{"id":19366,"date":"2023-02-03T15:27:23","date_gmt":"2023-02-03T20:27:23","guid":{"rendered":"https:\/\/sothebysrealty.ca\/insightblog\/en\/?p=19366"},"modified":"2023-03-15T12:30:30","modified_gmt":"2023-03-15T16:30:30","slug":"strong-appeal-for-luxury-property-despite-interest-rate-hikes","status":"publish","type":"post","link":"https:\/\/sothebysrealty.ca\/insightblog\/en\/2023\/02\/03\/strong-appeal-for-luxury-property-despite-interest-rate-hikes\/","title":{"rendered":"Strong Appeal For Luxury Property, Despite Interest-Rate Hikes"},"content":{"rendered":"

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As central banks continue to enact interest rate hikes in an effort to stave off inflation, they\u2019ve also created a drag in the overall housing market, as homeowners face higher mortgage costs. For now, though, buyers are still eager to get their hands on prime property\u2014especially if they feel they\u2019re getting a deal.<\/p>\n

\u201cIf it\u2019s priced in the right range, and it\u2019s a special property, it\u2019s still moving,\u201d says Chris Klug, broker and partner, Aspen Snowmass Sotheby\u2019s International Realty. Klug says that more buyers on the ultra-high-end had been taking out mortgages in the last couple of years because of \u201cincredibly advantageous rates,\u201d now he\u2019s seeing more cash buyers, private financing, and portfolio financing.<\/p>\n

\u201cThe fear of missing out that was happening last year is now replaced by the fear of paying too much,\u201d says Michael Pallier, managing director, Sydney Sotheby\u2019s International Realty. \u201cWhile the rates are going up, [buyers] may feel they don\u2019t have to rush because, in six months\u2019 time, prices might present a better value.\u201d<\/p>\n

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Higher interest rates are indeed causing a bit of a \u201clock-in effect,\u201d according to Jim Egan, Morgan Stanley\u2019s U.S. housing strategist. On an episode of Bloomberg\u2019s Odd Lots podcast, Egan explained that many would-be sellers are choosing not to sell and take on new mortgages, which could end up being two to three percentage points higher than the ones they have now. As such, he said, he sees listings staying tight, protecting home prices from falling.<\/p>\n

\u201cWhen buyers are comparing options, they\u2019re considering both high prices and rising rates,\u201d says John Cain, global real estate advisor, Pacific Sotheby\u2019s International Realty. \u201cIf they secured a mortgage a year or two ago, they may double their interest payment by purchasing now,\u201d he says.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/blockquote>\n

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While prices may be decreasing from their spring 2022 peak, Egan says he doesn\u2019t foresee a fall in home prices. \u201cThe structure of the mortgage market today is very different than it was in 2004-07,\u201d he said during the podcast. \u201cOver 90% of the market is fixed-rate, for one. Most people have locked in their affordability,\u201d he said.<\/p>\n

According to data obtained from the National Association of Realtors, in September 2022, the number of US$1 million-plus sales was 15.5% lower than it was during the same month in 2021.<\/p>\n

That may be because of the aforementioned lock-in effect, and because some luxury buyers are holding back as they wait to evaluate the impact of increasing rates on prices.<\/p>\n

In fact, in a survey of leading agents across the Sotheby\u2019s International Realty network, more than 53% expect interest rates to affect their business this year.<\/p>\n<\/div>\n

Stock Market and Inflation Loom Large<\/strong><\/p>\n

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Because luxury buyers rely less on credit, their buying decisions may be less sensitive to spikes in interest rates and more influenced by the stock market or inflation.<\/p>\n

\u201cBad headlines and stock-market corrections make for more cautious luxury buyers,\u201d says Brian Ladd, principal broker, Cascade Hasson Sotheby\u2019s International Realty in Oregon.<\/p>\n

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. Therefore, a downward turn in the market can scare off investors in luxury real estate.<\/p>\n

\u201cEvery time we have stock-market corrections of more than 10%, our luxury buyers generally quiet down until the stock market finds stability and a partial recovery,\u201d Ladd says.<\/p>\n<\/div>\n<\/div>\n<\/div>\n

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Interest-Rate Changes\u20142022 and 2021<\/strong><\/p>\n<\/div>\n

