Effect of Currency Devaluation on Real Estate

The effects of currency devaluation policies on real estate depends on the country of origin of the investor. For American investors, currency devaluation has a negative investment effect domestically and internationally by acting as a stealth tax or premium paid on real estate investments. Foreign investors, however, receive a discount on U.S. real estate purchases due to the favorable foreign currency conversion rate disparity. As a result, foreign investors investing in U.S. real estate, are able to convert their currency into more dollars, which effectively makes real estate less expensive for foreign investors while increasing costs for American investors.

Currency devaluation, monitored via the dollar index, is -- a government monetary policy that intentionally devalues (reduces in value) the domestic currency relative to other international currencies by printing money. Governments engage in this activity to reduce trade imbalances -- a phenomenon whereupon a country imports more goods and services from a foreign country than it exports to a particular country. Another result of devaluing currency is that government debt is significantly reduced, because the government is paying debt holders (treasury bond investors) with cheaper dollars.

United States currency devaluation occurs when the government prints money. This results in increased supply, which decreases demand, thereby lowering the value of the dollar. However, real estate prices do not follow the same principles. Currency devaluations only impact the value of a currency against other currencies and have no direct impact on prices, but does create negative investment consequences. For example, a $500,000 home selling on the U.S. market is $500,000 regardless of whether or not the USD (U.S. dollar) is valued at $1.00 or 74 cents relative to other currencies.

The following example analyzes the effects of currency devaluation on a European and an American investor investing in a $500,000 rental property in the United States. At the time of publication, one Euro (western Europe's official currency) purchases $1.44 USD. Whereas, an American investor's dollar currently has 74 cents worth of purchasing power. Regardless of which investor purchases the property, the fact is that the cost is $500,000. The effective result for both investors is that the American effectively pays a 26 percent premium, while the European receives a discount. Stated differently, the American investor pays $130,000 more than the European due to dollar devaluation.

Wealth destruction is a direct result of U.S. government currency devaluation policies which adversely impact real estate investors. Real estate provides investors essentially two benefits: return on investment (ROI) due to property value appreciation upon sale; and rents received during ownership. When the dollar is devalued the ROI, in real terms (actual return), on property values is substantially impaired. For instance, an investor receiving a 26 percent return on investment on the sale of property, in real terms, must subtract the decline in the value of the dollar (plus add in inflation) to determine the actual realized gain or loss. Regarding rents, every dollar received that purchases less than a dollar of goods is, by definition, a destruction of wealth.