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Say that the conversion rate of a local currency changes so that the currency is now relatively weaker against foreign currencies and as a result the inflation rate increases and as a result of that the central bank raises the interest rates.

On the one hand more locals will be forced to sell their properties because they cannot afford the increased interest rates on their home loans. With the over supply of properties and the shortage of buyers who can still afford properties, I would suspect the property prices should drop.

On the other hand, only the currency weakens not the property. So if the conversion rate was 1:10 against the USD and now the conversion rate is 1:20, shouldn't the prices of the properties double as well?

What could be expected to happen to the property prices in such a country?

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  • $\begingroup$ Three questions... First, is it fair to assume that you're talking about a small, open economy? Second, are mortgage loans in this economy a form of direct foreign investment, denominated in US Dollars, or is mortgage lending intermediated by the financial sector, so that the only direct effect is the interest rate increase? Three, is it fair to assume that this is a country without significant capital controls and with a floating exchange rate? $\endgroup$ – dismalscience Sep 19 '15 at 16:45
  • $\begingroup$ No trade can take place without exchanging currencies. Mostly locals will buy properties, although foreigners can also buy. The country has a central bank which "controls" the exchange rate, interest rates etc. $\endgroup$ – Jasper Citi Sep 23 '15 at 14:53

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