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Two Key Factors Will Impact the Luxury Housing Market: Report

(Bloomberg) -- Elections around the world are set to have a profound, albeit temporary, impact on luxury housing, according to a new midyear Luxury Outlook report from Sotheby’s International Realty.

“We really wanted to take a temperature check on what potential the US election might have on the market,” says Chief Marketing Officer Bradley Nelson, who spearheaded the report. “Globally, what we found when we spoke with colleagues, and did research in various parts of the world, is that there does seem to be a temporary dampening in transactional activity for a very short window immediately leading into an election.”

The report references elections ranging from the UK to the US to South Africa to India and quotes Christie-Anne Weiss at TTR Sotheby’s International Realty in Washington, DC, who says, “From my experience, what we see again and again is that our market gets quieter around October,” the month before Election Day. “Once the election is over and we know who the president is, business will resume as normal,” she continues. “It is buyer psychology—people do not make major investment decisions when there is imminent uncertainty.”

Elections won’t simply affect buyer behavior; they’re also anticipated to constrain supply. “You may decide this is a very noisy moment in time,” Nelson says, referring to a month leading up to an election. “So you might remain off-market” until elections are concluded, he says. “I think that’s a very common exercise.”

Interest-Rate Impact

But Nelson says elections are expected to be a sideshow compared with broader, global monetary policy. “The election is far, far, far overshadowed in terms of the performance of the housing market, by interest rates,” he says. “The interest-rate environment has stayed much higher for much longer. If you are looking for a cause and effect of what’s happening in housing right now, it’s really tied to high rates.”

The Sotheby’s report also quotes a broker in Dallas, who says that “if interest rates start falling, I think people will buy. If they stay elevated, people will remain on the sidelines.” The report goes on to cite luxury real estate transactions in Brazil, where rates have already begun to fall. It quotes the Brazilian broker Renata Victorino, who says “the most affluent buyers do not depend on credit, but for investors, the reduction in interest rates makes real estate a more interesting option.” 

Given that “every single expert that we interviewed for the report is predicting that rates will not start with a ‘5’ until 2025,” Nelson says, there’s a chance that luxury transactions will remain comparatively subdued for the rest of the year. “Your home is not appreciating as quickly as it did if you had purchased it in February of 2020,” he says. “But the value has remained pretty stable.”

An ‘Attractive Time to Buy’

This doesn’t mean there are deals to be found. As demand continues to outstrip supply, prices for luxury real estate around the world continue to remain firm, Nelson says.

It’s a phenomenon, he says, that can be attributed at least in part to “an older generational cohort that would have typically sold their home to downsize but are really choosing to age in place.”

This is the product of two factors: “They’re looking at the opportunities to downsize and seeing that it’s just as expensive as the larger home that they already have,” Nelson says. “And the second factor is they've accumulated so much wealth in their lifetime that they can really afford any in-home care that they might need and age in place for longer.”

Given that this generation isn’t going anywhere in the short to medium term, supply looks to be constrained for a while. But with falling interest rates set to bring more buyers back into the market, competition could spike precipitously for the few homes that are available. With that possibility on the horizon, “now is actually a pretty attractive time to buy,” Nelson says. 

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