The global luxury real estate market has had a good run recently.
Prices are up and key markets have shown healthy growth despite a period of intense uncertainty that occurred around the U.S. presidential election and inauguration of Donald Trump in 2016-17, and similarly momentous elections in the U.K. and France, as well as the Brexit vote; a massive dip in commodities and oil pricing; outbound capital flow restrictions placed on Chinese buyers; and significantly increased stamp duty land taxes enacted in London, Vancouver and Sydney.
While these geopolitical changes undoubtedly caused a pause in the luxury real estate market, "by September 2017, most uncertainty was out of the market," said Dan Conn, CEO of Christie’s International Real Estate. "And after a short standstill, people who had sat on the sidelines for 2016 and much of 2017, started getting comfortable spending again."
Looking ahead, although this spending is likely to continue, a normalization of monetary policy in the form of upward shifting interest rates, should hold prices at this current plateau, said Yolande Barnes, head of world research for Savills.
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To break this down a bit more, as the global economy has strengthened and wages have increased, interest rates, led by additional expected increases in the United States, will soon follow suit, said Liam Bailey, global head of research at Knight Frank. This means that the cost of borrowing and the cost of debt will become more expensive. While people will still buy luxury real estate, it’s unlikely that prices in the major global markets will go much higher. Instead, they’ll likely stay where they are—at a high plateau—for the foreseeable future, Mr. Bailey and Ms. Barnes said.
To predict what will happen to global real estate farther into the future, you need to consider where new wealth will be created globally and where new ultra-high-net worth buyers want to buy primary and secondary homes, experts say. Ms. Barnes believes much of this new class of millionaires and billionaires will come from Asia. But where they want to spend their money, and which cities—or markets within global cities—will be considered "hot" for real estate investment, remains to be seen.
In the near future, however, there are some news items likely to impact how the U.S., U.K., U.A.E. and Australian markets perform, explored below.
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U.S.: Expected Interest-Rate Hikes Should Slow Growth and Keep Prices Stable
When the U.S. luxury markets are viewed today, "the Trump effect was negligible," Mr. Bailey said, and the U.S. economy has continued to perform strongly and bring in a lot of foreign investment.
Leading up to three expected interest rate hikes before the end of 2018, which economists say should bring the federal interest rate up to 2.5% (it’s currently at 1.75%), Mr. Bailey said, prime U.S. markets including New York, Los Angeles and San Francisco are "bumping along on a high plateau," according to Ms. Barnes.
Miami and New York still have some over-supply, experts say, but the markets are healthy and prices remain relatively high, experts say. In Miami, luxury sales (those over $1 million) soared in the first quarter of this year, and the average luxury condo sales price rose to $1.027 million, according to Douglas Elliman. In New York, the average luxury sales price was up 4.8% quarter to quarter to $7.94 million, according to Douglas Elliman.
After the U.S. federal interest rate increases, Canada, the U.K. and Australia will respond and follow suit, as will places including Hong Kong and the U.A.E., that have a dollar peg to the U.S. currency, Mr. Bailey said. This is why a slowdown is expected worldwide.
"The only place that’s likely to buck the trend this year, and keep their interest rates low, is the Eurozone," Mr. Bailey said. That’s because while the economy has improved in the European Union, and prices have significantly increased in key markets in France and Germany, among other countries, there are still some significant problems that must be addressed before big changes to monetary policy take place.
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U.K.: Prices Expected to Remain Flat, After Recent Market Turbulence
The story in the U.K. is well-known: Stamp duty land tax increases occurred around the same time as the Brexit vote to leave the E.U. What resulted was some market instability, and decreased real estate prices—although the decreases were far less significant than the rises that preceded them—which leveled off in late 2017.
At this point, Ms. Barnes said, "it’s very difficult to disentangle whether the stamp duty change or the Brexit vote had a greater effect."
Looking ahead, Mr. Bailey said, some of that uncertainty will continue as additional details about the U.K.’s exit from the E.U. are ironed out, and details emerge about how U.K.-E.U. trade will operate.
But even as London struggles because of the stamp duty land tax increase and uncertainty caused by Brexit, the city was still second, behind New York, in the Knight Frank Wealth Report’sWealth Index, which details where the ultra-wealthy live, spend, invest, enjoy leisure time and educate their children. And foreign demand for London-based properties are still strong.
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U.A.E. Low Oil Prices Continue to Impact, as Cities Seek to Differentiate Themselves, and Show Long-Term Promise
When commodity prices and oil prices started to dip in 2014, the U.A.E. real estate market was hit hard, as money was no longer available to pay for the new luxury properties that developers were raising, Ms. Barnes said. This specifically led to price volatility in Dubai, a city that’s known for its new, luxury skyscrapers.
"The key thing to look at in the U.A.E. is how it’s going to fare in the post-oil economy," Ms. Barnes continued. Are emirates going to be able to deliver cultural offerings—like the Louvre in Abu Dhabi— that attract outside investment? And will upscale locales, such as Dubai and Abu Dhabi, retain their position as global cities worthy of real estate investment, and make it through the 21st century?
"People are looking for the winners and the losers—which cities make it and which cities don’t make it," Ms. Barnes said. "That’s going to be interesting to watch."
As prices in Dubai have recently started to edge up, Mr. Bailey said he thinks it looks quite interesting. Recent data backs up this notion that it’s a place worthy of investment. And a new U.A.E.-backed program, which if enacted, could offer potential buyers the opportunity to extend their visa by 10 years with a property purchase, could have a positive impact.
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Australia: Continuing to Prize Local Buyers, Feeling Impact of Chinese Capital Controls
The story in Australia is dominated by the fact that it’s a domestic market, much more than places like London and New York. For some time, foreigners have only been able to buy new construction in Australia—not resale properties. Stamp duty taxes levied specifically on foreign buyers also made it much more expensive for them to make a property purchase, and greatly decreased overseas demand. Then, capital controls slowed down the number of Chinese buyers entering the market.
Overall, though, Mr. Conn said, the Australian market is still very strong, and achieving record pricing—specifically on the Sydney waterfront. And there is still some foreign money.
But what you’re generally you’re left with, Ms. Barnes said, is the fact that both Sydney and Melbourne have probably hit that high plateau in value terms.
This means that Chinese and other foreign buyers looking to purchase real estate somewhere with significant upside potential will likely look elsewhere, to Vietnam, Malaysia, Indonesia or the Philippines.
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