Whats Happening in Finance and Property Investment

Australian property investors will lose out in the USA property market.

John Smith - Monday, December 09, 2013

Unless you have been living under a rock or not into property investing, you can't help to have seen the property spruikers jumping on the bandwagon to get you to buy property in the USA.

If you have been lucky you have not been caught by one specific spruiker and one specific American Real Estate company selling property for overinflated prices, but the risks don't stop there.

Buying property in the USA is way more riskier than buying property in Australia. In many places you can have a good street, then a bad street, then a good street, then a bad, all in the same suburb. Add in the fact that there are areas better property managers will not manage or are expensive, property managers that skim off the top or never send you any cash, renovations or as called refurbishments that you pay for and the work never gets done, and tenants that will trash houses or never pay rent. Investing in the USA  is not for the feint hearted, in fact one Aussie investor was even shot.

A simple google search and you can find many pitfalls, but I am not writing this to rehash all the same stories.

I want to write about a risk, that no-one talks about, or if they do it is glossed over or even spoken of in a positive light.

Before I do I should give you my disclaimer: I am not a financial advisor, and so I am not telling you to buy or not to buy property in the USA, however I am making you aware of a risk that not many if any will talk about.

That risk is Currency Risk.

What you say, your mad! Historically the Australian dollar has always been about 80c USD, so if anything, if I buy USD's while the AUD is more than 80c per USD then when the AUD falls to 80c, I make a profit.

My reply to that is - Well these are not normal times. What you could be seeing is the death of an empire, and the collapse of the USA dollar will be part of our future. How far into the future is anybody's guess, but it is close!

Making some assumptions on a property investment in the US: If you spent 100,000 AUD in the US now, and the USD fell by 50% in value, if you sold the property you would only get back 50,000 AUD. However if you held on the property and of course any rent you are receiving is also only worth half, then it could take a long time to make back that loss of $50K. For example even if you received a 20% yield on the original $100K value, it would take 5 years to make back the loss and even longer if the yield is worse than 20%, which many properties are. You also must keep in mind, what would happen in the USA if their dollar fell so much - you may not get any rent or less rent as the country falls into another recession or depression.

So why do I and for that fact many others think that the USD may fail? Lets look at some numbers -

The US Fed owned less than US$1 trillion dollars of debt before the 2008 financial disaster. This has now increased to over US$4 trillion today and they are adding to that debt at US$85 billion per month.

The USD has been in a gentle decline since July. Someday, the decline won't be so gentle. It will be brutal. Then investors will suffer huge losses as USD-denominated assets sink.

Last month when there were problems with increasing the US debt levels the global economy trembled faced with the prospect of a US default. China's official Xinhua news agency called for a “de-Americanised” world and asked for the creation of a “new international reserve currency to replace the dominant US dollar”. Seriously think about that - In the recent past you needed to buy USD to be able to trade with China and other countries, and it was that demand that helped keep the USD so high. What if that demand goes away?

The following is from a recent article in the Vancouver Sun:

'Three years after China allowed the yuan to start trading in Hong Kong's offshore market, banks and investors around the world are positioning themselves to get involved in what Nomura Holdings Inc. calls the biggest revolution in the $5.3 trillion currency market since the creation of the euro in 1999.

'And over the past few years we have seen the global use of the yuan rise dramatically.

'International use of the yuan is increasing as the world's second-largest economy opens up its capital markets. In the first nine months of this year, about 17% of China's global trade was settled in the currency, compared with less than one percent in 2009, according to Deutsche Bank AG.'

As you can see the future of the USD as the worlds reserve currency is not rosy.

But hold on, what is the US Fed doing with all this money they are printing or creating? Well, they are effectively financing the US budget deficit because the rest of the world has stopped supporting the 'system'.
In October, the US Treasury released its monthly 'Treasury International Capital' data. The data shows that the US needs foreigners to finance US$400 billion current account deficit per year (Difference of trade deficit and overseas earnings). The US would sell assets, either Treasury bonds, corporate bonds, or equities to these foreigners, and normally they would be snapped up.

But that buying has all but stopped. Previously, in the 12 months to August 2012 foreigners purchased USD 532 billion dollars  in treasury notes and bonds, but for the 12 months up to August 2013 they only purchased USD 25.3 billion dollars worth. Wow a shortfall of USD 506.7 billion dollars - if that is not something telling you what the rest of the world is thinking about the USD, then nothing else will.

So the US Fed is not issuing new money to promote anything, instead they are basically keeping the US government going.

Now above we are talking about new purchases, but what about all those treasuries and bonds already purchased. Well China has been dumping/selling its US treasuries and bonds since February 2010.

Not only that, to maintain their trading surplus, China's money printing presses have been going just as strong as the US.

So if you have been asking yourself what has been holding up the AUD, we are caught in this currency war, and because the Reserve Bank is partially doing the right thing, and not trying to match the currency printing, the AUD will remain high. I do say partially, and expect the reserve bank to increase money supply if the AUD stays too strong.

I realise there is a lot to take in, and in fact its not the full story, but keep in mind that the big question for the USD failing is not "if", but "when", and if you are about to swap your hard earned Australian dollars for USD, keep in mind that the historic relationship between the USD and AUD may not be maintained.

If we see the value of the USD plummet, the impact to the financial markets will be huge, and interest rates should jump quite high, as foreign investors either demand higher rates based on risk, or take cash back to the supposed safety of their own country. especially for Australia because we are a net borrower, 

Something I have learnt over the years and I have told many of my clients who come to me to talk about investment's with huge returns.

"The larger the return, the larger the risk"

So with interest rates in the USA at nearly zero so it's hardly worth having your money in the bank, and Americans being some of the biggest capitalists and savviest investors in the world, why do so many of these opportunities exist? Where is the risk that they can see and we don't?

We all know there is no free lunch, so if someone is offering you US property with no fees, now or annually, then they are getting their cut another way. Could you be overpaying for that property? If you decide you can live with all the risk, then make sure you do your due diligence.