October 4, 2022

MyDesignDept

Carefully Crafted Home

You want that luxe life? You’ll pay the price.

A Conversation with Selma Hepp

The location, design and architecture of a luxury home can grab the imagination and lead to fantasies about jet setting to the French Riviera or vacationing in an exclusive Asian metropolis. However, the luxury real estate market has so much more nuance in terms of location, price point and even buyer demographic than a daydream could ever convey.

In this episode, host Maiclaire Bolton Smith sits down with CoreLogic Deputy Chief Economist Selma Hepp to discuss the luxury real estate market both in the U.S. and abroad, as well as dive into the trends driving the sales of these chic abodes.

Maiclaire Bolton Smith:

Welcome back to Core Conversations: A CoreLogic Podcast, where we dive into the heart of what makes the property market tick. I’m Maiclaire Bolton Smith, your host and curious observer of all things related to property — from affordable housing to market trends and the impacts of natural disasters to climate change — I want to converse about it all.

So many of us fantasize about owning the home of our dreams. For many people, that’s a modest three-bed, two-bath home with a white picket fence. But for some, a more luxurious home is in the cards. And finding that perfect five-bedroom villa on eight acres of land in close proximity to a major metro area can be a challenge, one that could run you about $100 million. With such a price tag, it’s safe to say that there are only a few people in the world who could afford such a dream. While prices for luxury property have been steadily increasing, buyers who dream of owning such homes are undeterred.

In fact, the demand for luxury homes has expanded significantly in recent years. From Australia to Paris to California, the number of homes that are selling for seven (or even eight-digit) sums has climbed over 100%. But there is a class beyond luxury: ultra-luxury. These homes are sold for more than $40 million. However, they’re not always located where you would expect. Nor are they always owned by domestic residents.

As the restrictions imposed during the pandemic continue to fade, traditional international luxury markets have taken off. More surprisingly though are the new ultra-luxury property destinations that have made it onto the map. Joining us for a tour of the global luxury property market and an exploration of how the other half lives, we have CoreLogic Deputy Chief Economist Selma Hepp with us. Selma, welcome to Core Conversations.

Selma Hepp:

Hi, Maiclaire. Thank you so much for having me.

MBS:

Okay. So we’ve chatted with many of your colleagues on this podcast already this year, but we’re particularly excited to have you here to talk about the luxury market. So before we dive in, can you tell us a little bit about your background and your role here at CoreLogic?

SH:

Sure. Thank you. I’m Deputy Chief Economist at CoreLogic, and I’ve been with the company for about two years and a few months. I actually started at CoreLogic on March 17, 2020.

MBS:

Oh, wow.

SH:

Which I like to mention to people because it was the first day of the shutdown. So, it’s been an incredibly interesting experience, but nevertheless, I’m very excited to be here. So, I lead a team of a couple of economists in addition to our larger group, which is about five or six of us. And we utilize CoreLogic’s data assets to track trends in the housing market, to develop thought leadership, to find new trends to forecast what is going to be happening in the housing markets going forward.

MBS:

Wow, that is great and we are thrilled to be talking to you today. So let’s dive into this. Ultra-luxury: It is just a fantasy to most of us, but I have to ask, who’s buying these homes?

SH:

Yes. So this analysis comes from a presentation that I had to prepare recently for Forbes Global Properties, which was actually hosted in New York. Doing the analysis for this research topic has been actually really interesting to me because I didn’t realize in fact how many people are out there that are considered millionaires, but there are many of them.

And actually, there are as many as 3.5 million of them. And these are individuals who have a net worth of $5 million or more. There are ultra-high net worth individuals. And generally, those are the folks that are $10 or $30 million in net worth or more.

MBS:

Oh my goodness.

SH:

But nevertheless, yeah, it’s interesting. A lot of them actually live in Asian cities. And Tokyo is, as a matter of fact, tops the list with most high-net-worth individual folks.

MBS:

Interesting.

SH:

About 100,000 of them. Yes.

MBS:

Well, I can guarantee you I am not part of that group. So this is so interesting to me to hear, just to hear you talk about this. So we’ve used this word “unprecedented” so much when we’re talking about the pandemic, but that really is the word that comes to mind when we think about the last three years and the number of individuals that are now worth $5 million or more, who are owning these properties. So who are these power players that are driving the real estate market?

