This chart could also be called “Why International Demand for US housing is Elevated” since many European investors are looking for safe places to park their money.
Where we’ve been
Knight Frank’s Global House Price Index is published quarterly and tracks the performance of mainstream national housing markets around the world. They use Case Shiller results for the US market.
Europe at bottom:
With the Eurozone now in its second recession in three years buyer confidence is at an all-time low and it is no coincidence that all the bottom 12 rankings are occupied by European countries this quarter.
The top performers:
But it’s not all bad news. Six markets recorded double-digit annual price growth in the year to September; Brazil, Hong Kong, Turkey, Russia, Colombia and Austria.
Where we’re going
I help provide their Manhattan and Miami insights and they liked the way I characterize the state of luxury housing as a “safe-haven” and the “new international currency.” Here are the top line observations in their Q4 12 Prime Global Forecast:
• In 2013, we expect prime residential prices across the 14 cities included in our
forecast to rise by 2.5% on average, with Moscow, Miami and Dubai being the
• A sharp slowdown in the global economy is the highest risk for the world’s prime residential markets closely followed by government cooling measures.
• However, the current economic uncertainty is also considered a key driver of demand in prime cities as HNWIs seek the shelter of ‘safe-haven’ investments.
• Supply, or the lack of it, will be a key determinant of price performance in cities such as New York, Moscow and Miami in 2013.
• We envisage that government-imposed regulatory measures will keep a lid on price growth in Asia in 2013 but the west-east shift in the economic balance of power suggests more promising prospects in the medium term.
No surprises here. Knight Frank’s Global Home Price Index comprehensive ranking of housing price changes in 55 countries showed Brazil and it’s economic boom at the top of the list. The Brazilians have jump started the Miami housing market nearly single handedly because housing prices at home remain so high that the US appears much cheaper.
Global House Price Index 3Q12 [Knight Frank]
Over the summer Camilla Papale, Douglas Elliman’s CMO asked me if I would present something about the state of luxury real estate for their Elliman Magazine (and iPad app!). The finished result contained 3 parts:
Here’s the full piece in Elliman Magazine . I’ve inserted a portion of the presentation below in 2 parts:
LUXURY REAL ESTATE AS THE WORLD’S NEW CURRENCY
Since the beginning of the global credit crunch in 2008, luxury real estate has morphed into a new world currency that provides investors with both a tangible asset and a cachet that cannot be found within the financial markets. It’s as if these emboldened investors zoomed out of their local Google Earth view to discover the wider global perspective on luxury real estate.
HOW DID WE GET HERE? The US dollar has weakened in the years following the collapse of Lehman Brothers in the onset of the global credit crisis. The S&P downgrade of US debt in August 2011 from its benchmark AAA rating brought a flood of investors into US financial securities. That meant that our currency allowed us to buy less abroad, and the strength of other currencies provided international buyers with large discounts when purchasing property in US dollars. But it went further than that.
THE RISE OF LUXURY REAL ESTATE AS A “SAFE HAVEN.” The volatility of global financial markets and the resulting political fallout shook investor confidence, which in turn spurred a rise in foreign buyers seeking a safe haven to protect their assets. A wave of international buyers from Europe, South America, and Asia entered the US housing market, helping set record prices and revive luxury markets including New York, The Hamptons, and Miami.
SUPPLY-DRIVEN DEMAND. The luxury real estate market has become defined by the supply of available properties. While demand has remained constant and elevated, inventory has become a critical variable, particularly at the very top of the market, where surging international demand for one-of-a-kind properties has surpassed the limited supply. The resultant record-breaking sales of “trophy” properties have enticed more owners of luxury homes to make them available for sale.
THE RISE OF THE “TROPHY PROPERTY.” The trophy property has become a new market category that does not follow the rules and dynamics of the overall marketplace. One stratospheric price record is being set after another, and it is not only the list prices that are defining these record sales; the rarity of location, expanse of the views, quality of amenities, and the sheer size of these unique homes have all played an important part in attracting the interest of foreign buyers.
WHERE DO WE GO FROM HERE? Driven by the global credit crunch and political instability, the two factors that are expected to remain unchanged for the next several years, the US luxury housing market is expected to remain a “safe haven” for foreign investors for quite some time.
A CONVERSATION ABOUT THE COMMERCE OF GLOBAL LUXURY REAL ESTATE
I sat down with Dottie Herman and our friends across the pond, Patrick Dring, Head of International Residential, and Liam Bailey, Head of Residential Research at Knight Frank, to chat about the state of real estate in the prime markets across the globe and the rise of a foreign investment phenomenon.
