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I am thinking of buying property in Colombia and i'm trying to figure out if (or how bad) currency devaluation will affect it's value in the future.

I have historical indices for the value of houses in Pittsburg and Bogotá (so-called "real" value, adjusted to the Consumer Price Index.)

If I 100 base the two cities in 2010, Bogotá holds up surprisingly well.

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But the consumer price index compares the country to itself, right? It does not factor the devaluation of the peso compared to the dollar, right?

Would adjusting the Bogotá index to the historical exchange rate do the trick?

(This is not academic. I just want a quick and dirty way to evaluate if currency devaluation could destroy any value my colombian house gains.)

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  • personal finance questions belong to personal finance and money stack. I am migrating this there
    – 1muflon1
    Dec 3, 2020 at 22:57

1 Answer 1

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Unfortunately it is simply impossible to guess.

I am a great example because: one time, I made a small fortune on a house due to currency changes. Another time, I lost quite a bit :/

I just want a quick and dirty way to evaluate if currency devaluation could destroy any value my colombian house gains...

I know how to do this. It's a bit like swing trading.

  1. Write down about how much you figure a house there will appreciate over say 10 years. This is not a crazy idea. In some markets (Sydney, London) it's perfectly reasonable to say something like "it's not unreasonable to assume the price could double or triple" whereas, in for example regional US markets, it's perfectly reasonable to say "it's not unreasonable to assume prices will not really change much over that time".

And then..

  1. Write down about how much you figure the currency pair can change over that time. For example. For it's USD/EUR, it's incredibly unlikely it will change by 2 or 3 hundred percent. But. It's perfectly likely it will change by say 50% one way or the other.

You now have the answer by looking at the two.

Note: You mention CPI. The CPI doesn't help you at all in this. All that matters is: how much money you made on the house "times" how much the currency went down (if it did).

BTW you mention "currency devaluation":

that phrase is often used to mean a dramatic, "didn't that happen in Germany after some war" plummet in the price of the currency.

If a currency devaluation (in that sense) happens - you're f'd.

You lost and that's that.

However, I think you're just talking about the usual up and down swings of currency pairs:

For example, the AUDxUSD famously swings up and down (you're talking over long periods of time - wine cellar time, not like "2 years" ..)

enter image description here courtesy

I indeed was a "swing trader" as trendy people put it (i.e., before I was a ruined drunk) and that's a typical thing you, uh, swing on.

In short, essentially you have to know the answer to "2" above to answer the question you pose here.

If you think the currency is gonna "collapse", you're screwed and there's no way to win. If you think the currency pair is just going to swing around (over long time periods), away you go. After all, in real estate 10 years is nothing - never sell anything - so (consider the Aussie chart above) if that's the case there's no big deal if it goes up and down.

So you have to make a stand on 1 and 2 above.

(Again, the CPI is of no consequence. It's just an indicator - like - looking at employment or GNP something or The Economist's Big Mac Index. It could help you make a charting decision, but it has nothing to do with dividing House Sale Price by Exchange Pair Price, which is all there is.)

Do note that - unfortunately - anyone who gives you a specific guess is just guessing. Stock picking and currency picking is utterly useless. Nobody has a clue which way "COP" will go. But you might be able to decide for yourself (point 2) whether it's a currency pair that just swings around (like the Aussie) or whether something bad might happen ("like in Germany that time").

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    Of course you can't know which way currency will go. I decided to trust that the trends of the last 10 years (decent increase of house prices and mild downward currency fluctuation) would continue. What's confusing me is that I have a nominal price index and a real price index. I was thinking the real index, adjusted to purchasing power, sorta had the pesos's devaluation imbedded.(?) Thank's for the thorough answer, Fattie. Much appreciated.
    – afg
    Dec 5, 2020 at 13:18
  • Best of luck!!! Beware of any index, or other figure, calculated by either a government or a magazine! heh!
    – Fattie
    Dec 6, 2020 at 16:04

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