As the Australian dollar has lost significant value recently, developers are likely speculating on the effect this has on the Australian property market.
Having recently dropped from 0.94 USD in September to around 0.77 now (and 0.58 to 0.50 against the GBP, more stable against the EUR from 0.72 to 0.68 in the same period), the AUD is now the most volatile currency globally.
The value of the AUD is predominately affected by commodity prices (particularly coal and iron) and by interest rates. Both of these factors influence the demand of AUD, which impacts directly on it’s value and volatility.
One of the most fundamental points to remember, when continuing to read below, is that predicting the future direction of currencies – particularly ones as volatile as the AUD – is, in reality, crystal-ball gazing stuff. Regardless of the evidence economists give for their forecasts, the vast majority of them consistently get it wrong over the medium- to long-term. So as much as we can consider what effect the AUD will have on the economy over the next couple of years, your guess is probably as good as a seasoned economist’s.
What effect will a lower AUD have on the Australian property market?
There is no simple answer to this question, as it has an effect in a number of different ways, including:
- Strong Positive – It becomes far more attractive for foreigners to buy Australian property. At AUD/USD 1.00, a $350,000 apartment costs US$350,000; however at 0.70, it only costs US$245,000. If they buy at the current exchange rate, they have the potential to make a far larger profit on the sale of the property if they sell [if and] when the AUD’s value rises again in the future. Property Marketers will no doubt be leveraging this fact.
- Strong Positive – Tourism-centric areas, particularly the Gold Coast and Cairns, will likely see strong economic improvement if the AUD remains low, particularly given they are now coming out of a 6 year coma.
- Slight Positive – For Aussie expats and wealthy individuals who have invested in assets overseas, many have been unwilling to bring their money back home for some time now, as they would have received less AUD for their foreign cash. The fall in the AUD may therefore encourage many to bring their money back home – and naturally a percentage of that will get invested in property. The quantum of this is anybody’s guess, as there is a lack of reliable data to show how much Aussies have invested overseas.
- Slight Negative – The influence of price deflation could kick in – why would foreigners buy now, if they can potentially wait a bit longer for the AUD to drop further, and therefore buy at a lower price (and risk not seeing an immediate capital loss in their own currency)? This could therefore cause a pause in the level of demand from foreign buyers until the AUD stabilises.
- Slight Negative – Foreigners who have already bought properties when the AUD was high, may get scared that the currency will drop further and therefore sell now to get some of their investment back. The potential extent of this effect on the property market here is difficult to gauge for a number of reasons; firstly because there is highly conflicting data out there about how much of the market is owned and being purchased by foreigners (particularly over the last 2 years), ranging anywhere from 3 per cent to over 20 per cent; secondly because they would need to incur a large loss already; finally because many – particularly Chinese investors – culturally tend to have a long-term investment profile.
- Slight Negative– The large falls in revenues that the mining companies will now be experiencing is and will continue to cause them to layoff staff. An increase in the unemployment rate naturally causes an increase in foreclosures; however mining industry jobs only comprise a small percentage of total jobs in Australia, so this is unlikely to pose a great effect on the whole, except in mining-reliant areas – which, for most, losses are already evident.
- A relatively strong negative effect in areas reliant on mining, for both residential and commercial property. We have already seen this in many small coal mining towns; meanwhile Perth has started to see a reduction in demand (although the effect on prices there has only been relatively small so far).
- Potentially a relatively weak positive effect in areas that are not heavily reliant on mining.
- A relatively strong positive effect in tourism-centric areas.