Last year, median home prices in Los Angeles shot up by roughly 10% to 40% in many Westside neighborhoods including Beverly Hills, Bel Air and Santa Monica, according to Douglas Elliman reports. And this price growth is nothing new.
For the past five years, prime L.A. locations have seen significant and continuous year-over-year price increases, resulting in properties almost doubling in value. "I like to say that $10 million is the new $5 million," says Paul Habibi, a professor at the Ziman Center for Real Estate at the University of California, Los Angeles. "It’s like we blinked and prices at the luxury end of the market shot up dramatically."
Erin Kennelly, the executive director of research at Los Angeles luxury brokerage The Agency, says that data support this point. He notes that there were at least 54 homes that sold for above $10 million in L.A.’s Westside in 2017.
There are also almost a dozen properties currently priced above $80 million in L.A. And Later this year, a mountaintop behemoth is expected to be listed for $500 million.
What’s behind this continuous and steep price growth when luxury home prices in other top-tier U.S. cities, including New York, Miami, and San Francisco, have slowed, flattened, or dropped?
More:Los Angeles Luxury Market Cools at the Highest End
While a recent influx of foreign capital, a strong local economy, and a growing tech sector in what’s known as Silicon Beach have played a role, the true driver of this growth, experts say, comes down to market fundamentals: demand that is far outpacing supply. "We don’t have enough houses, and we’re not building enough houses," Mr. Habibi says. "That’s the leading reason we have this sort of price appreciation."
Most in-demand neighborhoods show greatest growth
While Los Angeles is a huge, sprawling city, most high-net-worth individuals want to be in one of a few Westside neighborhoods, including Beverly Hills, Bel Air, and Brentwood. These places are all close to where people need to get for work, shopping, and fun, Mr. Kennelly says, noting that "convenience has become more and more important to people over the years, which has exacerbated supply issues."
Prices for Beverly Hills flats illustrate how this trend has played out, experts say. Tear-downs in the flats now cost $7 million or $8 million, Mr. Habibi says, and luxury condos in buildings like the Montage, now trade at up to $3,000 per sq. ft. when they were closer to $2,000 per sq. ft. just three years ago, Mr. Kennelly says.
For tech employees who favor that same convenience and walkability, homes in Venice are a big draw, says Tami Pardee, the CEO of real estate brokerage Halton Pardee + Partners. She notes that the same convenience factor draws families to nearby Santa Monica, Mar Vista, and Culver City, and beach enthusiasts to Malibu or Manhattan Beach.
Unfortunately, these are the exact places facing the most serious building constraints, Ms. Pardee says, pointing out that there’s less housing inventory in some of these areas than there was 40 years ago.
More:Katy Perry Relists Los Angeles Compound
A few factors contribute to the lack of building, Mr. Habibi says. There are tough entitlement hurdles, he says, and strict regulations to meet. Then there is a lot of "local Nimby-ism in these communities—-especially in the high-end ones—that makes it almost impossible to introduce new inventory if you’re a developer," he says, noting that planning commissions and city councils that are beholden to their residents are often opposed to any growth measures.
When developers are approved to build on the Westside, they often raise massive 300-plus unit condo buildings, says developer Jonathan Genton, the CEO and founding partner of the Genton PropertyGroup, who is currently pre-selling condos in the under-- construction, 59-unit Four Seasons Private Residences in Beverly Hills—a project that took him "years and years" to get approved.
More room to grow
Even with this price increase, Los Angeles still has room to grow, experts say—particularly because luxury housing stock is still considered a bargain when compared to London, New York, and Hong Kong, where there’s some oversupply, Mr. Habibi says.
More:Tyler Perry Looks to Flip Beverly Hills Mansion for $17 Million
While geopolitical issues and new federal tax changes might have an impact on prices, generally, they’re unlikely to affect buyers at the top of the luxury sector, Mr. Genton says. Mr. Habibi agrees, adding that he doesn’t see any other market indications that spell trouble, such as lenders overextending themselves or price-to-income ratios shifting into bubble territory, as in 2006. "My indications are that 2018 is going to be a pretty good year," he says.
This story first appeared in Mansion Global magazine.