The expansive growth in the luxury-home market during the Covid-19 pandemic is expected to continue in 2022, albeit at a slower pace, as low interest rates and inflation fears push wealthy individuals toward alternative asset classes, and countries reduce economic-stimulus measures.
Across the globe, luxury-home sales reached record levels in 2021. The U.K. saw a major increase in sales priced at £5 million or more during the first half of 2021, while its stamp-duty holiday was still in place. While that program has since ended, the luxury market there is expected to benefit from foreign investors coming back into the market, as travel restrictions loosen in some parts of the world.
In the six months from June to November 2021, listing prices for homes in the top 10% of the market in the U.S. were up nearly 20% compared with the same period the year before, according to data compiled by Realtor.com.
“We don’t think the current pace of home-price growth, at least in the aggregate, is sustainable,” says Joel Kan, associate vice president of economic and industry forecast, the Mortgage Broker’s Association.
Still, as inflation rates rise, and developed markets continue to debase their currency, luxury real estate could be an attractive hedge and a way to get out of paper money, says Jonathan Woloshin, head of real estate and financials research, UBS Wealth Management. With experts predicting the 10-year Treasury yield won’t surpass 3% by the end of 2022, real estate may become even more attractive.
“If you look over the course of decades and centuries, luxury real estate—with all its ups and downs—has held value and even grown in value,” Woloshin says.
In late 2021, the U.S. Federal Reserve announced that there could be three interest rate hikes ahead in 2022, and the Mortgage Bankers Association has predicted the 30-year fixed rate could rise to 4% by the end of 2022.
“Every little bit of that rate increase is going to matter more because you’re applying it to a much bigger loan balance,” Kan says.
However, buyers paying in cash or using a securities- backed loan will be less affected by interest rates, if at all, Woloshin notes.
Meanwhile, many countries are considering increasing taxes, which may influence where high-net-worth individuals decide to locate. In the U.S., the current 37% top rate on income will rise to 39.6% in 2026, as 2017 tax reform provisions are scheduled to expire. President Joe Biden’s plans for a social spending bill would also create a new surcharge on high-income individuals whose adjusted gross income is over $10 million—or the top 0.02% of Americans. While those increases may not be enough to make wealthy individuals pick up and move elsewhere, a wealth tax could, Woloshin says.
“We’re seeing more and more of the wealthy renounce their U.S. citizenship, for economic reasons and for political reasons,” he says. Already, the number of Americans who renounced their citizenship hit an all-time high in 2020, at 6,707, according to the Internal Revenue Service.
Even countries that have long attracted high-net-worth individuals on account of their low taxes are considering increases. Singapore officials have hinted that higher levies for real estate may be on the way. The country already has imposed limits on second-home owners and foreign buyers.
In China, some speculate the government may roll out a nationwide property tax. The policy focus is “common prosperity” and addressing the wealth gap. In addition to proposed property taxes and regulatory measures aimed at controlling prices, the development of rental housing has gained traction.