Luxury Real Estate Remains a Seller's Market

Luxury Real Estate Remains a Seller's Market

  • Simantha Robinson
  • 07/28/22
 
Historically, the start of 2022 saw one of the strongest markets for luxury real estate. Demand for luxury properties outpaced new properties listed for sale, and inventory levels were at an all-time low in most of North America’s luxury markets. Prices continued to escalate, reaching new heights as sellers received multiple bids, over-asking prices, and contracts without contingencies.
 
Experts predicted, including the Institute, that the market would slow in 2022. However, there didn’t seem to be any obvious signs, even in March, that the demand for luxury properties would change as dramatically as it did and in such a relatively short period of time. Certainly, no one anticipated the dramatic upswing of inventory levels in May, which set the media alight with predictions of a real estate bubble burst.
 
In hindsight, a perfect storm was brewing at the end of March. A combination of a naturally slowing market was suddenly fueled by changes and an almost instant reaction to outside forces that included interest rate increases, inflation, supply chain issues, and stock market volatility.
 
 
By the end of March, inventory levels started to climb as those looking to sell recognized that market prices were close to their highest point. There was also an expectation that more homes would be listed in the spring season –typically the busiest period for most of North America’s markets - which, in turn, would allow sellers more breathing space in which to find a new home for themselves and not have to worry about escalating prices.
 
Equally, sellers recognized that interest rate hikes would start to play a large factor for both themselves and potential buyers. By selling in late March and April, they looked to get ahead of the changes in borrowing by securing lower mortgage rates and completing both their sale and new purchase before rates rose again.
 
Inventory increases of 19.7% for single-family homes, mostly made up of a 19.4% rise in new listings entering the market, clearly reflect this influx in April. March’s sales ratio of 83.7%, which represents the sale of over 8.3 properties for every ten homes listed, fell by 8.8% to 74.9%.
 
 
While the number of new listings in April 2022 comparatively outpaced the numbers in April 2021, the number of sold properties increased proportionately by 7.2%. This is important to recognize, as it confirms that as more inventory entered the market, it helped the flow of sales and appeased the pent-up demand.
 
April saw very little change in the amount of new inventory entering the market compared to March 2022. Inventory levels did increase, but as a result of fewer sales, which may have been a reaction to the first interest rate hike.
 
May saw the most significant rise of inventory levels in the single-family category, causing the first wave of media frenzy as new listings entering the market increased by 35.7%, which, in turn, drove up inventory levels by 35.8%.
 
 
The sales ratio dropped by 12.5% to 62.5% compared to April 2022, but sales increased by 13.2%. Again, this affirms that increasing inventory and steadier price levels allowed more buyers the opportunity to purchase homes.
 
Like the single-family market, the property market saw significant increases in both its inventory level in May and the number of new properties listed for sale; with a 25.4% increase, the number of homes for sale made up 20.8% of new listings.
 
This increase in listings drove the sales ratio down to 56.3%, but sales increased by 8.8% as buyers rushed to purchase before further mortgage rate hikes came into effect in May.
 
 
June’s inventory levels have nearly doubled compared to March 2022 as well as June 2021 for single-family homes and are up 66% and 54%, respectively, for attached properties. Although this may initially seem to bode a negative concern, the reality is that inventory levels remain far below 10-year historical norms seen prior to the pandemic.
 
Indeed, the pace of inventory entering the market has started to fall in both the single-family and property markets. June saw a decrease in the inventory percentage increase to 31.2% compared to May 2022 for single-family properties that included only a 19.6% increase of new listings and a 19.7% increase for attached property levels with only 13.5% new listings.
 
Increasing inventory levels have resulted in a declining sales ratio – this represents the number of properties sold against listings entering the market – which has fallen below 50% for the first time in two years to 45.06% for single-family homes and 41.34% for attached properties.
 
 
However, these percentages are still far above the 20.5% transition point, which represents that luxury real estate is still very much a seller’s market. Of the 140 markets researched, 121 remain seller’s markets.
 
In short, despite increasing inventory levels and the slowing of sales transactions, experts are very clear that buyers waiting for prices to plummet to pre-COVID levels are unlikely to witness a nosedive any time soon.
 
Popular price points, especially in metropolitan areas, are still seeing a slight upward trajectory, with only the newer boomtowns that benefited from the mass exodus from cities starting to see impatient sellers decrease their listing prices.
 
 
Although interest rates and inflation are slowing the pace of real estate, there has been a significant influx of former and new residents entering many of the more established metropolitan markets over the last year. The rental market flooded, causing rental prices to soar. With the cooling of the residential resale market, many renters have started to buy despite rising interest rates, weighing up the costs in favor of homeownership.
 
Supply is still low for luxury properties comparatively, which also gives potential buyers the opportunity to see their new property appreciate in value, especially as more people continue to return and fuel the demand further in the months to come.
 
Whether the move is to older established metros or to newer hubs where major corporations have relocated their headquarters, these cities’ real estate markets are forecast to withstand the increases in interest rates and inflation.
 
 
Over the last two years, we saw new markets emerge as the population shifted – whether it was in the bid to escape urban living, to avoid taxes, to explore a change of lifestyle, or simply relocate to leverage more affordability – current predictions are now hinging more on how economic factors will affect their real estate values.
 
Sellers will certainly lose some of their edge given that the sales ratio has fallen 50% since March, but inventory levels of highly desirable properties are predicated to remain tight, especially as recent buyers are unlikely to want to sell quickly nor give up the great rates they secured and locked-in prior to March 2022.
 
The summer and fall of 2022 are likely to see a very unsettled picture with regard to inventory levels, prices, and sales. Those looking at real estate as an investment expect a slower and bumpier ride compared to the last two years.
 
 
Homeowners looking for their next home then recognize that costs to purchase will be much higher (mainly due to increased mortgage rates), but that over the long-term real estate offers one of the most consistent ways to see a good return, but more importantly, ownership provides security and a safe haven for your family."
 
 

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