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I live in Asia where the inflation rate is approximately around 4.5-6% (average) in last 10 years. If in the next 10 years I plan to buy a house in other country (any country which I have the currency). Should I choose to buy the currency which have the lowest inflation rate?

For example, if I hold US Dollar 100,000 right now, and I can buy a house. But with the inflation rate of 1.3% in 10 years the price will be approximately 13% (USD13,000). Means my money will not enough and I must add 13,000.

However, If I hold JPY 11,000,000 right now and I can buy house too right now, with the inflation rate of 0.1%. it will be only 1% increase in next 10 years (about 110,000 JPY). It's not so much.

So, Is my idea correct?

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  • $\begingroup$ Buying a house is a margin activity subsidized by the government so any economic assumptions always require refraction such as repatriation of currency and tax laws. Also you are assuming simple interest and not compounding hence 1.3% over 10 years if compounding continuously is not 13% probably closer to 14%(I hate e). Point is if you want to make money leverage at a (subsidized) market rate by doing things like mortgages. $\endgroup$ – Jackie Jul 15 '18 at 0:39
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If a country has a lower inflation rate than your country, it's currency will tend to appreciate against your currency over time, see interest rate parity.

It is true that if inflation is low, house prices will tend to increase less over the next ten years, however, the currency will tend to appreciate, making it more expensive to buy a house in ten years time.

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  • $\begingroup$ How about if I buy the currency right now? before appreciate? will this solve the future problem? $\endgroup$ – dsc81 Oct 18 '17 at 1:49
  • $\begingroup$ Yes, it certainly will. $\endgroup$ – M3RS Oct 18 '17 at 6:41
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This is going to be an answer with a lot of caveats and definitely not a binding investment recommendation. It is simply intended to show the mechanisms usually employed.

You are right that the cash you hold would lose value. However, if you right now hold the funds to buy the house in the future, it would make sense to invest in a savings account or invest in a portfolio of stocks (exchange traded fund) that compensates you for that inflation and actually yields a positive interest rate as well. The interest rates in either country would theoretically compensate you for the loss in value that you would experience from inflation.

Theoretically, the combination of interest rate, inflation and exchange rate should stack up to basically the same amount in 10 years no matter what the exchange rates are right now.

That is theoretically. Whether that theory holds depends 100% upon whether your expectations about inflation rates and exchange rates are accurate.

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