Big Mac Puts a Time Stamp on US Real Estate’s Appeal For Foreign Buyers

Roxana Baiceanu —  February 20, 2013 — 1 Comment

McDonald’s popular meal may provide real estate professionals with some food . . . for thought.

Tracking the price variation of the iconic Big Mac across the globe may reveal that what several foreign real estate investors currently pay for a home in the US in their local currency is many times different than what it should cost them. We’ve compared 2013 to 2006 and the differences may surprise you!

Burgernomics and The Big Mac Index

The Big Mac index was introduced by The Economist in 1986 in order to show the volatility of currencies across the globe and, in turn, the (in)stability of national economies.

Let’s see how the price of a burger may help us understand why certain foreign investors are so lured by US real estate. The fact that a Big Mac costs $4.37 in the US but, for example, $5.39 (23.5% more) in Canada suggests that Canadians have stronger purchasing power. This means that when buying a home in the US, Canadians are paying 23.5% less in Canadian dollars than they should if their currency was not so over-valued.

Here’s a table that illustrates how the index currently assesses whether several currencies across the globe are at the correct levels or not :

 

Country

Big Mac Price ($)

Currency Status

US

4.37

 0.0%

Canada

5.39

23.5%

Brazil

5.64

29.2%

Euro area

4.88

11.7%

China

2.57

-41.1%

Russia

2.43

-44.5%

Note: The “-” symbol shows they are undervalued, while the positive numbers show currencies being overvalued.

Canadians Pay Less for US Homes

Canadians have been constant investors in the US real estate market since anyone can remember, interested especially in purchasing second homes in sunny states such as Florida and Arizona, but also in New York City.

At the current exchange rate, a $1 million home (USD) costs about the same amount in Canadian dollars. In reality, since the Canadian currency is 23.5% overvalued according to the Big Mac index, it should cost C $1,238,000.

What kind of home would C $1 million buy a Canadian now? Something similar to this 1,300 sqft condo at 40 Sutton Place, Manhattan, NY:

big mac index home1 Big Mac Puts a Time Stamp on US Real Estates Appeal For Foreign Buyers

40 Sutton Place, Manhattan NY. Credit: Douglas Elliman

In 2006, when the value of the Canadian dollar was 4% lower than the US one, Canadians would have had to be content with a cheaper property while still spending C $ 1 million.

On the other hand, Americans who want to buy properties in Canada are less advantaged. The Big Mac Index shows the US dollar weaker than the Canadian dollar by 19%. This means that US $ 1 million would buy an American a C $810,000-value home in Canada.

Check out this 1,900 sqft home at 467 St. Toronto, Ontario! Asking price: C $719,000.

big mac index home2 Big Mac Puts a Time Stamp on US Real Estates Appeal For Foreign Buyers

467 Shuter St., Toronto, Ontario

It’s Also a Good Time to Buy for Brazilians and Europeans

Before the financial crisis, in 2006, Brazil’s currency (the “real”) was weaker by 13% than the US dollar. Now, according to the Big Mac Index, it’s 29% stronger.
This means that a $1 million US home should actually cost Brazilians 2,575,000 reals but according to the current exchange rate it only costs them 1,993,000 reals.

Europeans are also benefiting from the current exchange rates. According to the Big Mac Index they should pay €823,110 for a $1 million home in the US, while they now pay almost €100,000 less.

China and Russia Pay Almost Double to Buy a US Home

Both China and Russia have a significantly weaker local currency compared to the US dollar. According to the Big Mac index, this means that Chinese investors need to shell out 41% more money when buying real estate in the US, while Russians should pay 44.5% more.

But at the current exchange rate, investors in these countries pay a lot more. A $1 million US property costs a Chinese investor 6,220,000 Yuan, while according to the Big Mac index the real value should be only 3,663,000 million Yuan.

In turn, Russians now pay 30 million rubles for a $1 million US home, while in fact they should pay a little more than half that. But with this money, they could only afford this 700 sqft. condo in Manhattan instead of the 1,300 sqft pad Canadians are able to buy.

big mac index home3 Big Mac Puts a Time Stamp on US Real Estates Appeal For Foreign Buyers

333 Rector Plaza Manhattan, NY. Credit: Douglas Elliman

Russian and Chinese currencies have always been undervalued compared to the US dollar. In 2006, for example, the Chinese Yuan was 58% weaker while the Russian ruble was undervalued by 49%.

Despite having weaker local currencies, neither Chinese nor Russian investors seem to be turning away from the US real estate market. According to the National Association of REALTORS®, China was the second-most important foreign investor for the US real estate market, responsible for 11% of international transactions in the country. This is not at all surprising, knowing that the number of billionaires in China has grown significantly over the last 2 decades due to the export of low-cost goods.

As for the Russians, they managed to shock the New York real estate market last year when billionaire Dmitry Rybolovlev closed the biggest condo sale NYC has ever seen when he bought the $88 million pad at 15 Central Park West.

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Roxana Baiceanu

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One response to Big Mac Puts a Time Stamp on US Real Estate’s Appeal For Foreign Buyers

  1. Interesting overview. The foreign buyers really are an importatnt factor driving the US real estate market at the moment and it is a wise place to invest because of the growth dynamics. It was actually Ekaterina Rybolovleva who bought the 15 Central Park West apartment from Sandy Weil

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