SH:

Yeah. So they are generally people who already actually had wealth and stock market returns that we saw over the last couple of years have really allowed them a multiplication of their wealth. So…

MBS:

Wow.

SH:

… we had a nearly universal increase in asset values over the last few years, and that has definitely had a healthy or very significant impact on the wealth of people from all levels of net worth. So that’s not just $5 million plus, but again, this is ultra-high net worth with $30 million plus in net worth. But just to give you a couple of interesting stats there, financial asset holdings actually are responsible for creating as much as $22.5 trillion in net wealth, just in 2021.

MBS:

Wow. Wow.

SH:

And then with real estate and other similar tangible assets, that added another $10 trillion in value. So, we’ve had in 2021, a 16.6% annualized return on the stock market, which when you look at it historically, it’s almost double of 10% annual return that we saw in the past century. So really, the housing market has been a significant contributor to that.

MBS:

Wow.

SH:

Global wealth in 2021 actually surged by double-digits, so the number of individuals with $5 million net worth and higher increased by as much as 25% in the U.S. in 2021 and 20% globally.

MBS:

Oh, those are some staggering numbers.

SH:

The other thing is when the pandemic started, equities actually, the value of equity has declined. So the stock market declined, and if you at the time were one of those wealthy individuals and you invested, the return has been as much as 60%.

MBS:

Wow.

SH:

So, it’s-

MBS:

Mind blowing.

SH:

Yeah. So, it’s about being probably in the right place at the right time.

MBS:

Yeah. And really, I mean, afforded these people the opportunity to do something like this by getting into these markets. So that makes me think that we’ve talked with your colleague Molly Boesel about some housing myths and some states of where the property market is. And we’ve talked a lot about how there’s been such demand for homes across the board. Are we seeing that same supply squeeze and demand for these upper, really ultra-luxury properties as well?

SH:

So yeah, similar to the overall market, the surge in demand has created supply pressures in the luxury market, which were also made worse by some of the similar constraints that the overall market had such as supply disruptions and then overall obstacles that we see in the new construction industry, some of them being lack of labor, lack of construction materials, the cost and then there’s, of course, regulatory constraints.

But what’s interesting for both markets and maybe the luxury market has benefited a little bit more from this is that there is the supply side of this, but what we saw during the pandemic was a massive increase in demand that we potentially wouldn’t be able to see at the same level had we not been in a pandemic because people were now able to work from home. And because they were able to work from home, these folks who have more wealth than you and I, they can now choose to buy in these exotic locations. So some of the surge in growth in sales for the luxury homes has been in locations that you would not necessarily have thought about prior to the pandemic.

MBS:

Okay. Exotic locations. That sounds fun. So, do we know where are these exotic locations? Do we know where they are buying and where are the buyers coming from as well too?

SH:

Yeah. So, buyers are coming from everywhere, but obviously there will be more buyers from locations where there are more high net worth individuals.

MBS:

Sure.

SH:

So obviously Asia being one of those places where buyers are coming from, but North America as well. North America actually — those ultra-high net worth individuals are most represented in U.S. with almost 40% of them living in the U.S. So they will be, as a result, also buying in U.S., but they will be buying in some of the other locations. But just to note some of the most popular locations for new home purchases, half of them were in the U.S. And then we had some in the U.K. Australia was one of the popular locations. Spain was another one. France and Portugal were the other ones.

And again, these were not necessarily locations that were not exotic or that didn’t have luxury buyers prior to this, but it’s just that number of buyers was that much greater during the pandemic. So ultra-luxury home sales, those over $40 million and higher, actually spread out geographically beyond just the areas that we traditionally have thought about as being ultra-luxury market.

SH:

So, Los Angeles is a top market. Most of the ultra-luxury sales happen in LA. But what was interesting over the last year is that Riverside, which is an adjacent market to Los Angeles, also had a sale — and the first sale that they’ve ever recorded — of $40 million plus.

MBS:

Wow.

