There is some advice that is so bad, as an act of public service it is necessary to debunk it. In this post, it’s about foreign real estate, or more specifically, why you should never buy foreign real estate.
Despite all the doom and gloom about US real estate bubbles, foreign real estate–with the possible exception of a handful of countries–is an awful investment, and much worse than US real estate both in terms of greater volatility and more risk.
Real estate crashes are not unique to America. Foreign real estate markets crash all the time, and they are often much longer, deeper, and more protracted than US real estate crashes. In the earlier post Advice to Ignore, real estate in the Bay Area and America, overall, has not only recovered from its 2006-07 peak, but has made new highs in many regions:
10 years is a long time to wait to break even, but it sure beats Japan, which 25 years later is still far from its 1989-1991 bubble highs:
During the final stages of Japan’s post-WW2 ‘miracle’, there was the belief that Japan would eventually ‘buy out the world’, having in 1989 bought out Rockefeller Center for $846 million, and in 1990, the Pebble Beach golf course. Many American business leaders emulated Japanese business management, culture, and mannerisms, such as by bowing, taking off one’s shoes at at home, long work hours, and fostering a culture of subservience and loyalty to the corporate hierarchy. All of that came crashing down in the early to mid 90′s when Japan’s bubble economy and buying binge finally burst. America has long since pulled ahead of Japan, which decades later has yet to recover. Buyers of Japanese real estate will likely die before ever seeing a positive return on their investment.
A major risks of foreign real estate investing is currency fluctuations. If you use your US dollars to buy property in Euros or Pounds, and the Euro or Pound loses 20% of its value against the dollar, you lose 20%, which is what happened in 2008 (financial crisis), 2011 (Greece and Spain crisis), 2014, and 2016 (Brexit). The Euro may also make gains against the dollar, but the trend for a long time has been for foreign currencies to lose their value against the US dollar. Since 2014, the US dollar has been very strong, which I predict will continue:
In the unlikely event the US dollar falls a lot, with US real estate it doesn’t matter, because the US dollar is still the world benchmark for wealth, and a store of wealth. The US dollar is not only a reserve currency, but everything (such has oil, gold, etc.) is denominated in US dollars, not Euros, Francs, Pounds, or Yen. Consequentially, the US can print as many dollars as it needs to prop up its assets, as it did in 2008-2014, and buyers of asset classes such as US stocks and US real estate benefit. Some call it fiscally reckless, but the US has the power to do this without suffering from the consequences of ‘wealth destruction’ and hyperinflation, that no other country in the world has. The central bank of Europe can print money to try to boost its economy, but such efforts may destroy wealth by weakening the Euro against the US dollar. America does not have that problem, because of dollar denomination. As an added bonus, when the US dollar falls, it makes America’s exports more competitive.
Especially since 2009, The US economy is pulling ahead of the rest of the world, with the possible exception of China. Since 2009, America has the strongest real GDP growth of all major developed nations (except for perhaps China). Why would the Euro, Aussie (Australian Dollar), Jpy (Japan), Pound, Kiwi (New Zealand), or Cad (Canadian dollar) become a reserve currency when their economies are much weaker. Rising interest rates under an inflationary, stimulus-laden Trump administration will strengthen the US dollar even more.
If Japan wasn’t bad enough, as recently as early 2014, Moscow was in the top-10 list of ‘most expensive cities’. Then came the late-2014 oil implosion, which saw oil prices fall from $100 in 2014, to $45 in late 2015. As a result, the Russian Ruble lost 70% of its value against the dollar in the span of a year, destroying the wealth of anyone who held Russian assets, because Rubles suddenly became much cheaper. Now Moscow is somewhere in the top 100-150, far from top 10.
And then in 1997-1998 there was Asian financial crisis, which saw the currencies of Indonesia, Philippines, and Thailand lose 30-70% of their value against the dollar in just a singe year. Poof–wealth gone.
Other notable examples:
Greece real estate lost over 50% of its value from 2008-2016 and is nowhere near coming back:
Ireland real estate…another train wreck, down 30-40% since 2007:
Romania…down 50% since 2008:
If you look at these charts, it’s immediately obvious that these declines are much longer and deeper than the US housing market crash, yet everyone thinks that the US housing market is the worst world in the world, due to biased media coverage. After accounting for weakness in the Pound and Euro relative to the US dollar, it gets even worse.
Yes, sometimes foreign real estate does well (Norway, Sweden, Hong Kong, Canada), but when things go south, it tends to be much worse than in the US. This is due to currency weakness, bubbles and fads, and smaller economies being more vulnerable to weakness. America is such a big and important economy, that it’s immune to these three things. With US real real estate investing, the returns may not be as great compared to some countries, but they are more consistent and smoother, and there is no currency risk.
A major reason why US real estate is so resilient–in addition to central banks having the power to prop up American assets, is because of huge private equity and foreign demand. Smart, rich Chinese buyers are flocking to the safety of US real estate and the stability of the US dollar. The Chinese know that $1 billion of US dollars is always $1 billion, but a billion US dollars worth of Yen or Euro may be something different tomorrow. With the exception of maybe Monaco, Cayman Islands, and parts of Northern Europe, wealthy Americans seldom buy foreign real estate (Warren Buffett will never touch foreign real estate), but wealthy foreigners love to buy American real estate, so it makes sense to own real estate in the country where all the rich people are buying.
Yes, foreign real estate may have higher yields and maybe you will save some money because the cost of living is lower, but what good does that do when your principal is destroyed in a bubble or currency crash. Also, when prices fall, so too will the rent, so the yields are often unchanged.
Other benefits of US real estate include the overall geopolitical stability of America and its government. As heated as the Trump vs. Clinton campaign was, it pales in comparison to the politics of much else of the world, where the stakes are much higher. In 2013, the government of Greece took 10 percent off the top of each bank account holder. That would be unheard of in America, but such occurrences are not too uncommon in smaller countries.
There are no shortcuts. High yield almost always comes with hidden risk that isn’t manifested until it’s too late, as the investors of Madoff’s fund learned the hard way. US real estate offers solid, consistent returns going back over a century, and with much less risk than foreign countries.