Oct 12, 2022 / CURRENCY

Why interest rates are affecting your property price

Exchange rates have been seriously volatile recently, with 50-year records being broken. Why is it happening and what’s the effect on your ski property?

Thinking of buying a ski chalet? Be conscious of exchange rates

For anyone looking to buy a ski property, rapid changes in exchange rates might have given you pausing to check the latest rates before entering your budget. For buyers from the USA, at least, a look of glee may have crossed your face!

Both the pound sterling and the Japanese yen have hit their weakest against the US dollar for decades, while we have now got used to the euro being below parity against the dollar.

Currencies are being buffeted from multiple angles, and anyone trying to understand the subject will be faced with arcane phrases like “risk off” and “dovish vs hawkish”.

Find out how to protect your property-buying budget with Smart Currency Exchange.

A dining table looking out to the mountains in Snowmass Village, United States.

So, what’s happening?

Exchange rates move up and down in response to political and economic events. The markets, which we’ve been hearing so much about lately, are determined by investors and large financial institutions looking for a return. That comes in the form of interest rates. These are decided each month by central banks – the Federal Reserve for the US, the European Central Bank (ECB) for Europe and the Bank of England for the UK.

But central banks’ two main responsibilities are to keep inflation low – 2% is the target – and economic growth up. For the first, by raising the cost of our mortgages and credit card debts via higher interest rates, they rein in the public’s spending and hence control inflation. Raise them too fast and you choke off demand too much and we get a global recession, which nobody wants.

The exterior of a 5-bedroom in Durango, Purgatory, Colorado, United States.

Hawkish vs Dovish

The banks’ problem has been balancing a recovery from Covid with the soaring inflation. During 2021 as inflation rose, most central banks held back from raising rates as they hoped that inflation was “transitory” post-pandemic. It wasn’t. Now, to prevent it going out of control, they are aggressively raising interest rates as fast as they can. This is known as a hawkish approach (dovish meaning going easy on interest rates). The most hawkish has been the US Federal Reserve, with three large interest rate rises consecutively.

The Bank of England has been much slower, which is why money has poured into the dollar and the pound has fallen disastrously. It settled in August at its lowest since 1985.

The ECB is also, now, raising rates faster, but there are other issues in Europe – namely the war in Ukraine – that are keeping the euro weak. The first worry is over gas supplies, with Russia having stopped exports. The fear is that power limits will put a brake on European (especially German) industry.

That has all led to what is termed a risk off mentality, where the risk to global peace, security and prosperity leads investors to buy “safe haven” currencies like the US dollar.

Hence the euro has been kept weaker, much to the relief of British buyers.

What does this mean for you?

For ski home buyers from the UK, the poor showing for the pound has been exacerbated by the new Chancellor of the Exchequer’s mini-Budget. The markets decided that his sums didn’t add up and pulled their money out of the UK, sending sterling down, briefly, far past the previous low to its worst position since 1971 against the dollar.

Since then, as tends to happen, the pound has bounced back a little.

For property buyers from the US buying in, well, just about anywhere, this is all great news. A €3,000,000 property in Europe now costs $645,000 less than last October!

For UK buyers, you are getting less for your money in the eurozone than a year ago, but more than the average over the past five years.

The living area of a 5 bedroom in Buttermilk Mountain, Colorado, United States.

Locking in a rate for absolute certainty.

The impact of market volatility on the cost of a ski home can be drastic. Agreeing a price on day one, then just hoping that the exchange rate won’t have moved a month or two later when you come to pay, could see you paying tens of thousands more than you had expected.

For many buyers, the solution is what’s known as a forward contract. This means that you and your currency broker agree to a fixed exchange rate for up to twelve months. Then, even if the markets drop, your budget is unaffected.

Find out more about how this works with Smart Currency Exchange.