Month: July 2024

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Mid-Year Luxury Report 2024: Industry Horizons

What will the anticipated drop in U.S. mortgage rates mean for real estate markets?

An intensely awaited development for the U.S. housing market this year is a long-anticipated fall in interest rates. While inflation has dropped over the past year, this progress has been slow, and officials within the Federal Reserve, the country’s central bank, have kept interest rates at 5.25% to 5.5%—a 23-year high—since July 2023. 

Where the Federal Reserve leads, mortgage rates follow. The average 30-year rate reached a peak of 7.79% in October 2023, the highest level in 20 years, according to national mortgage lender Freddie Mac. As a result, property sales have been on a steady decline over the past three years, based on U.S. Census data. The difficulty in securing a property during this higher-rate cycle even led U.S. President Joe Biden to comment on the issue in his State of the Union address in March 2024.  

He proposed a US$10,000 tax incentive designed to encourage first-time buyers and those wanting to sell their starter homes. “I want to provide an annual tax credit that will give Americans US$400 a month for the next two years as mortgage rates come down to put toward their mortgage, when they buy a first home or trade up for a little more space,” he said.

With another presidential election taking place in November 2024, concerns that the Federal Reserve’s decision on rates might be further delayed were dismissed by its chairperson Jerome Powell, who said the bank’s policymakers will “do what we think is the right thing, when we think it is the right thing.” 

Industry experts expect borrowers to get a bit of breathing room by 2025, however. The Mortgage Bankers Association estimates that rates will fall to about 5.9% by 2025, while Wells Fargo has made a similar forecast of 6%. In mid-June 2024, the Federal Reserve projected that it would only make one cut to interest rates this year, with Powell saying the “restrictive” policy “is having the effect we would hope for” in stabilizing the economy.

“I believe we can say with some certainty that U.S. mortgage rates will be lower at the end of the year,” says Anthony Chan, former chief economist, JPMorgan Chase. He anticipates that the rate at the end of 2024 will be around 6.4% and will fall to 5.9% in 2025.

“As buyers see lower rates, they will be less worried about the ‘lock-in effect’—the hesitancy of selling their house if it means taking out a higher-rate mortgage for their next home,” adds Chan. “This will ultimately support housing activity if the economy avoids a slowdown.” Fears of a downturn have dropped significantly, with JPMorgan Chase reversing its prediction in 2024. At a speech at the Economic Club of New York at the end of April 2024, the bank’s Chief Executive Officer Jamie Dimon said the economy was “booming,” adding that “the American consumer—even if we go into recession—is much wealthier than before.”

Less Means More

While leading institutions predict interest rates will decline, homebuyers face other roadblocks to securing a property: rising prices and low inventory. Although the number of homes on the market has risen this year, according to data released by the National Association of Realtors in April 2024, the projected time it would take for this current inventory to run out if no additional homes were built or offered for sale is 3.2 months—well below the six-month national average. Inventory for newly built homes is above this average, at 8.3 months, according to U.S. Census data.

This, in turn, could create upward pressure on prices until inventory reaches normal levels. Investment bank Goldman Sachs estimates that property prices will rise in the U.S. due to pent-up demand. According to Roger Ashworth, the firm’s senior strategist on its structured credit team, and analyst Vinay Viswanathan, home prices could rise by 5% in 2024, and by 3.7% in 2025.

J.P. Morgan Private Bank advised its clients in April 2024 that “now is a good time to buy a luxury home.” The bank said this was because the luxury market “is not impacted by changing mortgage rates like the overall housing market is” but is driven by increases in total net worth. “A post-pandemic surge in the total wealth of the top-income households… has spurred dramatic gains in luxury housing prices,” the bank added, and “that shows no signs of abating.”

Cities such as Chicago, Illinois are already seeing this effect. “Lincoln Park has been more in demand than I have seen in 20 years due to the lack of inventory and the healthy amount of appreciation over the past few years,” says Sam Jenkins, vice president of sales, Jameson Sotheby’s International Realty. “Good inventory that is priced correctly is few and far between.”

Despite the 5%-10% increase in prices, he says the Chicago market is fairly accessible. “But the time is now if you are looking at the big picture in the long-term,” adds Jenkins. “By next spring it could be a frenzy again, with multiple bids and more demand waiting in the wings.” 