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7.08%<\/strong> For a 30-year fixed-rate mortgage on 11\/10\/22. Interest rates first passed 7% on 10\/27\/22.*<\/div>\n<\/div>\n<\/div>\n
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2.98%<\/strong> For a 30-year fixed-rate mortgage on 11\/10\/21. Those mortgages were at less than 3% for most weeks between 7\/30\/20 and 11\/10\/21.*<\/div>\n<\/div>\n<\/div>\n

Other issues are affecting the high-end market, too, Klug says. \u201cThere are several macro challenges\u2014Ukraine, interest rates, and inflation are all affecting it,\u201d he says.<\/p>\n

Still, luxury real estate represents a safer bet for many buyers, even in high-interest-rate conditions.<\/p>\n

\u201cThe reason for buying into luxury real estate as an investment is primarily that the capital values are expected to appreciate over the long-term, due to location and scarcity of supply,\u201d Steve Tay, senior associate vice president, List Sotheby\u2019s International Realty, Singapore says. \u201cThis still holds true even in a high-interest-rate environment.\u201d<\/p>\n<\/div>\n

53% of Sotheby’s International Realty agents that believe interest rates will affect their business in the coming year, according to Sotheby’s International Realty Market Survey 2022.<\/p>\n<\/div>\n<\/blockquote>\n

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Cash buyers make a comeback<\/strong>
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\"\"91 Chemin de L'Ile, L'\u00cele-Cadieux, QC<\/a><\/div>\n<\/div>\n<\/div>\n<\/div>\n
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Over the past few years, even ultra-high-net-worth individuals have taken advantage of historically low-interest rates and used credit to purchase homes. Now that interest rates have more than doubled over the past year, reaching more than 7% at the end of October 2022, these buyers are turning back to cash.<\/p>\n<\/blockquote>\n<\/div>\n<\/div>\n<\/div>\n

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\u201cWe are definitely seeing buyers move from loans to cash,\u201d says Ryan MacLaughlin, owner and principal broker, Island Sotheby\u2019s International Realty in Hawaii. Some, he says, \u201care hoping to finance the home after the fact as a refinance with a lending institution, once interest rates go back down. They will wait for that even if it’s a year or two away.\u201d<\/p>\n

During the third quarter of 2022, 35.7% of single-family home and condo sales in the U.S. were all-cash, according to Attom Data Solutions.<\/p>\n

That number tends to be higher among luxury buyers, Sotheby\u2019s International Realty brokers say. Jacques Menahem, founder, French Polynesia Sotheby\u2019s International Realty, says about 50% of his transactions in the past year came from cash buyers.<\/p>\n

\u201cSellers always prefer cash over credit,\u201d Menahem says. With interest rates changing so quickly, banks may change their mind on preapproved loans. A seller will likely choose the less risky bet.<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/blockquote>\n

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In some places, cash buys have always been the norm. Buyers of \u201cbig-ticket properties are mainly cash buyers and therefore, quite immune to the rising interest rates at the moment,\u201d explains Chris Whitehead, managing partner LUXHABITAT Sotheby\u2019s International Realty in Dubai, who\u2019s seen an influx in ultra-high-net-worth individuals over the last 12 months. For areas like Dubai, he says, buyers are \u201cmore sensitive to the stock market and foreign exchange market fluctuations as opposed to interest rates.\u201d<\/p>\n

\u201cOur equity-to-loan ratio is probably as high as you\u2019ll find in any jurisdiction in the world,\u201d says Joe Zahm, president and broker, Turks and Caicos Sotheby\u2019s International Realty. \u201cWe have so many cash buyers.\u201d<\/p>\n

Some of those offers may be all-cash to a seller, he says, but a buyer may still be getting money off their business line of credit or on their primary home line of credit.<\/p>\n

Cain says over 50% of his clients buy all cash. \u201cIn the last three to six months I\u2019ve seen more cash buyers enter the market than financed buyers. Although rates have increased, they are still reasonable from a historic perspective,\u201d he says. \u201cPeople who need to buy due to life circumstances will still transact regardless, but if possible, may try to get smaller loans or buy down their rates.\u201d<\/p>\n

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*Source: Weekly data from Freddie Mac\u2019s Primary Mortgage Market Survey<\/em><\/p>\n

This article was originally featured in Sotheby’s International Realty’s 2023 Luxury Outlook Report<\/a> and has been adapted for Sotheby\u2019s International Realty Canada\u2019s INSIGHT Blog. <\/em><\/p>\n<\/div>\n

Photo Credits: Max Vakhtbovych \/ Pexels, Max Vakhtbovych \/ Pexels<\/i><\/p>\n<\/div>\n

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