What is the “china risk” for Colorado Real Estate?
I wrote an article earlier this week, stocks drop 5% what about real estate that focused on the macro impacts of the correction/volatility in the stock market. This recent volatility wave was kicked off as a result of a slowing of the Chinese economy.
So what does this mean for Colorado Real Estate in particular and why should we care about china? A few weeks back China devalued their currency in order to help their local economy (the Chinese government gave other B.S. reasons in the press). Basically a currency devaluation makes their exports more attractive. As the dollar is stronger, our dollar can buy more Chinese goods at a lower price. This theoretically should help stimulate many of their export businesses since they are now much cheaper for foreign countries to buy.
As a result of their devaluation, other currencies throughout the world have also either intentionally devalued their currencies to stay competitive or they got devalued due to pegs with other currencies. So long and short, the dollar has become stronger against many currencies throughout the world.
A stronger dollar will impact Colorado in three ways and the ski towns in particular will get hit hardest. Read Why?
There are three major impacts to Colorado as a result of the “currency war” set off by the Chinese devaluation
First, a stronger dollar means products in the United States are now more expensive for foreigners. In this case the Yuan now buys fewer dollars therefore making U.S. products more expensive and less completive from a pricing standpoint than products made domestically or in other areas with weaker currencies. So the devaluation of the Yuan will mean fewer products sold by U.S. companies in China; this is already being felt by many U.S. companies including Apple, GM, etc.. who have come out with reduced forecasts for their growth in China. Colorado companies with large sales/growth in China will feel the stronger dollar immediately as sales slow down
Second, tourism will take the brunt of the impact. A strong dollar also make services in the U.S. more expensive. The hotel room in Aspen is now 15% to 20% more for many foreigners. This rapid increase in relative price due weak currencies abroad will likely cut short or derail many tourists. With many of Colorado’s resorts relying heavily on international visitors (they are typically the biggest spenders with longer stays) this could hurt the bottom lines of many businesses within the resort communities. The Wall Street Journal had an interesting article on this topic yesterday, Strong dollar clouds U.S. tourism
Third, real estate purchases by foreigners will also lag. Much of the growth in Colorado real estate prices in the resort communities can be attributed to foreigners buying real estate in the U.S. This trend was due to the fact that U.S. real estate was seen as a value to many foreign purchases and also a safe investment. Just like U.S. manufacturing products becoming more expensive the currency devaluation has also made real estate less of a value. For example assume the foreign currency dropped 15% against the dollar and the foreigner was under contract to buy a million dollar ski property, due to the currency devaluation this property is now costing the buyer in relative terms $150,000 more to purchase. The Wall Street Journal did an interesting article on this topic as well, strong dollar makes real estate less attractive for foreigners
So what does all this mean? Although I doubt it will be catastrophic for real estate in Colorado since low rates are continuing to drive investors into real estate and we have a diversified economy in the state. There will be some effects/ hiccups from a stronger dollar to manufacturing, tourism, and real estate sales. The ski towns will be the first indicators of the severity since they rely so heavily on international tourism along with international buyers. How substantial these impacts are remains to be seen. This is definitely something to keep an eye on over the next 12 months
Written by Glen Weinberg, COO/ VP Fairview Commercial Lending. Fairview is a hard money lender specializing in private money loans in Georgia, Colorado, Illinois, and Florida. They are recognized in the industry as the leader in hard money lending with no upfront fees or any other games. Learn more about Hard Money Lending through our free Hard Money Guide.