In New York City, prices could be tempered as sellers who have been waiting for a year or more finally list their properties. “It is likely that as interest rates fall, sellers will feel more bullish about the market and finally list their ‘warehoused properties,’” says Jonathan Hettinger, senior global real estate advisor, Sotheby’s International Realty – Downtown Manhattan Brokerage. “This increase in supply could limit the price appreciation we would normally expect in a declining interest rate environment.”

In New York City, the market for luxury properties selling above US$4 million has been somewhat insulated from the rise in interest rates. “This is because many such purchases are done on an all-cash basis,” says Hettinger. “It’s likely that a decline in interest rates will impact lower-priced properties more than those at the top end. Cash buyers always have a major leg-up on buyers who require a mortgage—I don’t see this changing.” 

George Ballantyne, global real estate advisor, Gibson Sotheby’s International Realty in Boston, Massachusetts, agrees. “I don’t think I have any luxury buyers who have mentioned interest rates during their search or negotiation,” he says. These buyers have other sources of financing and their offers are not contingent on them obtaining a mortgage, adds Ballantyne.

A similar effect is seen on the West Coast, where “many Bay Area residents have access to substantial assets, whether they are personal or familial,” says Alex Hachiya, senior real estate advisor, Sotheby’s International Realty – San Francisco Brokerage. “Now more than ever, sellers prefer to work with buyers who make all-cash offers.”

Hachiya also echoes a warning about waiting for interest rates to come down, as this “will most likely mean buyers will end up paying a higher purchase price, since additional buyer activity will drive prices up.” 

In general, a more important factor in the luxury field is how U.S. equity markets are performing and what returns are being generated, says Chan. “If investors are doing well, as they did in 2023 and have so far in 2024, that will boost demand for luxury housing.” Buyers who have seen massive gains in their stock market portfolios may also opt for slightly more expensive homes when interest rates start declining, he says, as a way to secure those profits. 

Global Ripples

Global financial markets are interconnected, so a change in U.S. interest rates affects capital flows in other countries, which in turn can lead to changes in interest rates, says Paulo Fernandes, owner and CEO, Paris Ouest Sotheby’s International Realty in Paris, France. 

Europe’s real estate markets have already seen some softening—prices for residential properties declined by 0.3% in the EU in 2023 and 1.1% in the Eurozone, based  on data from Eurostat released in April 2024. The largest drop occurred in Germany (7.1%) where economic growth has been slow, while prices rose in Bulgaria (10.1%), Croatia (9.5%), Lithuania (8.3%), Poland (13%), and Portugal (7.78%) due to higher growth.  

Any impact felt in France from falling interest rates in the U.S. will be “indirect, complex, and may take some time to materialize,” says Fernandes. “It is difficult to give a precise time frame, as it depends on many factors and how the financial markets and central banks react to the new conditions. The national economy and the state of the political sphere should also be taken into account. These can attenuate or amplify the impact.” 

The same applies on the other side of the world. “If interest rates increase, the yen will appreciate, which may impact the number of inbound clients for a bit,” says Mugi Fukushima, director, List Sotheby’s International Realty, Japan. “Overseas clients account for 30% of our clientele, so we’re watching what happens [in the U.S.] quite closely.”

“Some estimates suggest that it takes between one and two years for U.S. monetary policy to have its maximum effect,” says Julian Brown, managing director and founder, New Zealand Sotheby’s International Realty. “However, there is a large degree of uncertainty because the structure of the economy changes over time, and conditions vary.”

Fluctuating exchange rates are important to how attractive the New Zealand property market is. “We have a lot of international interest, especially from the U.S., due to the weaker New Zealand dollar,” says Brown. Buyers who are interested in purchasing homes in New Zealand also have more flexibility when it comes to mortgages, as they can be split into multiple loans at different terms and rates.

Buyers in the U.S. should also be aware that while 7.55% may be the standard for a 30-year fixed-rate mortgage there now, they vary globally, averaging 3.95% in France for example, or as high as 11.01% in Mexico, where most property deals are primarily done in cash. These rates are influenced by various factors, including the monetary policy of central banks, the local inflation rate, and each country’s economic growth.

