The property market implications of Australia's nosediving dollar

The Australian dollar has been on a downward trajectory to sit around a near five-year low, sparking concerns from investors about the implications of this fall on their real estate portfolios.

As domestic and foreign investors alike navigate this uncertain economic environment, understanding the impact of currency volatility on investments is crucial.

From restrictions imposed on foreign investors to domestic challenges of housing affordability and construction costs, the depreciating AUD has the potential to reshape investment strategies.

The value of the AUD once made a swift recovery from the pandemic-era low of $0.57 to the US dollar in March 2020, to reach $0.80 again in February 2021.

However, the AUD has since slumped again, declining steadily to hover in the low $0.60 range since December of last year (A$1 buys 62.07 US cents at time of publication).

Weakened AUD to spark foreign investment surge

For foreign investors, the falling AUD signals an opportune time to enter the Australian real estate market or expand their existing portfolio.

Currency fluctuations can significantly impact an investor’s returns. A weaker AUD affords foreign investors greater purchasing power in the Australian market, as their home currency is more powerful.

As a result, more foreign buyers will likely seek to purchase property in Australia, turning the heat up on an already competitive market. Aussie property is also relatively affordable on the global stage.

In an effort to reduce pressure on the undersupplied housing market, the Australian Government has imposed restrictions on foreign investment.

Currently, foreign investors must receive approval from the Foreign Investment Review Board (FIRB) before purchasing property in Australia. New Zealand citizens are the only exception, afforded full purchasing power in Australia.

As of 1 April, however, the Australian Government will introduce a total ban on foreign citizens purchasing established property in Australia. While the weaker AUD makes for appealing economic conditions for foreigner investors, the impending ban will restrict their purchasing power to new dwellings or vacant land.

With just a month remaining until the ban is imposed, Australia is likely to see an uptick in foreign investment activity as buyers attempt to beat the ban.

Currency volatility heightens housing affordability concerns

The impact of Australia’s depreciating dollar on domestic investors is less clear cut.

With foreign investment buoyed by a more favourable exchange rate, this increase in demand could result in prices being pushed up across the Australian housing market.

Housing affordability is already at an all-time low, with data from the 2024 PropTrack report indicating a median-income household could only afford to purchase 14 per cent of homes sold in Australia.

If the Australian dollar continues to fall, affordability issues are set to deepen. The cost of importing goods such as construction materials and appliances will rise due to the weakened exchange rate, making building new housing less affordable.

In addition to impacting the purchasing power of domestic investors, it’s also likely to steer these investors towards smaller dwellings such as units and apartments rather than detached houses.

Dwellings located in amenity-rich suburbs and emerging areas are likely to become more appealing to investors, offering a lower entry price with potential for higher rental yields and strong growth.

In good news for home-based investors, experts say this period of decline is unlikely to be sustained long enough to impact inflation.

Westpac Chief Economist Luci Ellis says despite depreciations in the exchange rate between AUD and USD, there should be no material implications for interest rate decisions.

In February, the RBA reduced interest rates from 4.35 to 4.1 per cent for the first time in four years. This rate cut was passed on by all four of Australia’s big banks, signalling shared confidence that inflationary pressures are easing.

While the depreciation of the Australian dollar presents both challenges and opportunities, foreign investors stand to benefit from increased purchasing power in the Australian market.

However, impending government restrictions on foreign ownership will limit options, driving heightened interest in new developments. Foreign investment in Australian commercial and residential property has taken a massive hit over the past few years but a flurry of activity could be looming as the dollar dives and buyers rush in before the new restrictions take effect.

For domestic investors, this rising demand could further strain affordability, which is already at critical levels.

Despite these pressures, the long-term stability of real estate remains strong.

Real estate has long been favoured as a more stable investment asset and will likely remain a steadfast component in the portfolios of Australian investors throughout this time of currency volatility.