Strong Appeal For Luxury Property, Despite Interest-Rate Hikes
As central banks continue to increase interest rates in an effort to stave off inflation, they’ve 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—especially if they feel they’re getting a deal.
“If it’s priced in the right range, and it’s a special property, it’s still moving,” says Chris Klug, broker and partner, Aspen Snowmass Sotheby’s 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 “incredibly advantageous rates,” now he’s seeing more cash buyers, private financing, and portfolio financing.
“The fear of missing out that was happening last year is now replaced by the fear of paying too much,” says Michael Pallier, managing director, Sydney Sotheby’s International Realty. “While the rates are going up, [buyers] may feel they don’t have to rush because, in six months’ time, prices might present a better value.”
Higher interest rates are indeed causing a bit of a “lock-in effect,” according to Jim Egan, Morgan Stanley’s U.S. housing strategist. On an episode of Bloomberg’s 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.
“When buyers are comparing options, they’re considering both high prices and rising rates,” says John Cain, global real estate advisor, Pacific Sotheby’s International Realty. “If they secured a mortgage a year or two ago, they may double their interest payment by purchasing now,” he says.
While prices may be decreasing from their spring 2022 peak, Egan says he doesn’t foresee a fall in home prices. “The structure of the mortgage market today is very different than it was in 2004-07,” he said during the podcast. “Over 90% of the market is fixed-rate, for one. Most people have locked in their affordability,” he said.
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.
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.
In fact, in a survey of leading agents across the Sotheby’s International Realty network, more than 53% expect interest rates to affect their business this year.
Stock Market and Inflation Loom Large
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.
“Bad headlines and stock-market corrections make for more cautious luxury buyers,” says Brian Ladd, principal broker, Cascade Hasson Sotheby’s International Realty in Oregon.
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.
“Every 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,” Ladd says.
Interest-Rate Changes—2022 and 2021
For a 30-year fixed-rate mortgage on 11/10/22. Interest rates first passed 7% on 10/27/22.
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.
Source: Weekly data from Freddie Mac’s Primary Mortgage Market Survey
Other issues are affecting the high-end market, too, Klug says. “There are several macro challenges—Ukraine, interest rates, and inflation are all affecting it,” he says.
Still, luxury real estate represents a safer bet for many buyers, even in high-interest-rate conditions.
“The 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,” Steve Tay, senior associate vice president, List Sotheby’s International Realty, Singapore says. “This still holds true even in a high-interest-rate environment.”
The percentage 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.
Cash buyers make a comeback
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.
“We are definitely seeing buyers move from loans to cash,” says Ryan MacLaughlin, owner and principal broker, Island Sotheby’s International Realty in Hawaii. Some, he says, “are 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.”
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.
That number tends to be higher among luxury buyers, Sotheby’s International Realty brokers say. Jacques Menahem, founder, French Polynesia Sotheby’s International Realty, says about 50% of his transactions in the past year came from cash buyers.
“Sellers always prefer cash over credit,” 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.
In some places, cash buys have always been the norm. Buyers of “big-ticket properties are mainly cash buyers and therefore, quite immune to the rising interest rates at the moment,” explains Chris Whitehead, managing partner LUXHABITAT Sotheby’s International Realty in Dubai, who’s seen an influx in ultra-high-net-worth individuals over the last 12 months. For areas like Dubai, he says, buyers are “more sensitive to the stock market and foreign exchange market fluctuations as opposed to interest rates.”
“Our equity-to-loan ratio is probably as high as you’ll find in any jurisdiction in the world,” says Joe Zahm, president and broker, Turks and Caicos Sotheby’s International Realty. “We have so many cash buyers.”
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.
Cain says over 50% of his clients buy all cash. “In the last three to six months I’ve seen more cash buyers enter the market than financed buyers. Although rates have increased, they are still reasonable from a historic perspective,” he says. “People 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.”
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