Question:
in Egypt recently the local currency Pound has been going down in value. and i had a discussion with my friend about investing in real estate.let's say i bought a property in Egypt in 2020 at 100K USD when the exchange rate = 15 Egyptian Pound for 1 USD and i paid in local currency because there is a law that says real estate prices should be in local currency so i paid 1,500,000 Egyptian Pound for the flat.
In 2024 i sold the property at 3,000,000 Egyptian Pound so it looks like i doubled my money. However, now the exchange rate = 60 Egyptian Pound for 1 USD.
Therefore in reality i lost half of my money by this investment.
I said this cannot be possible and the value of the property should go up with the inflation. and I argued that investing in real estate or commodities like gold is one of the safest and best ways to protect your money from inflation.
unless i was in need for the money and sold it at any price, or the market is down due to the low demand and high offers in the market or any other factors. But, in principle the property true value should be at least whatever is 100K USD i paid in 2020 is worth in 2024 which is in this case 6,000,000 Egyptian Pound.
his argument was that this only applies to Gold and inflation and fluctuating exchange rate doesn't affect properties prices.
can you please explain if this is possible or if we both are wrong and give us some knowledge about this scenario and how can i truly secure my invest or money against inflation
Answer:
Let’s start by understanding the numbers (Table 1).
|
Table 1 |
|||
|
|
2020 |
2024 |
Percent change between 2020 and 2024 |
|
Egyptian Pound (EGP) per USD :Value of USD in terms of EGP |
15.0 |
60.0 |
300.0 |
|
USD per Egyptian Pound (EGP): Value of EGP in terms of USD |
0.067 |
0.017 |
-75.0 |
|
Property Price Quoted in Egyptian Pound (EGP) |
1,500,000 |
3,000,000 |
100.0 |
|
Property Price Quoted in USD |
100,000 |
50,000 |
-50.0 |
Notice that the value of the USD in terms of the EGP increased by 300% between 2020 and 2024 but the value of the EGP in terms of the USD declined by 75 percent during the same period. During this period, property prices quoted in EGP increased by 100 percent (i.e. doubled) but nevertheless declined by 50 percent when quoted in the USD.
Average annual inflation, as reported by the World Bank, during 2021-2023 was about 17.6 percent. Therefore, if property prices increased at the rate of inflation, a EGP 1.5 million property in 2020 should be worth about EGP 2.9 million at the end of 2023. Therefore, given your example, property prices when quoted in EGP have more than kept pace with inflation in Egypt.
Nevertheless, since the EGP depreciated against the USD, property prices when quoted in the USD show a 50 percent decline. It is imperative to be aware of exchange rate movements especially when investing in a foreign currency (i.e. a currency which is different than that of the investor). Countries which experience adverse shocks often see their currencies lose value against the USD. A closed financial account (lack of free flow of capital across countries) will also hinder property prices in keeping pace with a fluctuating exchange rate among other factors. Therefore, it is possible for changes in property prices to differ from changes in the exchange rate.
Although gold is thought to be a hedge against inflation, research is divided on this issue. There are periods in which gold prices keep pace with inflation and periods when gold prices increase less than inflation.
Investment is a risky activity by its very nature. In theory, inflation-adjusted bonds of AAA-rated countries or companies could be one way to hedge against inflation. It is important to keep in mind that investment advice must be sought from a certified financial advisor when considering investments.