SH:

So what we are seeing is people spreading beyond the traditional market. This is the ultra-luxury market, but even in say $20 million plus, we’ve seen more markets now in 2021 that we were not traditionally thinking of being $20 plus million markets.

MBS:

Right. That’s so interesting. So a couple of things I want to dive into there, I guess. Were there any traditional luxury markets where home values have decreased and maybe are no longer luxury? Are we seeing that as well?

SH:

Well, I wouldn’t think of it that way because I doubt that a home that’s $2 million say in Buenos Aires, I don’t think that it’s not going to be a luxury home anymore.

MBS:

Sure.

SH:

But there were a few markets that actually saw a decline in value so that in other words means that if the home was priced at $1.1 million, it would’ve been now $1 million a year later. So that’s how one can frame in thinking about this. But actually, Buenos Aires was one of those markets that saw the largest decline. It actually had an 8.2% decline.

The other markets were, for example, Cape Town, Jakarta, Kuala Lumpur, Bangkok was another one. And in thinking about why this may be the case, actually you want to think about how the pandemic was handled…

MBS:

Sure.

SH:

… in those markets. So, unfortunately, Argentina had not done so well with handling the pandemic. So I imagine that was one of the reasons why high-net-worth individuals were leaving that metropolitan area.

MBS:

Okay. So I want to talk about the U.S. for a moment, but I can’t help but ask this question because I’ve mentioned many times on this podcast that I live in the Silicon Valley, and I hear you talk about $2 million properties. Two-million-dollar properties are not luxury homes where I live. So I guess is there a definition of what is defined as luxury? Is it according to the percentage of properties per area, or is it… It can’t just be $2 million and above because I’ve seen some pretty not-luxury properties for $2 million where I live here. So just-

SH:

No, that’s a great question, Maiclaire, and actually, there is not a universal definition. People think of it in different ways, but because we may not necessarily have specific data on what 1% of property is in say, Dubai, the only thing we know is that number of home sales over $10 million say sold in this year in Dubai. That’s why we tend to go by price buckets.

MBS:

Gotcha.

SH:

But to put you at ease in terms of the $2 million versus some others, it was actually all price ranges above $2 million. And let me give you an example, homes that were priced between $10 and $20 million in the U.S. alone were up almost 90% in 2021…

MBS:

Wow.

SH:

… versus 2020. And then thinking about ultra-ultra-ultra-luxury, which is $20 plus million, sales were up as much as 70% in 2021 versus the prior years. So, I mean, we are talking universally here in demand.

MBS:

Wow. Okay. So in staying with the U.S. then and looking at how those demands have increased or how the increases have been so… I’m going to say exponential, those are huge numbers of increases. Anyone who’s bought a home in the U.S. in recent years has seen the bidding wars that have happened. And I’ve talked about that a little bit on this podcast too, of experiences we’ve had buying our home.

But is this the same experience with the luxury market? Are there bidding wars of people being, “I’ll pay you $52 million? No, I’ll pay you $75 million!” Do those happen in those ultra-luxury properties?

SH:

Yeah. Actually, ironically, they do. And again, similarly to the overall market, that trend has been exacerbated by a lack of supply.

MBS:

Wow.

SH:

So, actually in 2022, as many as two in 10 properties, so about 20% of properties went over the asking price and historically, or at least prior to the recession…

MBS:

Wow.

SH:

… that share averaged about 8% to 9%. So almost doubling of properties that are now selling over the asking price in the luxury market.

MBS:

Wow. That’s just mind-blowing, when we look at the amount of money that is being traded for those properties. So does this trend indicate anything about the future of luxury property markets?

SH:

Well, it does to some extent suggest that the demand is strong. Now, we expect in general the demand for the housing market to slow down. For one, we’ve had a surge in mortgage interest rates. The other thing is home prices have been growing at double-digit rates. So naturally, you get to the point where people start wondering, are we now on a decline? That may detract some of the demand similar in the luxury market, but what’s really interesting is that obviously those that have millions of dollars to spend, they’re going to think about it in a different way.

So, with inflation being another factor that is top-of-mind right now, people oftentimes think of real estate as an inflation hedge. In luxury markets, in particular, that may actually lead to continuation in demand.

MBS:

Sure.