“The bottom line is that residential real estate markets in the United Kingdom, Europe, and Asia are influenced by economic growth, while luxury markets are more influenced by local equity markets,” says Chan. “In Asia, Thailand and Malaysia are facing some growth headwinds. After a recession, New Zealand may recover during the second half of the year. South Korea is expected to enjoy stable economic growth. Japan may be slowing down, but is coming back with a booming equity market, which should boost sales of real estate.”

Mortgage rates vary widely across the world, as does the typical term of a loan. There are also many variations in the types of deals offered by mortgage lenders, from long-term or time-limited fixed-rate deals to variable rate loans tied to the current interest rate.

Speak with your Sotheby’s International Realty Global Advisor to learn more today.

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Mid-Year Luxury Outlook 2024: People Power

More than half of the world’s population will vote in national elections this year, so how will political change affect real estate markets?

This year marks an unprecedented wave of national elections across the globe. According to Reuters and The Economist, about half of the world’s voting-age population—over four billion people spanning nearly 80 countries that collectively account for more than 60% of global GDP—will be eligible to cast their ballots in what Time magazine has dubbed “the ultimate election year.”

The most closely watched election is in the U.S., the world’s largest economy and third-largest nation by population, which will elect its next president in November 2024. The Democratic and Republican party platforms’ approaches to real estate are starkly different. Democrats are looking to improve housing affordability through initiatives such as tax credits and down-payment assistance, while Republicans aim to stimulate economic growth through pro-business, low-tax, low-regulation policies.

“The U.S. 2024 presidential election represents a critical moment for investors and financial analysts around the world—with the potential to have an impact on several areas, from economic policies to specific markets, the outcome could shape the global economic future,” says Renata Victorino, director, Bossa Nova Sotheby’s International Realty in São Paulo, Brazil. Victorino and her colleagues in South America are keeping a keen eye on what is happening in the U.S., even as municipal elections take place in Brazil in October 2024 to decide the leaders in more than 5,000 cities and towns across the country.

Meanwhile, in other areas of the world, India—the largest nation by population—started its massive six-week election process in April 2024 and voting for the parliament of the 27-member European Union took place in June 2024.

These events could have a dramatic effect on real estate markets for years to come, with the outcomes already playing out in countries that held elections in the first half of 2024, and the anticipation of changes in the political landscape felt in countries that have yet to hit the polls.

The Election Effect

“Historically, the housing market tends to experience a slowdown in activity during presidential election years,” according to a report issued by the Nationwide Mortgage Bankers in March 2024. “This trend is particularly noticeable in the months leading up to the election as individuals prioritize political developments over real estate decisions.”

“Every election year the market typically softens,” says Claire Reynolds, managing partner, United Kingdom Sotheby’s International Realty in London, who has been involved in luxury property sales for two decades. “Uncertainty can create a wait-and-watch attitude, resulting in a market with temporarily subdued growth.”

Christie-Anne Weiss, global advisor, TTR Sotheby’s International Realty, Washington, D.C., who has more than 40 years’ experience in navigating the market during presidential elections, agrees. “From my experience, what we see again and again is that our market gets quieter around October,” the month before Election Day, she says. “Once the election is over and we know who the president is, business will resume as normal. It is buyer psychology; people do not make major investment decisions when there is imminent uncertainty.”

This effect spans the world. Pre-election uncertainty “slows down housing sales, specifically in metro markets, and impacts stock market activity, especially if a coalition government looks like it’s coming into power,” says Ashwin Chadha, chief executive officer, India Sotheby’s International Realty, whose background as a seasoned banker with BNP Paribas, Citibank, and Barclays has been invaluable to his work in real estate.

A sense of political stability, on the other hand, can have an unsurprisingly positive effect. Since India’s incumbent Bharatiya Janata Party (BJP) has held onto power in this year’s elections, Chadha observes that the real estate market is likely to benefit. “The current government has reiterated its intentions for high spending, drawing in investments to boost the manufacturing sector,” he notes. “Both infrastructure spending and manufacturing augur positively for the property market, including luxury real estate.”

Manufacturing is one of the industries that has led to the rise in the country’s millionaires, which numbered 850,000 in 2022, an increase of 473,000 since 2012, according to research by the Swiss bank Credit Suisse. It also calculated that the number of millionaires in India grew annually during that time by around 8.5%, compared with an average GDP growth of 5.6%.

