Is the Luxury Segment Reflective of True Market Conditions?

A recent news article surmised that the resale market is poised to pick up steam since the luxury segment is showing strength. However, is strength in the luxury market indicative of a strong market overall or a precursor of better resale conditions to come?

Not necessarily. Chief economist Gregory Heym stated that activity at this small upper end has traditionally been a leading indicator for the broader market. Now, he says, there may be less of a connection between the two segments. The stock market has created new wealth and the number of millionaires has grown, so more buyers are paying in cash. That has left luxury buyers mostly insulated from economic factors such as rising short-term interest rates.

The thought that luxury buyers aren’t as affected by economic factors is reinforced by research Coldwell Banker did several years ago profiling the luxury home buyer. Consider the following point: Nearly one-third (31.5%) of buyers paid cash to purchase their one million dollar plus home. Of those who choose to take on a mortgage, 17% placed a down payment that was 50% or more than the price of their new luxury home.

But if the real estate market wasn’t strong, would luxury homes continue to be purchased? Yes, because the two don’t always correlate.

In the United States, there was a surge of million dollar sales towards the end of their housing boom.  2005 was a record year for luxury home sales. (CNNMoney)

While luxury sales reached record highs, the rest of the market was slowing down.   An article in the August 2005 Newswire stated:

“Luxury home prices posted double-digit gains and rose to all-times highs in Los Angeles, San Diego and San Francisco in the second quarter of 2005 compared to a year ago…While prices have risen rapidly, real estate agents said sales are slowing, inventory is increasing, and sales are taking longer. Agents attributed those trends to the seasonal sales cycle, but also cited rising interest rates and greater caution among buyers as prices reach new heights.”

Even after the US housing market was in notable decline, the luxury segment roared onwards.  The Washington Times reported:

“Although the U.S. housing market slipped overall in 2006, the luxury market has continued to boom as a result of rising wealth at the top of the demographic pyramid,” said Laurie Moore-Moore, founder of the Institute for Luxury Home Marketing in Dallas.

The rich also remain bullish about real estate as an investment. A recent study by Architectural Digest and Sotheby’s International found that 36 percent of affluent families planned to invest in housing despite the collapse of the market last year. Their unimpaired enthusiasm has driven up sales of luxury homes in places such as Phoenix by as much as 360 percent since 2000.

“Luxury home buyers are somewhat insulated from factors that might affect a typical buyer, like interest rate hikes,” said Scot Spalding, president of LuxuryHomesandProperties.com.

The article in today’s Herald stated that there were “187 sales in June this year compared with 132 a year ago.”  That figure was actually for year-to-date luxury sales, not just for the month of  June.  (Can you imagine what the average price would have looked like last month if that were the case?)

In Calgary, record levels of million dollar homes sold in 2007 alongside record sales in the rest of the market.  This was followed by a marked decline in the average and median price in the following year and a half.  Now in 2010, luxury sales are up year-over-year, yet the the rest of the market has stalled and is behind last year’s YTD numbers.

So while it’s positive that the luxury market is chugging along and sales are up year-over-year, it really has no bearing on how the rest of the resale market is or will perform.

Source: http://www.housepriceindex.ca (click to enlarge)

click to enlarge

(In 2007, luxury sales peaked alongside record resale numbers.  Now in 2010, luxury sales are up YoY yet resale numbers are down.   Million dollar sales account for about 3% of the total SFH’s sold so far this year)

6 responses to “Is the Luxury Segment Reflective of True Market Conditions?

  1. The condo luxury market in Calgary isn’t experiencing the same YoY increase as SFH’s.

    Condo million dollar plus sales (Jan 1 – July 18th)
    2010: 5
    2009: 13
    2008: 18
    2007: 15
    2006: 11


    Throughout Canada, luxury sales have spiked while the rest of the market is slowing down.

    Vancouver luxury sales up 184%
    Edmonton up 164%
    etc,

    In the 1st QTR of this year, 9 out of 13 markets surveyed by RE/MAX broke luxury sales records.

  2. Great information! I’ve been looking for something like this for a while now. Thanks!

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