Understand the mutual relationship
There is a very well known relationship between the value of a country’s currency and its house prices. As a currency devalues, domestic home-owners can worry that the value of their property is decreasing and rush to sell. If too many people do this then prices will fall more quickly. In the worst case scenario, the bottom can drop out of a country’s housing market which in turn creates opportunities from investors holding stronger currencies. They are able to buy up cheap properties, which eventually causes the market to slowly recover again.
One of the reasons Spain joined the Eurozone is that it is a relatively stable currency whose value is dependent on the actions of communities in 19 countries protected by European banking regulations. This has strengthened the Spanish economy overall – stabilising the housing marketing in Spain. The pound has traditionally been stronger than the euro but there are many factors affecting the balance.
Factors affecting currency exchange rates
Hair-trigger details can affect foreign exchange rates, although they’re more likely to be influenced by dramatic changes in international stock markets, global politics and consumer confidence. Individual countries can also be affected by internal monetary policy, national inflation and fluctuations in GDP.
Political uncertainty in Great Britain has caused a wavering exchange rate against the euro. However, sterling is historically very tenacious and one of the strongest currencies in the world. Forecasts suggest that as long as political uncertainty doesn’t linger, the pound will continue to grow against the euro.
To date, the lowest exchange rate was in June, 2016 at €1.02 to £1. Today it’s more like €1.17 to £1, meaning that a £50,000 nest egg will be worth €58,500 in Spain. That said, at its peak in April 2000, the pound reached €1.70 to £1, which would have made £50,000 into €85,000.
How can you protect your investment?
While on holiday abroad, it’s often wiser to use a credit card for foreign purchases than a debit card. Why? Because your credit provider will have negotiated an exchange rate on behalf of its customers that is usually lower than any cash rate of exchange an individual can obtain. In addition, your debt exists in your domestic currency which is protected by domestic law.
The same works for larger purchases. Owning some credit in the domestic currency of the investment (so in euros if you’re buying a house in Spain) protects your investment against wild changes in currency. Even cash buyers, like Juliet and James in our podcast series, took out a small mortgage in Spain in order to buy their apartment in Barcelona. They say that “because of the volatility in the currency we eventually decided to take a small mortgage out on the place so that we’ve got some exposure to the euro and that hedges the investment.” This means that if they don’t sell (or bequeath) the property at the same price (or less) than what they paid for it in euros, they won’t lose extra money if, at that time, the pound has dropped below the euro in strength.
Getting a Spanish mortgage is actually a relatively simple procedure and you can find out more about it on our blog How to get a mortgage in Spain.
