Arbitrage in Unfamiliar Places: The International Residential Real Estate Market

Abstract

International commodity market arbitrage is generally based on moving the commodity between countries to exploit price differences, making allowance for exchange rates. This form of arbitrage is clearly impossible for services and immobile objects such as real estate. However, there is the possibility of another form of arbitrage when the buyer can move to the product in order to enjoy what it offers. Such a situation is possible in the international market for recreational properties such as exclusive mountain ski resorts and oceanfront estates. By constructing repeat sales indices for several such markets, we show that prices of internationally traded properties differ from prices of local properties in terms of the impact of exchange rates. Rising values of a country's currency dampen local currency prices of internationally-traded properties relative to domestic properties, and vice versa. We also find that relative prices of similar international properties in different countries vary with exchange rates. Overall, we show there is a significant long-term equilibrium relationship between relative prices and exchange rates.

Keywords: exchange rates, international real estate, law-of-one-price, one-way arbitrage

JEL Classification: R32, F31