JONATHAN MILLER: Douglas Elliman has a broad coverage area that includes some of the most affluent housing markets in the US. Are you seeing any short-term issues that may influence luxury investor decisions over the coming year?
DOTTIE HERMAN: At the end of this year, we may see a repeat of the consumer behavior we saw at the end of 2010 when US capital gains tax rates were expected to rise. Ultimately, the rates did not increase, but many consumers in the luxury market took preventative action before the potential tax increase and raced to close their sales by the end of 2010. Despite the ups and downs in the quarters that followed, the luxury housing market was not adversely impacted in the long-term.
JM: Paddy, according to Knight Frank’s Global Briefing blog, housing prices in central London are up sharply, but the pace of growth appears to be slowing, perhaps because of the new stamp duty (a tax on properties priced at £2M–the equivalent of $3.15M–or more). What does this mean for the luxury market?
PADDY DRING: In short, the £5M ($7.85M) market is up year-on-year. The new stamp duty on property sales above £2M seems to be having an impact only on the band just above the new £2M threshold. Foreign demand remains high and, notably, we have sold to over 62 different nationalities within the last 12 months. They are less affected by the changes in stamp duty, since the rates in London are still in line with many other European countries.
JM: Dottie, your firm has sold a large number of luxury properties this year, despite a lukewarm economy and tight credit conditions. Record sales and listing prices are becoming nearly commonplace and a significant portion of this demand for luxury real estate is coming from abroad. Do you see this developing into a long-term trend?
DH: It’s certainly been a year of records and I do think we are embarking on a period where luxury real estate has the potential to outperform the rest of the housing market. Several of the markets that we cover, Manhattan and Miami in particular, have been firmly established as highly sought-after international destinations. As much as we fret about how slowly our economy is recovering, the US has proven itself as a “safe haven” for many international investors who are concerned about the turmoil of the world economy and political stability. Luxury investors from much of Europe, Russia, Asia and South America have been buying here at the highest pace we have seen since the credit crunch began.
JM: Liam, the US is seeing a higher-than-normal influx of real estate demand from foreign investors who seem to be focusing on the upper end of the housing market. These investors are well represented from Europe, Asia and South America. Are you seeing the same phenomenon when it comes to luxury properties in the UK? What are the primary regions where this demand is coming from?
LIAM BAILEY: The focus of demand continues on London and its easily accessible suburbs. London is facing even higher global demand than New York, with the top end strongly led by Russia, Europe, Canada, and the Middle East, and demand in the new development investment market very much led by Asia.
JM: In the US, access to financing is a key challenge to domestic purchasers, including luxury investors. What are some of the key challenges facing your clients who are looking to purchase real estate outside of their own countries?
PD & LB: Financing remains a consideration for many, although mortgages are more available in many of the markets than people are led to believe. Of course, the property needs to be quality and in a core location and have a more conservative loan-to-value ratio, however, many of our clients purchase in cash, so they are more affected by market sentiment and, of course, liquidity if they need to sell unexpectedly in the future. Factors affecting market sentiment include the usual considerations, such as exchange rate, a stable political base, as well as a sound legal system that guarantees clarity of title and tax considerations. The latter of course is affecting not only the cost of acquisition (stamp duty), but also, in some countries, the cost of holding (wealth tax) and ultimately selling (capital gains tax). Access, infrastructure, and climate (if lifestyle-driven) all remain key, as do low crime rates as people become more aware of their privacy and personal safety.
JM: Since the beginning of the credit crunch, you’ve constantly stressed to your clients that the terms of a sale are just as important as the price of a sale, given the challenges of obtaining financing. How do international buyers fi t into this new world defined by tough lending standards?
DH: Despite mortgage lending in the US remaining tight, luxury markets in the areas we cover have improved quickly. I can only imagine how much stronger the US housing market would be if we saw credit ease to historically normal levels. International buyers tend to pay cash or obtain financing from their native countries, which has given them an advantage over many domestic purchasers. Combine the ability to pay in cash with both the weakness of the US dollar against many of their native currencies and a volatile global economy, and you can begin to understand why we are seeing a strong presence of international buyers in our markets. Like our friends at Knight Frank, these luxury investors are interested in our proven core markets that already have a large concentration of luxury properties. Overall, we continue to be excited about our market’s expanding presence in the global luxury housing market—there are many opportunities out there for this new international investor to explore.
