Australian Property Investment and the Australian Dollar

At the time of writing the Australian dollar is worth around US$0.92 – up from US$0.67 in less than eight months. That is one huge appreciation and anyone who is exposed to the currency risk will certainly have noticed it. The rise of the Australian dollar is most spectacular against the US$ but its also up against almost every other currency from pounds to Euro to the New Zealand dollar. So what does the Australian dollars rise have to do with the Australian property investor? Plenty – even if you don’t think you are exposed to currency risk – you should understand what drives currencies and their close cousins: interest rates.

To a lay person it really seems that the Australian dollar is riding high because of two main things: one the confidence that Australia will avoid a recession due to China buying everything we can dig out of the ground. The second reason is that because of the rebounding economy the Reserve Bank has raised interest rates and will probably continue to do so. Both factors means that foreign investors like the rates their cash can get in A$ and they have confidence in the Australian economy.

This means – if you are investing in Australian real estate using income or assets from overseas you are paying quite a lot more than you would have a few months ago. So how do you manage the currency risk if that is your situation?

Good Times in Australia sees the A$ hit new highs

Well hindsight is 20/20 – but I would have been buying Australian dollars as the dollar hit all time lows, earlier this year, if I was planning on buying real estate in Australia anytime soon. For those Australian who work overseas and earn in another currency – this is a low risk game worth playing. Low risk – because eventually you will spend the money in Australia at some time – so its not like traditional Forex trading. Just like averaging interest rates – in my view the easiest way to reduce your currency risk is to transfer the same amount of money back to Australia regardless of the rate of the day – some times you’ll lose, other months you will gain – but on average you reduce your risk substantially.

If you had been doing this for the last six months – you would have bought some cheap Ozzie dollars – and be enjoying some of the developed world’s highest interest rates.

If rather than an income I had a lump sum to transfer to Australia I would probably delay buying by at least six months. I would bring a 1/6th of my lump sum into A$ over each of the next six months. At worst I will be getting a good deposit rate – but with some luck the dollar will drop against your lump sum’s currency over that period and you win a little, without having to place an all or nothing bet of either transferring now or later. Any major bank should only be charging you around $25 per an international transfer so the bank fees are trivial for any significant sum.