Uncertainty and its Effect on Luxury Real Estate Purchases
How much does economic and political uncertainty impact high-net-worth-individuals and their decision to purchase a new luxury primary residence?
The luxury property marketplace is impacted by a single overriding and intangible element—sentiment. Uncertainty, in both major political events or economic shifts, often leads buyers and sellers of high-value residential property to reflect on what might be, resulting in hesitation and inaction.
From the U.K.’s EU Referendum and the U.S. election to restrictions on Chinese capital outflows and Russian sanctions, many affluent buyers and sellers have been waiting for a clearer indication of global political and economic outcomes before proceeding with a luxury home sale or purchase, creating a period of pause.
Globally, primary residence markets—cities and suburban areas where most buyers purchased primary residences versus second-home or investment purchases—saw an overall steadying of high-value home sales in 2016. In our annual study of luxury housing markets worldwide, sales of million-dollar-plus homes in primary residence markets increased by 2% over the year prior.
Although this reflects a softening of the market, it still represents the strongest result across all luxury housing sales categories in 2016—overall luxury home sales worldwide recorded a 1% annual increase, and second-home vacation markets posted a 7% decline in million-dollar-plus home sales.
[infogram id=”page-9-primary-residence-market-see-stable-growth-in-luxury-home-sales-1h8n6mg70wn96xo” prefix=”ojN”][ See how current trends in global luxury home sales across all market types compare to previous years, as revealed in our 2016 and 2015 reports ]
In contrast to a buyer or seller transacting at the lower end of the housing market, a high-net-worth-individual’s (HNWI’s) decision to purchase or sell a luxury property is less often based around necessity and is more heavily weighted on lifestyle or investment goals. Moreover, high-net-worth (HNW) capital is less tied up in primary home equity, so these major global shifts weigh heavier on HNW second (and more) home buying and selling decisions.
During unsettling periods, what is of utmost importance for luxury home buyers and sellers is the perception of stability and the return of consumer confidence.
Many HNWIs sidelined cash until after the U.S. election… that cash is now beginning to be injected back into the market
According to a survey of more than 200 global luxury real estate agents from the Christie’s International Real Estate network—undertaken in the 10-12 weeks following the U.S. Presidential election—the outcome of the election was less important than the fact that it had concluded and uncertainty had subsided to some degree (see survey results below).
[infogram id=”fb_impact-of-us-elections-1hdw2j1zrpxx2l0″ prefix=”mZ3″]Notably, 60 % of real estate agents reported that the 2016 U.S. election outcome had little to no impact on their luxury property sales to date; 21 % observed that it had increased high-value home sales.
“Nearly half of the HNWIs in our market were sidelining cash until the election was over,” says Kevin M. Leonard of Illustrated Properties in Palm Beach Gardens, Florida. “We are now seeing that cash being injected back into the luxury real estate market.”
“When there’s uncertainty, people who can delay big financial decisions tend to do so,” adds Hall Willkie of Brown Harris Stevens in New York. He notes that national elections temporarily weaken Manhattan’s property market, but the impact was intensified in 2016 with million-dollar-plus sales dropping by over 3 % annually. At the higher end of the Manhattan market, the drop was more pronounced, with an 8 % decline in sales over $10 million.
Although a significant reduction in both ultra-prime and million-dollar-plus home sales was reflected in numerous other major primary residence markets, local factors such as an influx of new stock (Miami) and recently introduced property taxation (London), had more impact on sales volume than other macroeconomic factors such as the slowdown in the Chinese economy, the UK’s EU Referendum and the U.S. election.
“Property taxation increases, amendments to non-dom rules and uncertainty surrounding the UK’s vote to leave the European Union have all contributed to impact on transaction levels in the prime London market, which remain low,” says Lulu Egerton of Strutt & Parker, exclusive Affiliate of Christie’s International Real Estate in the U.K.
“However, London retains its attractiveness to overseas buyers and the fall in sterling following the Brexit vote has created a currency play for dollar- and euro-based buyers.”
As a result, a shift in city-level policies can have a ripple effect on the fortunes and purchasing patterns of international buyers. Vancouver’s tax on foreign buyers, for example, caused a shift in the Canadian foreign investment landscape, resulting in an uptick in sales from overseas buyers in nearby Victoria and distant Toronto. [ Why did Toronto took this year’s title as the world’s ‘hottest’ luxury real estate market? ]
Luxury housing markets in primary residence markets across the U.S. saw declines in sales volumes, in part due to uncertainty, while similar markets in Canada, perceived as more stable, saw on average an 83 % annual growth in sales.
The same holds true of London: as the UK’s EU Referendum and property taxation cooled the market, buyers migrated to other parts of Europe where financial markets were perceived as more certain. European primary-residence markets saw on average an 11 % increase in million-dollar-plus home sales in 2016 over the year prior.
[infogram id=”page-9-luxury-real-estate-sales-declined-the-most-in-primary-housing-markets-where-uncertainty-prevailed-1hzj4oy9j30p6pw” prefix=”Rml”]“Amsterdam’s property market is booming. Prices rose 9 % in 2014, 17 % in 2015, and 23 % last year,” explains Pieter Joep van den Brink of Residence 365, Christie’s International Real Estate’s exclusive Affiliate in Amsterdam.
Paris saw similar strengthening of the market, due more to local factors than to Brexit: “Historically weak interest rates, a strong decrease in luxury house prices between 2012 and 2015 and a cheap euro in US$, were the major factors that pushed the Paris market into a booming period since the beginning of 2016,” says Charles-Marie Jottras of Daniel Feau Conseil Immobilier. “Listing inventory plummeted 35 % in one year, driving prices upward.”
Ruth Kennedy Sudduth of Landvest, an exclusive Affiliate of Christie’s International Real Estate in New England, saw this in her regional market. “The stock market and strong employment underpinned a solid, though highly regionally variable, real estate market. The cities and nearby are on fire, while the rural areas which had lingered at near recession lows in pricing had a solid performance in the fourth quarter of 2016,” Sudduth adds.
In today’s increasingly globalized financial world, historically local events are now felt by luxury home buyers and sellers a world away
So while uncertainty creates a slowdown in luxury housing, we see that it can be temporary. Early 2017 is already showing signs that the prolonged slackening across some luxury property markets is beginning to ease.
[ Excerpt from Christie’s International Real Estate’s 2017 Luxury Defined white paper on the international prime property market. Read more insights from the latest report here ]
