments necessary to keep the deal alive, if they believe the returns justify it.

Also, if the property or portfolio in question represents a fundamentally sound investment, and the investor is planning a long-term hold, it’s unlikely that a few percentage points of currency flux is going to derail things in any case. Sudden movements are another matter. In January, when the Swiss franc soared by almost 30 percent against the euro overnight and thus made Swiss properties that much more expensive for investors trading in euros, that reportedly put the kibosh on some early-stage deals. Historically, the movement of the U.S. dollar (with a few exceptions) hasn’t been that drastic against other major world currencies, and it certainly hasn’t been recently.

For U.S. investors, the strong dollar probably does mean more buying power overseas, but again, things are not quite so simple. A stronger currency might be a good thing at the front end of the investment, but it doesn’t change property fundamentals. A solid overseas play is still going to be a solid play; and a risky play is still going to be risky, reflecting factors that are more important to generating returns than currency flux. Also, considering that the returns of overseas assets tend to be denominated in local currency, a further weakening is always a possibility that might offset whatever strength the U.S. investor had going in.