Personal Investment & Financial Planning Q`s/Rent prices vs property prices

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Question
Hey John,

I was hoping you might help me out with a doubt I'm having regarding both rent and property prices: in a context of uncertanity regarding monetary policy (market is expecting a devaluation of local currency vs USD) property prices tend to drop, and drop even more when the devaluation takes place.

Can the same be expected of rent prices? Will rent prices drop with property prices when a devaluation takes place?

I understand that this question is more thoretical than anything else, but I appreciate any insight.

Thanks in advance!

Regards,

Felipe

Answer
Hello Felipe,

There is a lot to consider in your question.  Rents, property prices, foreign currency fluctuations and the effects on local real estate value.  I will try to address your basic question.

Property prices and rents are of course closely related.  Rent is just the use value for a real property, whether it be commercial or residential.  The value of any asset is a reflection of its use value.  However, your question appears to be concerned with what happens to real estate values, and therefore rents, when there is a major change in exchange rates.  I think you are asking what do local real estate values and rents do when the local currency devalues against a foreign currency, in this case the US$ being the foreign currency.  Property values in US dollar terms will quite probably decline following a "devaluation" (that is in parentheses because I think there is a distinction  between "devaluation" and "depreciation"), but in local currency terms the nominal value of real property and rents is likely to rise. Particularly if foreign investment is a significant consideration, given the possibility that local real estate may look inexpensive after the decline in the local exchange rate vis a vis the foreign currency.  Real estate is probably not a great asset class to demonstrate the concept of "purchasing power parity", but this equilibrating pressure is still instructive.

I think it is important to remember that real estate value is a very location specific phenomenon, and probably more influenced by local supply and demand than by currency fluctuations.  If you are investing in real estate across borders, then of course currency fluctuation can have a big effect on your asset values, but it is important to analyze the currency effect separately from the intrinsic local value, in local currency terms, as the starting point.  

Hope this was helpful.  Good luck.

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John Guilford Kerr, CFP, CFA

Expertise

I can answer questions related to personal financial planning, asset allocation, private equity investment analysis, fixed income, mutual fund, ETF, and stock questions, estate planning (basic), education planning, insurance planning, and business financial planning.

Experience

I have thirty-eight years of experience in finance, in the U.S. and internationally, for both public and private corporations. I have specialized in personal and small business financial planning and investment advisory services since 2005.------ - ten years commercial banking, New York, Paris, Houston, Charlotte, Atlanta---- - six years treasurer of a publicly traded health care company, Philadelphia----- - six years international project finance (Bechtel), San Francisco, Manila, London----- - five years head of international hotel development (Hyatt), Chicago---- - eleven years personal financial planning.----- Registered Investment Adviser, Hawaii---- FINRA General Securities Representative - Series 7---- FINRA Uniform Combined State Law - Series 66---- Resident Producer Insurance License, Hawaii-, Accident and Health or Sickness, Life, Variable Life and Variable Annuities

Organizations
CFA Institute of Hawaii---- Certified Fiancial Planner Board of Standards, Inc-----. National Association of Personal Financial Advisers----- Financial Planning Association----- National Association of Tax Professionals

Publications
Project Finance Yearbook - 1997 / 1998 "Manila Water & Sewerage System Concession"----- "The Road To Helsinki, An Analysis of European International Relations Leading to the Conference On Security and Cooperation in Europe"' published 2015.

Education/Credentials
Certified Financial Planner, Certified Financial Planner Board of Standards, Inc.---- Chartered Financial Analyst, CFA Institute----- Certificate in Financial Planning, Boston University---- Masters in Foreign Affairs - University of Virginia---- Bachelors of Arts, Government - Ohio University

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