Even as the effects of the COVID pandemic continue to linger and inflation accelerates more quickly than expected, high-net-worth real estate buyers have continued to pursue new investments and construction overhauls to invest in what matters most to them: where to call home. The pandemic has created new hurdles and surprising opportunities for the real estate and construction industries, which has many stakeholders and developers watching the market closely. As shifts in the supply chain, O&M costs and capital markets continue to fluctuate, property decision-making in both the US and international markets continues to move based on the personalities and needs of buyers.
In an exclusive interview, Erin Sykes, Chief Economist at Nest Seekers, dives deeper into the financial and market factors shaping both the US and international real estate sectors, where record price spikes, tightening inventory and new post-pandemic priorities have buyers expanding into new locations around the world to diversify their investments.
“Interest rates are expected to remain low until mid-2022, though inflation is accelerating far more quickly than expected (up 4.2% in April, up 5% in May, and 5.4% in June) and is debatably higher than what has been reported,” says Sykes. “Economic recovery combined with reflation has diminished expectations of equity returns, thus shifting monetary allocation into alternative investments for many.”
Fluctuating US Vertical Markets Have Investors Looking Internationally
“Building a new home in the US has never been so expensive,” says Sykes. “There is a huge disparity in pricing between resale and new construction markets as the nationwide housing shortage has swelled to 3.8 million units, according to Freddie Mac.
“It’s often been said that the rich live in the Hamptons and the wealthy live in Europe, but economic factors combined with a desire to travel are driving more international interest from the US.”
International buyers represent nearly 10% of the total transactions in Portugal. With buyers from the US picking up momentum, this is a choice location for investment, especially given the low cost of living. Local programs like the Non-Habitual Resident tax, which grants a set of tax exemptions and flat rate taxation for a period of 10 years, and the Golden Visa 2020, makes this an ideal market to consider. Even with the pandemic, property prices in Portugal rose 8.4% and the total transaction value was 26.2 billion euros, a 2.4% increase over 2019.
Looking more locally at the Hamptons, the market is resilient, with a trajectory of pandemic recovery steeper than in Europe, which makes places like Portugal the more affordable option, a turn on the truism about rich versus wealthy.
Vacation homebuyers have a unique opportunity to invest through competitive price points even in places such as London. Throughout the US and London, the ultra-high-end $10 million-plus market has continued to showcase an ability to hold steady with low-interest loans in the range of 3%. There may not be a more opportune time to purchase a trophy home than now.
Constraint Shaping the Market
Across the globe, demand for real estate assets has been met by stressed supply chains and labor shortages. US investors are seeing permits for future home-building fall 3% from May and may continue to see material prices and a lack of manpower prohibit some builders from capitalizing on potential project pipelines.
Lumber prices have only just begun to decline from record highs of 154.3% cost rises year-over-year since May. Meanwhile, materials such as copper and cement remain in short supply, appliance production is lagging demand due to semiconductor shortages and steel imports face tariffs. Not surprisingly, the National Association of Home Builders showed confidence among single-family homebuilders falling to a 10-month low in June.
Within the elite segment of the real estate market, though, investors and owners are still looking to invest in new property. In high-demand areas like Palm Beach, the value of new construction has risen 139% year-on-year, more than the previous three years combined. This demand in the South Florida market has stayed strong, despite the mass return to cities like New York and London.
Factors Behind Changing Buyer Profiles in the US
There are demographic shifts impacting the market as well, with millennials being one of the chief drivers of change. The generation is showing a growing interest to become first-time homeowners, as those with the means increasingly become buyers rather than the renters they have stereotypically been, especially during Covid. However, the lack of access to supply and affordable material remains an impeding factor for millennials.
“Many millennials have been priced out at this point, so those who did not pull the trigger previously may be renting for the foreseeable future,” says Sykes.
20% down payments may not cut it in this fiercely competitive market. Despite low-interest rates, cash buyers are more prevalent than ever, even waiving contingencies to seal the deal. (Most, however, are still taking the opportunity to finance after closing.) This strong sense of urgency to secure a property while rates are still low, even if it is not a forever home, is widespread and expected to continue, especially in urban areas as they continue to reopen and return to normality.
Cities in low-tax states like Texas, Florida and Tennessee will especially continue to see strong demand over the next three to five years.
“At this point, the continued demand for low-tax states with more space and opportunity for self-sufficiency is no longer directly correlated to COVID,” says Sykes. “We are seeing changing preferences on a large scale as homeowners see the opportunity to reduce their costs of living by shifting residency.”
The demand in the South Florida market has stayed strong, despite the simultaneous return to cities like New York. Many have determined that a second home is a preferred investment over more temporary expenditures. What was once a vacation spot, has now become a location for a secondary or even a primary home. These factors have contributed to spikes in demand for housing in areas with little available inventory and a dearth of raw materials needed to build more.
Traditional Urban Cores Still Popular
Despite this shift to larger, more traditional homes in places with cheaper costs of living, there is still a desire to be in or close to major cities like New York and London, which is driving up prices and driving down availability after a short-lived discount during the pandemic. The draw of arts and culture, five-star restaurants and nightlife, as well as the desire for proximity to major international travel hubs and the offices of major corporations, still make these cities an attractive place to live.
As a result, there has been a sooner-than-expected buying and renting boom, coming off what was a full-on market collapse in mid-2020. In New York, there was a 33 percent increase in contracts signed in the Lower Manhattan luxury market in Q4 2020 compared to a year earlier. In London, the average time to find a buyer decreased to 57 days in May 2021, down from 88 days in May 2020. Some of this speedy recovery is due to the vaccine rollout but some of this is also due to people simply recognizing, after lockdowns and the quiet life in the country, that they miss city life after all.
“While New York still sees a lot of premium rental listings, the deals of the COVID era are quickly disappearing, a sign that the market in the city, and in other major cities, is returning to normal and may be even more competitive,” said Sykes. “The question then for high-net-worth individuals is one of priorities when it comes to deciding between a caribbean hideaway or a downtown Manhattan loft.
“Each of these locations opens up new opportunities for life, work and play. The determining factors depend a great deal on one’s current portfolio profile and what people’s priorities are after reassessing their situations during the pandemic.”
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