-Housing prices continue to remain stable – the slight YOY dip in prices was caused by a large increase in 1-bedroom sales pulling the overall numbers down (mortgage rates driving the entry-market)
-Closed sales slipped 5% from last year but pendings jumped 4.9% ahead of last summer – 2011 had more written business in first half of year while 2012 had more momentum going through summer.
-Inventory fell 24.3% from last year to lowest level in 7.5 years. Low equity keeping many sellers from listing (those sellers can’t become buyers because of tight credit), election year paralysis and concern about direction of economy, Europe, Federal Reserve’s QE3.
-Condo price trends outpacing co-op price trends likely due to foreign buyer demand.
-Luxury market prices slipping as inventory edging higher – however there was a jump in 3-bedroom sales.
-New development sales market share at 17.8%, consistent with past several years.
-Manhattan remains one of the best housing markets in the US: employment rising, tight inventory and strong international demand – despite tight credit conditions.
Here’s an excerpt from the report:
…The Manhattan housing market showed seasonally stable pricing and sales activity. Smaller apartments continued to gain market share as mortgage rates continued to fall and city employment levels rose. The sharply declining listing inventory reached a 7.5-year low, while the monthly absorption rate demonstrated a brisk market pace as it reached a 5-year low. All price indicators posted modest year-overyear declines, as 1-bedroom apartments gained 5% market share to represent 37.8% of all sales, edging out the 2-bedroom market as the largest market segment. Median sales price was $890,000, down 2.3% from $911,333 a year ago. Average sales price and average price per square foot slipped 1.4% and 2.4% from the prior year quarter to $1,444,463 and $1,103 respectively. Year-to-date, median sales price remained unchanged from a year ago at $850,000, while average price per square foot increased 0.6%, further reflecting price stability in the overall market…
Here’s the press coverage for the report today.
-Distressed sale market share has fallen to 40.6% of all sales from 2/3 in early 2011. Fewer lower priced distressed sales are skewing prices higher.
-Non-distressed sales showed stable to modest price appreciation.
-Listing inventory continues to fall sharply.
-Days on market had second fastest rate in more than six years.
Here’s an excerpt from the report:
…The housing market in Miami’s coastal communities continued to show increases in nondistressed sales, falling inventory, and demand from foreign buyers from Europe and South America.
The median sales price jumped 20.9% to $196,500 from $162,500 in the prior year quarter. The $399,440 average sales price and $257 price per square foot both showed the same pattern, with respective gains of 17.7% and 14.2% over the same period. The 28.5% year-over-year gain in median condo prices largely outpaced the 4.4% gain in median single-family home prices. This was largely due to the drop in lower priced distressed sales activity over the past year, related to the “robo-signing” scandal at the end of 2010. In addition to the court-related foreclosure backlog, servicers slowed the volume of property entering the market during most of 2011 and early 2012. Condo sales saw more of a decline related to this matter; distressed condo sales fell 31.9% over the past year, while distressed single family sales fell only 11.7% over the same period…
Here’s a great research piece from Knight Frank on the state of housing in many of the world’s cities.
South America is dominating other regions in market performance right now. Canada shows strength (all the HGTV shows seem to be filmed there) and why isn’t Greece falling harder?
Knight Frank published their The Global House Price Index recorded its weakest annual performance since the depths of the recession in 2009, recording only 0.9% growth in the year to March 2012. Doubts over the Eurozone’s future, along with the Asian governments’ staunch efforts to cool their markets and deter speculative investment, have taken their toll.
Here’s in the index table:
For each week’s Eye on Real Estate Show on WOR NewsTalk Radio 710, we include a segment called “The BlogCast” where I discuss several housing related (sometimes a stretch) posts from some of my favorite blogs. They cover topics that are current, funny or simply a “must read”.
Saturday’s BlogCast covered the following blog posts:
[The Real Estate Bloggers] The Watergate Hotel Sold To European Investment Group For many of us, the term Watergate brings back bad memories of politicians gone bad. We forget that the scandal is named after the Watergate Complex, a group of 5 buildings near the John F. Kennedy Center for the Performing Arts. The hotel that was attached to the complex failed in 2007 but was purchased yesterday by a European real estate management company. They plan on returning the hotel to it’s former glory while keeping the option of turning some of the rooms into condos if the market will accept it.
[Straight Talk About Mortgages] Lending Rule #101 – Don’t Loan Money to People Who Can’t Pay It Back… Duh, it’s all about common sense. People who can’t pay it back shouldn’t get the loan in the first place…
[ST Paul Real Estate] Should I take the fridge? I got a call last week from a woman who is being foreclosed upon and there isn’t anything she can do about it at this point…She wanted to know if she had to leave her appliances behind when she left her home. She told me that they are fairly new and that she would like to keep them.
