- Dollar Diversification
Despite the resilience of the local property market, especially in the Western Cape, South African property returns can be misleading due to transactions occurring in ZAR, a currency that notoriously depreciates. To illustrate this:
● 1995, 31 March: 1 USD = 3.58 ZAR
● 2023, 04 October: 1 USD = 19.33 ZAR
That’s a little over 6% per year, every year since 1995.
This consistent depreciation significantly impacts the real value of your investments.
To illustrate my point, consider the following graph:
The blue line represents the ZAR's value against the USD over time, while the red line shows the inflation-adjusted real growth of South African property in dollar terms. As you can see, the blue line steadily declines, illustrating the weakening ZAR. In contrast, the red line highlights how the perceived growth in ZAR terms can be misleading when converted to a stable currency like the USD.
Comparative Property Appreciation
Let's use an illustration to compare the real growth rate of properties in South Africa and the USA:
● South African Property: Appreciates by 10% per annum
● American Property: Appreciates by 5% per annum
Despite the higher nominal appreciation rate in South Africa, the real growth rate in dollar terms is often better in America due to the ZAR's depreciation.
The blue line represents the nominal growth of South African property in ZAR, while the red line shows the real growth in USD terms. The green line represents the nominal growth of American property. Notice how the red line (real growth in USD terms) for South African property often lags behind the green line (American property growth) despite higher nominal returns.
Impact on Investment Portfolio
This discrepancy is particularly alarming when considering the impact on your entire investment portfolio. As the ZAR continues to depreciate, the real value of your ZAR-priced assets erodes, undermining your wealth-building efforts.
So, where should we, as South Africans, turn to acquire property for our investment portfolios? The answer might lie in the tropical paradise known as Mauritius.
