Lower Australian Dollar to Benefit Market

Real Estate Market set to benefit from a lower AUD

The property market is rising. Record low interest rates are credited with restoring confidence in the housing sector. But low interest rates may not be the only catalyst causing the market to turn around. A lower Australian Dollar (AUD) is also helping the Australian real estate market. If its international exchange rate remains low, it should also contribute to the sustainability of the market rebound.

Whenever the currency moves decisively in one direction or another, there are winners and losers within the economy. As the AUD soared over the past three years, its impact on affected areas of the economy was widely discussed. The real estate market was negatively affected by the high AUD, but its role seemed to have been overlooked in much of the commentary.

There are four main reasons why a high AUD negatively impacts on the local Australian real estate market.

1) Expats working abroad have traditionally enjoyed being paid in a strong currency (other than AUD) and used this as an advantage when buying real estate back in Australia. It was one of the true benefits in taking an overseas job for a few years. See the world, save some money in a strong overseas currency and buy a property in Australia upon their return home.

But this script and the reality had deviated in recent years as a higher AUD diluted the benefits of earning a salary in Great Britain Pounds (GBP) or European Dollars (Euro). Hence, the strong AUD in recent years had a negative impact on the Australian real estate market.

However, since the beginning of 2013 until the start of July, the AUD has lost 6% against the GBP and 10% against the Euro. These sharp falls in the AUD, which are predicted to continue, have now re-opened the way for expats to get back on track and buy into Aussie real estate.

2) Overseas investors have been nonexistent in recent years. On a global scale, our real estate prices skyrocketed as the AUD rose to record heights. But as our property market hit the doldrums throughout 2012, it actually became more attractive in the eyes of overseas investors. This in turn dampened demand for our new developments, which caused excess supply in this area along with unsold inventory. There are an increasing number of reports now about rising demand from Chinese investors in the Australian property market.

3) Australians buying/investing offshore was rampant throughout 2011 and 2012. The US housing market seemed to have been the market of choice.  As US house prices hit rock bottom and the AUD peaked at $1.10 against the United States Dollar (USD), Aussies bought up big time. It was a double whammy – buying into a soft housing market with a strong Australian currency. Now, as the US market slowly begins to rise from the ashes and the AUD pulls back, investors will no doubt look closer to home for their investments.

4) New arrivals immigrating into Australia were more likely to rent than buy in recent years. To move from the UK, China or Europe to Australia and buy a house upon arrival, means they effectively buy in their previous currency. When the AUD hovers around its long-term average, this is quite an achievable prospect for new arrivals. In recent years though, the excessively high AUD meant many people immigrating here opted to rent instead of buy, in the hope the AUD would eventually drop.

These four factors weighing on the market as a result of our strong currency over the last few years, will begin to have the reverse effects now as we adjust to a lower currency. Global investment banks are not in agreement about where the AUD will head in the next two years. Forecasts range from $0.75 against the USD to $1.05. From a local housing perspective, lower is better than higher.

To predict how the property market may play out overall, it would also be wise to consider fundamental factors other than low interest rates and unemployment. Currency movements are not really factored into many discussions about the property market, but their effect is far more powerful than is generally acknowledged.

 

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