5 Trends That Will Shape Luxury Real Estate in 2023
The luxury housing market, like most other real estate sectors, is adjusting to a slowdown. Affordability and home size are every bit as much on wealthy buyers’ minds as other consumers. “The reality is we are coming out of one of the best real estate markets in history,” Gary Gold, a luxury property specialist with Coldwell Banker Realty in Beverly Hills, Calif., notes in the latest Coldwell Banker Global Luxury Trends Report. “But that level of demand and price appreciation wasn’t sustainable.”
Nearly 90% of respondents to the Coldwell Banker survey say they believe the real estate market will be better than or the same as 2022 for property investment. The following emerging trends were noted in the report.
Smaller Homes Offer Greater Appeal
The pandemic-era trend of supersizing a home may be shrinking in popularity. Affluent buyers are embracing smaller properties for their second- or investment-home purchases. Smaller luxury single-family homes between 270 and 300 square meters sold nearly 19% faster than larger ones, according to the report.
“Now that the pandemic has loosened its grip on lifestyle decisions, the big house may not be as much of a necessity as it was during 2020 and 2021,” the report notes. “Some affluent buyers may not need or want to work from home anymore. Schools are open again, and kids don’t need extra spaces for at-home learning and play. Others may be looking to return to city life, where smaller footprints prevail.”
Further, higher home prices may prompt more downsizing, too. Many luxury buyers also tend to purchase in cash, so smaller homes may be appealing for their lower upfront costs.
Buyer’s Remorse Grows
In the previous homebuying frenzy of the last two years, many buyers had to make hasty purchase decisions to beat the fierce competition. They now may regret their choice: About a quarter of survey respondents who purchased a home in the last two years say they are not satisfied with their property, citing lifestyle changes, property size, remote location, lack of neighborhood amenities or a return to full-time office work.
This may prompt more luxury buyers to move. After all, more than two-thirds of survey respondents say current market advantages, like less competition and slowing growth in home prices, may change their minds about buying in the near future. However, some discontented affluent buyers may decide to keep their home and fold it into their real estate portfolio.
Global Buyers Return
International real estate transactions are back on the rise as foreign buyers eye U.S. housing—and Americans target destinations overseas. About 92% of U.S.-based respondents say they’re considering purchasing a property abroad.
Europe is one of the most attractive regions worldwide for investments in real estate according to the Statista Research Department, Nov 28, 2022. Investment into European real estate reached €152 billion in the first half of 2022 - the strongest ever first half of a year, according to preliminary data from CBRE.
In 2021, the commercial real estate sector was estimated at approximately nine trillion U.S. dollars, while the market cap of listed real estate companies was over 615 billion U.S. dollars. Almost two years after COVID-19 hit the continent, industry experts were still targeting a return level between five and ten percent for their property investments in 2022. In an investment climate affected by artificially low interest rates and tricky geopolitical events that can affect stock markets drastically, some think investing in European housing, office or warehouses is a good alternative.
Global FDI flows rebounded to USD 972 billion in the first half of 2022. However, much of the increase came in the first quarter, whereas global FDI flows dropped by 22% in Q2 2022, compared to the previous quarter. This drop is not surprising given increasing inflation and interest rates, rising energy prices and Russia’s full-scale invasion of Ukraine. The United States was the leading FDI recipient worldwide, followed by China and Brazil.
Faith in Investments
Over a third of survey respondents believe real estate is the safest long-term investment, ranking higher than stocks and bonds, cryptocurrency and pensions. They believe real estate as an investment can diversify a portfolio, offer long-term investment, provide financial gains from rental income and serve as an inheritance for their children, according to the survey.
“Increasing numbers of the affluent appear to be gravitating toward real estate to create financial, emotional and psychological stability,” the Coldwell Banker report notes. They’re also showing greater optimism about returning to traditional luxury epicenters that have held long-term value (e.g. New York, Los Angeles, San Francisco, Chicago and Boston). Further, the report shows, they’re targeting areas that are less likely to be affected by climate change. In the search for greater stability within their portfolios, luxury home buyers are showing demand for second and third homes in multiple locations, eyeing the diversity as a hedge against inflation.
More Cash Deals
Higher interest rates over the last few months have promoted buyers to seek alternative financing methods. The wealthy are leveraging more cash in real estate transactions. “I think buyers don’t mind taking some money out of the stock market right now and putting it into something more tangible like luxury real estate,” Roger Pettingell of Coldwell Banker Realty in Sarasota and Longboat Key, Fla., writes in the report.
Cash transactions are expected to continue increasing. All-cash sales comprised 26% of transactions in November 2022, up from 24% a year earlier, according to NAR data. Besides cash, wealthy buyers are using margin or stock portfolio loans and private bank loans, the report notes.