Since the Great Recession bottomed in 2009, luxury real estate around the world has experienced a phenomenal increase in value. Markets from New York, London, Hong Kong, and Monaco to Aspen have seen high net worth buyers push real estate prices to record levels. Monaco tops the list as the most expensive residential market in the world with an average sales price per square foot of $4,500, followed by Hong Kong and London at $3,000 and $2,000 per square foot respectively. New York at $1,860 per square foot and Aspen at roughly $1,500 per square foot are the most expensive markets in the United States. In addition to average per square foot sales prices hitting new records, luxury markets are also seeing records set for residential sale prices per square foot. Hong Kong currently holds the record with a property that sold for over $21,000 per square foot. Manhattan has also set records with new penthouse properties selling for over $10,000 per square foot; and Aspen has on several occasions exceeded $3,600 to $5,000 per square foot.
In addition to the global increase in value per square foot, the sheer number of luxury home sales and valuations have set records. In the past year, there have been ten home sales at prices exceeding $100 million worldwide topping $1.4 billion. This is twice the number and volume of the last record year of 2014 when there were five sales exceeding $100 million. Besides the number and volume of sales, the sizes of the transactions are setting new records. The most expensive home sold in the world this past year was a $270 million single family home in Hong Kong. The next two most expensive sales of $150 and $131 million were also in Hong Kong and China. The United States had three $100 million plus residential sales, one in East Hampton at $110 million and two in Los Angeles, including the Playboy Mansion that sold for $105 million.
So what is driving this global demand for luxury real estate? The answer is likely a combination of factors. Basic economics teaches us that prices increase as demand for a product exceeds supply. On the supply side, most luxury markets have seen a flood of supply of luxury residential homes in the past few years. For example, in the Aspen-Snowmass market there are over 120 listings of residential properties priced over $10.0 million. Of those roughly 29 are new or spec homes either completed in 2016 or currently under construction. At the same time, in past 18 months there have been 27 sales of properties in the Aspen-Snowmass market over $10 million, of which 8 where new assumedly spec homes. So at this point in time, the demand for luxury homes, new or otherwise, is being adequately met. This scenario is similar in the other luxury markets across the United States where the supply is adequate to meet the demand.
The demand side of the equation seems to be driven by two factors, one the overall increase in wealth of high net worth individuals primarily from record setting stock market valuations, and second, the flow of international capital from less secure areas of the world to more secure parts of the world like North America, Europe and Australia. But the demand side seems to be showing some signs of slowing. Despite continuing to see record prices for special properties, large luxury markets, such as New York, a bell weather luxury market, have since 2016 seen a significant slowing of demand for most high-end luxury properties. The number of luxury property closings in New York has declined in 2017 about 36% from 2016. However, in the Aspen-Snowmass market there is no sign yet that the luxury market is slowing with 14 sales over $10 million in the first seven months of 2017 compared to 13 sales in all of 2016.
So at this point in the luxury home market cycle, what are the potential risk factors? In markets such as Aspen, the health of the stock market seems to have a significant impact on the luxury home market. Historically, major corrections in the US stock markets, such as what happened in 1980-1981, 1991-1992, 1995-1996, 2000-2001 and 2008-2009, have led to significant softening for demand for luxury homes in Aspen as well as most other luxury markets. Currently, the US stock markets have set new record highs based on the continued growth in the economy and corporate earnings. As long as the stock market valuations hold up creating more wealth for high net-worth individuals, luxury real estate markets should continue to hold up. But, if we start to see a slowdown in the economy or a downward trend in the stock markets, that could be an early warning sign that the demand for luxury homes could slow significantly.
William Small, CCIM is the Founder and CEO of Zenith Realty Advisors, LLC, a commercial-investment real estate advisory and investment firm. If you’re interested in contacting him, you can reach him at (970) 925-3866 or by email at William.Small@ZenithInvestment.com