If you missed this past Saturday’s show or any prior show, you can listen to the podcast at any time or subscribe to it for free via iTunes to always get the latest show delivered automatically to your computer or handheld device. My Blogcast is usually in the first hour of the show.
Listen to the most recent Eye on Real Estate podcast.
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Or visit the Eye on Real Estate Website.
source: GS Investment Strategy Group
Current improvement seems to be on the low end of the range…but it’s not clear to me how this occurs at meaningful levels until excess supply is cleared.
From their Investment Strategy Group
The key changes to our 2010 outlook are as follows:
download report [GS Investment Strategy Group]
I came across this amazing table (hat tip: Robert Paterson’s Weblog) that lays out the percentage of each European country’s national debt to GDP compared to the US. The author applies a 5% debt repayment rate to estimate how long it would take to pay it off (assuming no more additional debt).
While the US is far better than the 19 other countries listed, I am more concerned about the continued growth US debt – it appears to be growing unabated.
Irish eyes are NOT smiling. It’s hard to imagine an influx of foreign investors providing meaningful real estate demand from Europe anytime soon, in addition to the restraint caused by the rising dollar relative to the euro.
Reality check – At 97% financing for 19 years, the US is beginning to feel like an FHA mortgage. Hey, isn’t FHA losing money?
I did a short interview on Bloomberg yesterday regarding their coverage of Knight Frank’s 2010 Wealth Report
The Bloomberg coverage was in reference to my contribution to the report via interview where they matched me up against their analyst Xavier Wong, Head of Research for Greater China and Hong Kong.
The prime New York market, where prices fell 12.5% in 2009, is gaining strength , but the recovery is tentative, says Leading New York property commentator Jonathan Miller
The frozen market in Manhattan in the first half of 2009 gave way to a much stronger second half of the year. By the summer, the market began to see a recovery in sales activity following an improvement in economic confidence prompted by a revival in the stock market.
While the market has undoubtedly improved compared with last year, we ought not to get too excited. The recovery of late 2009 was a short-term uptick, due in large part to a release in pent-up demand. My view is that the surge in demand is not the start of a rising housing market. While sales are up sharply, prices have moved “sideways.”
I have some lingering concerns for the New York market in 2010. The market has been aided by government stimulus measures – tax credits for first time buyers, in particular. This package will expire in mid-2010. While the US economy is growing, the high rate of unemployment – around 10% and somewhat higher locally – as well as a tight mortgage lending environment do not provide a firm basis for ongoing growth in house prices.
A real fear for 2010 is rising mortgage rates, currently at near record lows. The potential for growing foreclosures, which were not a problem in 2009, is another real factor.
One segment of the market that has seen a noticeable uptick has been international demand, where the weak dollar has prompted interest from Asia, Europe and South America. Demand from South Korea has also become more noticeable.
Looking outside New York, both Boston and Washington DC have also improved, with rising resale volumes in both markets. On Long Island, the Hamptons luxury second home market has surprised everyone with its resilience to date. As a discretionary market, there was general concern that this region would see large declines in prices and sales from the 2008 and early-2009 market turmoil. In fact, both sales and price trends have remained in line with the Manhattan market.
The Wealth Report 2010 was released today by Knight Frank Research. It is a much anticipated annual survey targeted at the high end consumer with great detail on global residential property trends. The report covers 56 high end housing markets across the globe.
Check out The Housing Helix podcast for my interview with Andrew Shirley, Editor and Liam Bailey, Head of Residential Research for the Knight Frank Wealth Report 2010.
I had provided commentary on the NYC housing market for the report.
….While the market has undoubtedly improved compared with last year, we ought not to get too excited. The recovery of late 2009 was a short-term uptick, due in large part to a release in pent-up demand. My view is that the surge in demand is not the start of a rising housing market. While sales are up sharply, prices have moved “sideways.”…
Some interesting data points:
In light of this strong growth, the Hong Kong government has threatened measures to restrict the market – notably through mortgage lending restraint, reducing, for example, the mortgage limit for luxury property from 70% to 60%. Despite these potential restrictions the market continues to grow.
This example points to an interesting development. The crippling impact of property bubbles bursting in Europe and the US has created a much more confidently interventionist approach in China, Hong Kong and Singapore (where cooling measures were introduced in September last year) among other markets.
Update: Just came across the Bloomberg video and my interview giving a quick take on the US luxury portion.