According to a recent article on Luxury Insights blog:
Wondering what the new year will bring to the luxury housing market? We are guessing it will look a lot like last year.
Five years ago the recession sent the U.S. housing market into a tailspin. Happily, 2012 appears to have been a turnaround year for the residential market; however, the recovery can still retreat into a false start due to financial and political issues — including the uncertainty created by deficit issues, an expected increase in the capital gains tax, and the Dodd Frank Act (which sets new mortgage standards as of January).
The luxury home segment has led the recovery, beginning in 2011 in many markets. One major driver of luxury market activity has been the increase in the number of wealthy U.S. households. The start of the recession saw the number of High Net Worth Individuals (HNWI) — those with a million or more in investible assets, not including their personal residence — drop dramatically. Consequently, the luxury home market cratered. However, this affluent group recovered their wealth quickly and many focused on residential real estate as a desirable asset. For some, a second or third home was both a lifestyle purchase and a portfolio play. Record low interest rates and the perception of bargain home prices were also purchase motivators for the affluent.
As a result, the luxury market in many areas enjoyed increased activity in 2011 and in 2012. For instance, California is often considered a bell weather state and it was one of the hardest hit geographic areas in the downturn. According to DataQuick, in the second quarter of 2012, million dollar home sales in California were up 10.3% above the same quarter the previous year. This was the highest level of million dollar sales since the third quarter of 2007. One of the strongest luxury market recoveries occurred in Miami where, according to Knight Frank stats, the luxury home segment saw a jaw-dropping 35% price increase over a two year period ending in September, along with declining inventory levels.
While U.S. luxury purchasers are active, a major driver of the luxury market is the wealthy international buyer. Foreign demand for U.S. homes has grown, as has the diversity of the foreign buyer prospects. The factors which influenced foreign luxury home demand in 2012, are still at the top of the list as influencers for 2013.
- Wealth creation. As wealth rises, especially in emerging countries, the number of prospects shopping for prime residential properties grows.
- The flight to safe haven. The U.S. is considered a stable, safe place to invest. For those who wish to move assets out of their home countries, the U.S. has special appeal. For some, physical safety for themselves and their families is also a consideration.
- Currency fluxuation. Although home prices slipped when we went into recession, the home price decline is aggravated when some currency exchange rates are considered. In short, the bargain prices brought by the recession were discounted further for some foreign buyers.
- The desire to own prime property and enjoy a desirable lifestyle. Lifestyle is a powerful motivator. Trophy homes in desirable areas have great appeal and supply is limited.
Where foreign buyers come from depends upon the market. Brazilians, Venezuelans, and Argentinians continue to flock to Miami along with Germans and Italians. Australians and Brazilians are boosting the Aspen market. Russians, the British and French are joining Wall Streeters in the New York Hamptons. Watch for Chinese buyers at the very, very top of the U.S. luxury market, especially in New York. Eastern Europeans are also popping up as prospects in some U.S. markets. Across all price points, Canadians still rank as the number one foreign buyers, followed by the Chinese.
All in all, without a fall off the U.S. debt cliff, a tidal wave from the Euro crisis, or an unpredictable black swan event, the luxury home market should continue to be healthy (and perhaps even grow) in 2013. If you are wondering just how big this market segment is, the $500,000 and above market represents 10% of sales and the $1 million and above market is about 1.6% of sales. Luxury is a small, but desirable market niche and this is a good time to fine tune your luxury strategy or target the luxury segment if you aren’t already.