SH:

Strong demand for luxury properties. And the other thing is wealthy people tend to think about real estate as a store of value. It’s something that’s there that’s not going to be taken away, so that also contributes to the continual demand for such properties.

MBS:

Okay. Something else you mentioned was sometimes these luxury homes are not always a first home. They’re secondary homes, which even that blows my mind. But when we talk about uber luxury here, can you talk a little bit about how the market for second homes has changed because of the pandemic? I know that this is something that a lot of people, maybe even not on the luxury side have looked for a second home because of the pandemic, because they didn’t have to live near work.

They could live somewhere else, and they would go to a country home or a beach home or something. So how has this changed because of the pandemic in the luxury market specifically?

SH:

Yeah. So multiple-home ownership actually, or one can think of it as co-primary ownership because they spend as much time in a primary home as they’re in the secondary home. But that was another unique trend that rose out of onset of the pandemic. So as these folks had more freedom to work from anywhere, and they had more money to spend, they were able to easily swap first homes for the second homes. So actually, the share of people with more than one home, or actually three homes, almost half of folks that have $5 million and more in net worth own three homes. So yes.

MBS:

Of course they do.

SH:

So, they were able to do that…

MBS:

Wow.

SH:

… to split up their time and probably will continue to do that.

MBS:

Investing their money.

SH:

Right, right.

MBS:

Wow. My mind is blown, three properties. That is a dream. That is my dream at some point, but maybe not these ultra-luxury properties. It leads me to think too, what kinds of properties are these? Are they buying beach homes? Are they buying country homes? Do we know what kind of homes these second and third and maybe even fourth and fifth properties are?

SH:

Yeah. Yeah. We do. I mean, we know that the largest increase has actually been in resort areas. So, wherever you can get outdoor amenities such as beaches or lakes or mountains. These have been some of the most popular areas, but what’s very interesting to me too to find is that there was also an increase in demand for rural land.

SH:

So, high-net-worth individuals were not just buying already-existing homes, but they were buying land on which they can build their dream homes. So that was an interesting little tidbit that came out of my analysis.

MBS:

That is really interesting. My brain instantly goes to the increased cost of construction, and cost of materials too, but I’m guessing that’s not going to be one of their problems if they’re spending this much money on buying raw land to build their dream home.

SH:

Yeah, yeah. I think maybe the bigger problem was really just lack of maybe getting the materials here. We had all those supply disruptions, just transit-wise. Then there are people, there’s a lack of people who work in construction, which is an overall problem. So, I’m sure just getting those things to work all together, to be able to build a home faces similar challenges as the overall market.

MBS:

Yeah. I’m glad you mentioned that because that is a major issue that we’ve seen. And that we’ve talked about in this podcast before too, is supply chain disruption and the limited resources to be able to build a new home. And that’s led to construction shortages, which has led to more demand, lower building stock and just all perpetuates out in the full overall housing market.

Okay, so this is so interesting, Selma. I’m loving this. This is so great. So to finish off today, I want to look at the future. I sometimes finish these podcasts saying if we could look into a crystal ball, I know we can’t predict the future, but are there any trends specifically with luxury real estate that people should pay attention to and how do we think these trends will affect the market going forward?

SH:

So, yeah, the crystal ball has been much more unclear these days than it used to be. And we would be remiss to not mention what’s happening in Ukraine. And especially in light of the fact that a lot of folks, those ultra-high-net-worth individuals are actually from Russia. But that aside, I think opening of the economies and being able to fly again to most of the countries in the world will open up again those markets for wealthy people that were maybe closed during the pandemic.

So, the forecast for the luxury market — it’s very positive. We do still think that home prices will grow at a solid clip. They were growing, on average, at about 10%. Again, there were markets for example, such as Dubai, that actually had the strongest home price growth or I want to say 40%. Obviously, there’s going to be moderation from where we were in 2021, but still relatively strong growth in home prices and continuation of strong demand.

MBS:

Wow. This is just so interesting. And thank you, Selma, so much for joining me today on Core Conversations: A CoreLogic Podcast.

SH:

Thank you. Thank you so much for having me, Maiclaire. It was such a pleasure talking to you.

MBS: It’s always a pleasure talking to you, Selma.

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