Bloomberg — Following 2022, where luxury real estate stayed relatively stable, even as interest rates jumped and the stock market slumped, the coming 12 months will see sustained demand, according to a new 2023 luxury outlook report from Sotheby’s International Realty.
“You’re seeing wealth creation grow at such a fast pace that there’s no impact on the demand side of the luxury housing equation,” says Bradley Nelson, the company’s chief marketing officer, who spearheaded the report.
That wealth, he says, will continue to run up against an entrenched ownership class that might not have incentives to sell. “The majority of affluent individuals own their primary residence, if not multiple residences, and to the extent they’re using financing for those, they have really favorable economics,” he explains, referring to the historically low interest rates that predated early 2022. “So what that could mean is just less inventory coming onto the market.”
Some 53% of Sotheby’s agents expect interest rates to affect their business in 2023, according to the report.
Looking for Value
Demand won’t necessarily bring rising prices.
Given that luxury buyers might try to avoid financing, stock market volatility and a global recession could make buyers increasingly price-sensitive this year. “Many luxury buyers use their equities portfolio to purchase a home, either by selling a portion of their stock or taking a loan against their portfolio,” the report continues. “Therefore, a downward turn in the market can scare off investors in luxury real estate.”
Nelson suggests that 2023 could be the year that luxury home buyers go ever so slightly off the beaten path. “I think the biggest growth in terms of value will be what are considered to be second-best locations,” he says. “So if you’re dying to buy something in Colorado to ski, Aspen has seen such price appreciation that there’s probably more opportunity for appreciation and value in one of the other ski resort communities.”
The same goes for the beach, he continues. “In Southern California, where is the most expensive oceanfront property in the state? It’s likely in Santa Barbara and Montecito and Carpinteria. So perhaps oceanfront properties further south, say in San Diego, could have greater opportunities for price appreciation.”
Similarly, the report predicts that Americans will continue to stretch the strong dollar wherever it has the biggest impact.
Last year, 40% of Sotheby’s International Realty’s luxury buyers in Mexico City were foreign; this year, the report says, that number is anticipated to grow to 60%. The percentage of American luxury buyers in Italy increased from 5% in 2021 to 13% in 2022, according to the report.
“You’re just looking at relative comparisons,” says Nelson. “So if you’re contemplating a ski property, comparing Switzerland to Aspen, the run-up of price appreciation in Aspen compared to Switzerland is really quite staggering.” Switzerland, in other words, could suddenly—and perhaps for the first time in history—look like a bargain. “If the dollar is on parity with the euro, it just becomes more attractive, and you have more options than you did,” Nelson says.
This year could also see an inflection point in the way real estate is used as a tool for intergenerational wealth transfer, according to the report. Giving heirs real estate through trusts and LLCs, or simply transferring a deed to a child’s name, has the potential to reduce estate taxes.
“This isn’t something new,” Nelson says. “We’ve been talking about the intergenerational transfer of wealth for a while.” But this year, he continues, “is when it’s going to show up in the market,” most likely in the guise of further constraining supply. “A lot of second-home properties are not coming onto the market,” he explains, “These are being positioned as generational properties, and we see that accelerating in 2023. It’s purely a demographic reality.”
This, Nelson says, leads back to the biggest anticipated challenge for luxury real estate this year. “The biggest headwind by far is supply,” he says. “Obviously, you couldn’t say with a straight face that the current interest rates are not a headwind to the market. But I think it’s compounding the inventory situation and making it even worse.”
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