2000 vs. 2005 Part 6: Blame the Euro

Tuesday, February 8, 2005, by Lockhart

While we gnash our teeth and appraise the living options in Far Jersaway, a Curbed correspondent takes calculator to the tulip craze to speculate on why new development deals are happening with such speed. His analysis—which, like all good analysis, is rooted not in facts but rather in sheer speculation—lays the blame at the feet of the Euros and their oddball currency. Does this make any sense? Judge for yourself.

A Curbed correspondent emails:

I'd bet that a very high percentage of the buyers of most of the developments we're seeing in New York and Miami are begin driven by what amount to foreign currency speculators. As you'll see, the trade works for anything that is USD denominated, but with the high familiarity quotient and the size of the investments required to make a decent profit, these two markets make particular sense.

Here's the trade... Let's say you are from any of a host of European countries who use the Euro as their currency. Right now, 1 Euro will get you $1.28. So, if you have EUR1mn to spend, you can buy a place
that's worth $1.28mn... see how this works? Now, lets say you hold this property for five years and during this time the USD regains strength and the EUR-USD exchange flips back to favor the dollar (which, given the 5-yr time horizon is a pretty reasonable assumption).

I'm not a currency trader, so I don't know what futures look like for this particular trade (but I'm sure you have a reader who does), but just to have some fun, we'll assume that the exchange gets back to slightly better than parity... so that 1 Euro will now only get you 90 cents. In that setting, even if the overall real estate market never increases in value, your $1.28mn investment is now worth $1.41mn. Now, imagine what that number would be if the real estate market appreciates over the next five years the way it has for the last five. Even if the exchange rate holds steady at EUR-USD parity (1 euro
for 1 dollar), you'd be pretty well off.

So what does all of this mean for the real estate market in New York and Miami? It should be pretty straightforward. There is probably "artificial" support to the market, i.e. there are people (or hell, even spec funds) buying just to secure a large USD denominated asset, not because they see a value in occupying the property itself. Granted, people have speculated on NY real estate for centuries, but I have a feeling that the exchange rate means their doing so in larger numbers than before.

So, when the currency arb reverses and all of those foreign buyers start selling, the bubble pops and they have to sell even more (there will eventually be a break even, below which they'll loose money)... as you pointed out, a la the tech equity market in 2000 and 2001.

Suggested reading: "The Euro, Our Currency," by a rouge group calling itself "the EU."

Filed under Real Estate Miscellany,

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