So how has the collapse of sterling affected the international property market?

by Mark Benson on December 9, 2008

The last few weeks have seen a major collapse in the value of the sterling against the US dollar and many other currencies of the world in what is turning into a serious problem for the UK government. The ongoing reduction in UK base rates is reducing the attractions of sterling and the ever weakening economy, ever growing budget deficit and general downbeat aura surrounding the UK are not helping. So how exactly is sterling performing against the major currencies of the world?

Sterling against the US dollar

The close relationship between the UK and the US on both political and trading fronts is being severely tested after the sudden demise of the UK currency against the dollar. Over the last 12 months, using average exchange rates for each month, sterling has fallen from US$1.9701 in January to US$1.48 so far in December. This is a reduction of 25% which offers a serious risk to UK-based property investors looking towards the US market.

As we know, the US property market has collapsed over the last 12 months in line with the UK but this reduction in the exchange rate of about 25% will negate much of the benefit to be had from falling US property prices. Unless sterling recovers in the short term this will be a major drawback for any UK-based international property investor looking towards the US and other countries which are linked to the currency.

Sterling against the euro

As more and more European countries join the euro, this is turning into a major problem for the UK where the rate has fallen from €1.3386 in January to €1.16142 in December which is a fall in the region of 13%. While the fall against the Euro is not as marked as that against the US dollar, again we will see much of the fall in European property prices negated by the conversion from sterling into the euro.

Many people are now suggesting that the UK is on the verge of joining the euro with the appointment of Lord Mandelson to Gordon Brown’s government seen as very much a step in this direction. Whether now would be the right time to join, after the sudden demise of sterling against the majority of major currencies of the world, is open to debate.

Sterling against the Japanese yen

While the Japanese property market may not be as popular with UK investors as it once was, after the appearance of China and India on the scene, there are still substantial investment flows from the UK into Japanese property and Japanese businesses. Since January we have seen the exchange rate fall from ¥212.662 to ¥137.726 in December which is a fall in the region of 35%, by far and away the largest reduction in the demise of sterling.

In many regions of Japan the fall of 35% in the spending power of UK property investors into the Japanese market could actually see the vast majority of investors see an increase in property prices when compared to the sterling equivalent just 12 months ago. This more than any other currency reflects the serious nature of the decline in the power of sterling in the international marketplace.

Sterling against the Brazilian real

Brazil has been something of a property hotspot over the last couple of years and many will be surprised to see that sterling has actually appreciated in value against the Brazilian currency over the last 12 months. The average rate in January was Br3.4915 to the pound and in December the rate is Br3.6243 Brazilian real which is a rise of 4%. However it is worth noting that the exchange rate did fall to Br3.04 Brazilian real in August but has since recovered.

This offers a welcome opportunity for UK investors looking at property in the region and will actually see the increased buying power reduce the sterling cost of properties yet further compared to just 12 months ago. This is a rare break for the many UK based International property investors who are under serious pressure in many markets around the world.

Sterling against the Australian dollar

The vast majority of people will be surprised to see that sterling has appreciated over the last 12 months against the Australian dollar at a time when the Australian property market appears to be holding up better than most. The average rate was A$2.23418 in January and this increased to A$2.28395 in December for a net rise over the 12 month period of 2%.

Again, this does not sound like an awful lot for property investors to get excited about, but when you consider that Australia is a prime location for expats and property investors from the UK, many will feel the consequences with their investments.

Sterling against the Hong Kong dollar

Hong Kong has always had a very close relationship with the UK government and UK property investors, something which has still continued even though sovereignty has changed. However, there are major problems for UK investors in Hong Kong with news that the currency has fallen by 25% over the last 12 months from HK$15.3751 to HK$11.4719, which has reduced the spending power of many UK investors.

Hong Kong is in a similar boat to Japan as it is expected to bounce back fairly quickly from the ongoing economic downturn although the effect of any increase in property prices in due course will be negated for many UK investors unless sterling mounts a sharp rally in the short to medium term.

Sterling against the Singapore dollar

Many people believe that Singapore is one of the major business centres of the Far East and as such it has a very large expat community and significant interest from UK based International property investors. News that the exchange rate has fallen from S$2.8183 to S$2.25382 over the last 12 months (a fall of 20%) offers something of a challenge to many UK-based investors.

The country has attracted both UK businesses, UK workers as well as a number of elderly UK residents looking to relocate to the region. The more popular property market in the region is centred around the capital but there are a number of growing property markets in other areas of the country.

Conclusion

This is just a snapshot of the consequences of the fall in the UK exchange rate against many of the world’s leading currencies. Historically exchange rates have tended to move within fairly small bands but the fall against the US dollar, the Euro, the Japanese yen and the Hong Kong dollar are very worrying on a longer-term basis unless sterling can mount something of a recovery in the short to medium term.

{ 1 comment… read it below or add one }

Yes2Property December 12, 2008 at 10:44 pm

I think 2009 is going to be a rocky, but interesting year for the global economy. It sounds that things are turning around in South Africa but only time will tell.

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