International Currencies Made EZ #4

by | Dec 14, 2004 | Archives

Few economic events can have as much impact on your life as the falling U.S. dollar. I am learning this right now while on a trip to London. If one converts what things cost here in dollars…well its just better not to.

While I am away, the Gary Scott messages each day contain a review from the course International currencies Made EZ. This information can help you understand why and how currency parities move. Here is a section from Chapter Four. This report is dated but do not let the dates and numbers get in the way. The fundamentals remain the same.

How Currencies Fluctuations Affect Real Estate value

In 1970 I lived in London, England for a year, then moved to Hong Kong. During that time I also maintained a home outside of San Francisco, California.

This was a time of great inflation. My homes in California and in Hong Kong appreciated greatly. In 1976, when I moved from Hong Kong back to London, I noticed that London real estate was priced about the same as it had been in 1970. This puzzled me. Why had London property prices remained flat despite inflation?

On investigation, I learned that there had been a huge real estate crash in 1970 which continued to dampen real estate prices six years later despite the rampant global inflation. Then at the same time, the British pound collapsed suddenly over 35% versus the U.S. dollar from 2.4 dollars per pound to a new all time low of 1.52 dollars per pound. To my way of thinking London houses, which I thought were already very cheap by world standards, just became 35% cheaper.

I could not resist, started property shopping and eventually bought an old five bedroom house in Bedford Park in west London. I converted $15,200 to make a 10,000 pound down payment and took a 25,000 pound loan to meet the 35,000 pound asking price I had negotiated (about US$53,250).

A couple of years later, the pound rose and I sold my London house and made some great profits.

London property had been underpriced. I was able to sell the house for 115,000 Pounds. I made a profit of 80,000 pounds. But the currency change helped enormously too. The pound had risen from 1.52 U.S. dollars per pound back to over 2.2 dollars per pound. My 80,000 pound profit was not worth US$121,600 (value at the 1.52 rate) but was worth $176,000. I earned $54,400 extra profit because of currency moves!

There is much we can learn about real money, international purchasing power and how they affect currencies. This is a classic example of how real money moves versus currencies that have been adulterated by governments.

In this case, property was the real money. Residential property is a classic hedge in times of inflation and currency destruction because it always offers a real service of value, i.e. a home for one to live.

In the study, this real money was first lowered by a local real estate crash. Most British real estate buyers were not aware how inflation had pushed real estate prices up in other countries. They were inadvertently beggaring their neighbors. British businesses could operate cheaper then elsewhere because it cost less to house their employees. This gave Britain an unfair advantage. Their low real estate prices were not caused because there was a greater supply of British land nor were British builders more efficient nor were British building materials more abundant. British homes were cheaper only because investors elsewhere had not yet seen the discrepancy.

Then prices really became cheaper when the pound crashed. I was lucky to buy when Britain was beggaring their neighbors the most. This did not last long. Overseas buyers (like myself) caught on to the cheap prices and Americans, Japanese and Arabs began buying London homes. Prices soared. So much money flowed into Britain that the pound rose.

As is usually the case the pound had been oversold at its bottom, so that it rose dramatically. The effect was shattering on my business (remember that at work I had pound expense, but U.S. income), but in my house sale, the results were wonderful.

Much of the profit I enjoyed from the sale of this house came from the very forces we have reviewed in these first four lessons. Certainly this period of dramatic inflation and currency turmoil was caused by the historical factors we have learned so far in this course. I was sitting at just the right place at the right time and so currency moves ruined my business, but also saved my overall finances enough that I could afford to buy a nice home in the English countryside and rebuild my business from a more modest base.”

Until next message, good investing!