Nearly 80 countries (dark blue on map) are holding elections in 2024, according to news sources including The Economist, Reuters and Time magazine. This equals:

4 billion people eligible to vote in elections worldwide

50% of the world’s population

60% of GDP

Hein Pretorius, real estate associate, Lew Geffen Sotheby’s International Realty in South Africa, says May 2024 was a “watershed” election for South Africa. “This is the first year since 1994 that the ruling African National Congress [ANC] party does not have an outright majority,” he says. “The ANC is going to have to choose a partner in a coalition government, and it has a number of options.” The party’s main opposition, the Democratic Alliance, which has pushed a major land reform policy that would transfer state-owned land to individuals, has said it is open to coalition talks.

In the U.K., meanwhile, the Conservative and Labour parties went head-to-head in a general election on July 4, 2024 with the Labour party winning by a clear majority.

“The recent elections offer an opportunity for change. Against the backdrop of an optimistic interest rates outlook, housing plays a big part of the new government’s manifesto,” says Reynolds. “Only 18% of buyers [in central London] are purchasing their main home, 54% are purchasing a second home, and the other 28% are buying for investment,” Reynolds adds, citing statistics gathered by her firm. “International investment is hugely vital for the prime central London market, with the three most dominant groups of buyers being from the U.S., the Middle East, and China.”

Keeping Watch on Interest Rates

While real estate agents the world over are watching out for political changes, they are keeping an even closer eye on interest rates, which may play an even bigger role in homeowners’ decisions to buy and sell than who occupies the seats of power. This is because interest rates are set by the Federal Reserve’s Federal Open Market Committee, a group of 12 banking leaders, and not by those seated in the White House or Congress.

“There’s a lot more conversation about politics this year, and a lot of polarization,” says Russ Anderson, president and chief executive officer, Briggs Freeman Sotheby’s International Realty in Dallas, Texas, who has three decades of experience in real estate and banking. “But, when it comes to real estate, people are more focused on interest rates than politics. No matter who wins, if interest rates start falling, I think people will buy. If they stay elevated, people will remain on the sidelines.”

Weiss echoes this view, saying that the major drivers in property markets this year are “interest rates and the broader economic environment, more so than the upcoming election.” While interest rates are affecting the market at various price points, Weiss sees transactions taking place across the board, especially with the increase in luxury inventory in the Washington, D.C. area. “It is a wonderful time, in particular, for cash buyers,” she says.

In Brazil, rates are already going down, and are expected to fall further, Victorino points out. The country’s central bank reduced the basic interest rate by half a percentage point in March 2024, reducing it from 11.25% to 10.75%. “The change helps to make financing for real estate more accessible,” she says. According to a survey of economists released by Brazil’s central bank, the expectation was that by the end of 2024, rates would reach single digits. “The most affluent buyers do not depend on credit, but for investors, the reduction in interest rates makes real estate a more interesting option, favoring those seeking long-term profitability.”

As for India, strong economic fundamentals are being bolstered by falling interest rates along with rising wealth. “The economy is growing by close to 8%, and inflation is now pretty much under control,” says Chadha. “According to a report by Jefferies, a leading global, full-service investment banking and capital markets firm, India is expected to be the world’s third-largest economy by 2027. It is currently the fifth-largest economy, having just displaced the U.K., and our prime minister has an aggressive economic plan.” Such economic growth would also affect property markets.

An Interconnected World

While real estate agents are watching their own local elections closely, the property market is highly interconnected globally, so they have an eye on other elections as well, and the U.S. election looms the largest.

Chadha, even in his bullishness, recognizes concerns from abroad. “There are always risks,” he says. Internationally, a slowdown in the U.S. could have “a cascading effect on foreign investment.”

But Victorino points out that “investment in the real estate market is one of the most stable, and the easiest to recover, even in unstable scenarios.”

Experts including Lawrence Yun, chief economist at the National Association of Realtors (NAR), agree that investing in real estate is solid in the long-term. According to a report issued by the NAR in 2023, upper-income households in the U.S. saw the value of their homes increase by an average of US$150,800 over the past 10 years. “This analysis shows how homeownership is a catalyst for building wealth for people from all walks of life,” says Yun, adding that, on average, homeowners are able to build “a net worth about 40 times higher than that of a renter.”

“An uncertain market can present good opportunities for those with an appetite for higher-risk investments, or those who take a longer-term view,” says Reynolds. “For those taking a five-year or longer view, we’re forecasting good growth.”