Although it’s just a sliver of the broader housing market in ultra-competitive New York City, experts are seeing a growing number of high net worth individuals opting to sign a rental lease agreement instead of a mortgage.
“The high-end rental market’s strength is a phenomenon that has been growing along with the purchase market,” says Jonathan Miller, president of New York City-based Miller Samuel Real Estate Appraisers, alluding to the uptick in sales of luxury properties in hot real estate markets around the country. “In other words, the high-end housing market has expanded.”
But if you have enough money to own a property, why would you choose to rent instead and give up benefits like building equity?
The answer is complicated and centers on the changing dynamics of the housing market and the uncertainty that still pervades global financial markets.
U.S. News talked to the experts to find out why some wealthy would-be buyers are hesitant to put roots down:
Increased availability of high-end rental properties. Although New York City avoided the worst of the housing bust thanks to its standing as one of the most important financial centers in the world, real estate values still took a hit during the downturn.
As a result, homeowners—many of whom bought at the peak of the market—who would’ve unloaded properties by selling them, have instead hung onto them waiting for prices to rebound. In the meantime, they’re renting those properties out, experts say, making high-end rentals more accessible than they would have been just a few years ago.
“It sounds strange, but this is supply driven,” Miller says. “You’re seeing listing product that’s not usually available.”
Now, those same people who might have felt rushed into making a big-ticket home purchase have the option to rent a comparable property while they scope out the area.
“Renting is a very viable option, especially for those leaving the suburbs and getting back to the city for the first time in many years,” say Gary Malin, president of Citi Habitats, a New York City-based real estate firm. “They don’t need to rush into a decision because they can rent a very beautiful apartment that suits every need they have.”
“They don’t have to marry that apartment—they can date it and make sure they like the city, the neighborhood, high-rise living,” he adds. “If they do, then they can start looking to purchase down the line.”
Mobility and convenience. Many high net worth individuals have properties in various locations and would rather skip the cost and maintenance associated with owning a place in New York City, Malin says.
“People are willing pay a premium to have this kind of carefree living situation,” he adds, noting that some developers have responded to this demand by reserving penthouse suites in new developments for renters.
“People in that sort of stratosphere financially have a lot ideas put in front of them but if they see something and they don’t feel like they’re sacrificing anything in standard of living [they could choose to rent],” Malin says. “Especially if they’re not sure it’s going to be a long-term investment for them.”
Limited sense of urgency. With the current low-rate environment and the near-assurance from the Federal Reserve that money will be cheap to borrow for the next couple of years, there’s little sense of urgency among buyers to lock in a low rate on a mortgage.
That’s made some would-be buyers sit it out for awhile and contemplate their home purchase decision longer, Miller says.
“It’s more of timing and lack of a sense of urgency affirmed by the Fed’s policy of keeping rates low because they anticipate some challenges ahead domestically,” he adds.
Uncertainty. Although pockets of markets have seen appreciation in prices, nationally values continue to edge downward. That, coupled with economic distress in Europe and uncertainty about the future of the U.S. economy has kept some people on the defensive when it comes to spending large amounts of money.
“Especially in a shaky economy, people don’t necessarily feel like they want to deploy their capital in something because maybe the market hasn’t hit bottom yet,” Malin says. “They don’t want to risk that, but they do need to live in the city and the rental market definitely speaks to them.”