A side effect of housing bubbles

by Rob Regan on February 25, 2013

There is lots of talk about 4 major housing bubbles in other parts of the world.  Canada, Australia, Hong Kong and China.  One interesting side effect is how housing bubbles elsewhere can prop up markets here.  The Chinese buying properties in New York, L.A., and here in San Francisco is a common tale.  I personally know Canadians who have purchased investment properties in places like Florida and Arizona.   There are a few reasons this happens.

One is simply that in bubble economies everyone thinks housing in the best investment in the world, so they’re on the look out or other opportunities.  Recently, when they’ve look at our post-bubble markets things look downright cheap.  This is the case of the Canadians I know who bought in Florida and Arizona after those markets collapsed.

Another reason is currency differences.  The U.S. dollar has more or less gone straight down in value since 2002.  To Canadians and Australians, where the U.S. seemed exorbitantly expensive to travel to or buy in not too long ago, now everything looks cheap, real estate even more so.  Similarly, but much more extreme, is fear of an economic collapse in places like China where inflation is rampant, real estate prices are out of control, and there are clear and obvious signs of serious malinvestment like entire cities that have been built and no lives in.  If you’re a wealthy Chinese business person buying a property in another country provides significant security in case things go awry in your own country.

Finally, there are those who trade currencies, and when they envision a big change in value, one way of taking advantage of that is through real estate.  There are plenty of forecasts that now see at least a short term bottom in the U.S. dollar, and see all bubble economies being at tops for their currencies.  The opposite was true 10 years ago where the U.S. dollar was at a top and it would have paid for Americans to invest in these other countries.  Even if the property you purchase doesn’t budget in price, but your own currency goes down 25% compared to the foreign country, you’ve essentially made 25% on your investment if you sell and convert the money back.

What I find most interesting about this idea is how one housing market supports another.  For example, U.S. investors during our bubble may have helped ignite housing bubbles elsewhere.  Now, the other countries with current housing bubbles are supporting the recovery in prices here.  Of course none of this would be possible without low interest rates and easy money.

Please note, this is not investment advice.  There are lots of things that could cause bubble markets to continue to go up, and lots of reasons our market could stop its recovery, and lots of reasons currency expectations could go in the opposite direction.  This article mainly describes what has been happening in recent years.  That said, if you are someone in one of these countries thinking about investing in San Francisco, give us a call.

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