There is an increased worry of a global recession as a result of rising inflation worldwide. However, as many novice real estate investors learned in 2008, economic volatility presents a chance to buy physical assets. Particularly, this applies for the ultra- luxury market. Here, the ultra-wealthy tend to invest in luxury real estate
There has been some observation that more new clients preferring to store their money in a low-risk luxury asset with a higher chance of appreciating due to historically gorgeous local neighborhoods, expansive acreage and square footage, and recently refurbished buildings as the value of the dollar continues to fluctuate.
The ever increasing value of luxury real estate
The value of ultra luxury real estate increases practically always. For instance, the average trade price in the $10 million+ segment in the Hamptons was $15.52 million in 2016. As of now in 2022, it is $19.95 million, and it may rise more before the year is up. Even with market volatility over the years, the average value of ultra-luxury properties has climbed over the long term for a total return of 28.54%, even if this average price metric has fluctuated between quarters in all markets.
Salacious headlines claim that given the macroeconomic situation right now, all markets are doomed to fail. It is true that increased interest rates make financing a new house more expensive. It’s also true that ultra-wealthy homeowners whose primary property is worth $10 million or more must replace their home before placing it back on the market. This is true because doing so it would be more expensive now when interest rates are higher than they would be in 2020 or 2021. As a result, many people have pulled their houses off the market, which has caused inventory to be consumed.
In other words, the decrease in trade activity is more indicative of supply than demand. US companies can’t recall a period when they had so few listings to choose from and so many keen purchasers ready to purchase a property worth at least $10 million.
Right property at the right time
Drops in trading volume relative to 2020 and 2021 are another indicator of market stabilization in secondary markets. Between 2019 and 2021, South Florida, a developing alpha market prior to Covid-19, doubled in size, attracting a significant flood of buyers from the northeast. The 46% decrease in trade volume in the third quarter versus the same period in 2017 indicates a slowing market velocity, which usually heralds a market cycle’s maturation and sustainability.
The third quarter in the Hamptons saw fewer sales in the $10 million+ range (15 trades), but it ended with 20 properties entering into contracts, suggesting that demand is still there but that purchasers are patiently waiting for the right property to come up for sale at the appropriate price. Despite the Hamptons’ phenomenal performance in 2020 and 2021, it is still doing quite well compared to its pre-pandemic rates. With 61 trades to date, another 20 under contract, and the entire fourth quarter still ahead of us, we are on pace to surpass the 70 ultra-luxury residences sold annually on average between 2016 and 2021.
Do the ultra-wealthy invest in luxury real estate in New York City?
The ultra-luxury buyers in New York City have different incentives than those who went to the Hamptons or South Florida during the pandemic, despite the fact that the city is undoubtedly doing better than its 2020 levels. Smart money purchasers of today are patient and prepared to wait for a property and what they believe to be fair-market worth. Over the past two years, all markets have seen a decrease in bidding wars. The high percentage of sales of homes worth $40 million or more that experts observed in the third quarter—22% of all sales of properties worth $10 million or more, as opposed to their historical average of 13%—best illustrates buyers’ patience.
The few discerning ultra-wealthy buyers able to invest in a luxury real estate of $40 million or more have found fair market value by taking advantage of their patience and market volatility in the largest and most costly price class. For the rate of sales to stabilize, as in the $40 million+ ultra-wealth class, expectations between sellers and buyers must be in line throughout the whole luxury real estate market.
Last quarter, the city also experienced record-high rates of new development trades. As developers were preparing for people’s eventual return to the city, the development of ultra luxury real estate increased in 2020 and 2021. In fact, new development sales surpassed any single quarter in the previous three years. They made up 39% of all trades totaling $10 million or more so far this year, compared to an average of approximately 18% in previous years, demonstrating sustained demand for high-quality goods.
Ultra luxury real estate more alluring than ever
For high-quality real estate, there has never been greater liquidity on the buyers’ side, but this liquidity is more intelligent than before. As quality inventory becomes available, ultra-wealthy buyers are willing to pay fair value and invest in the luxury real estate. But as the new year is right around the corner, sellers’ pricing expectations are beginning to match buyers’ perceptions of value, making ultra luxury real estate more alluring than ever.
