Examining the demand for luxury real estate

Over the last 18 months, the status of the real estate market, in particular the luxury sector, has been a hot topic across all news outlets, multimedia platforms, and within the industry itself.

Conversations have mainly focused on the variety of trends, with reviews covering a multitude of topics from rising prices, falling inventory levels and increases in demand to multi-faceted relocations and migrations and the growing concern about delays surrounding new builds from builders and developers.

There has been, however, one constant agreement throughout — ‘the home’ has officially become one of, if not, the most important factor in today’s decision processes with respect to how individuals choose their way of life. For the luxury real estate consumer, the question of where to live, what type of property, the features, and amenities that will meet their practical needs and ‘must-have’ requirements all combine in their search for homes that offer security, as well an enhancement in the quality of today’s live, work, and play environments. Many would say that these parameters are not so very different from those that have always been the top search criteria of the wealthy.

While this is true for the most part, it is the actual sheer amount and continued increases in sales volume, diversity of locations and prices that have created some of the most exceptional circumstances in the current luxury market.

We, therefore, seek to investigate what has driven this enormous demand for luxury real estate — are these factors still in play and how will this play out in the upcoming spring market and beyond? It has been widely recognized that the pandemic drove people, especially the high end consumers, to change their expectations and aspirations for their goals for homeownership and attitudes towards their lifestyle requirements. It now seems that there are two other factors that not only played a significant part, but will probably have a longer lasting effect on the demand for luxury real estate.

In a recent report released by Coldwell Banker Global Luxury (CBGL) they shared the staggering percentage growth of global wealth in 2021 and, more significantly, the number of individuals who are now classified as high net worth (HNW) – those with over $5 million in net worth.

CBGL commissioned Wealth-X to research the growth of wealth globally during 2021 and while their results led to an expected annual percentage increase, of more significance was the rate that it had increased. This nearly unbelievable increase had been unpredictable, even as little as three months prior to the end of 2021, until Wealth-X finally assimilated the data in January 2022. For the most part, the growth of wealth has steadily risen over the last 10 years, but the results were truly unprecedented for 2021. The volume of wealth increased by 2.1% in 2020 compared to 2019, but in 2021, it grew a staggering 20.4% compared to 2020.

As an extension of this analysis, CBGL investigated the source of this growth. The consensus was that many of the key reasons included rebounding stock markets, new industries, businesses quick to change their distribution networks and increasing home equity. However, while these factors were all contributors to the overall growth of wealth, it was the rising number of individuals, with their increased wealth, that had the greatest impact on the increasing volume of luxury property sales during the last 12 months.

“The global population of individuals with a net worth of $5 million+ reached more than 3.6 million globally in 2021. That was an increase of 19.8% over 2020 and a notable difference from 2020, which saw only a 2.2% gain over 2019. This extraordinary wealthy population growth led to a real estate expansion like we’ve never seen before. A new map for luxury opened up new locations and multiple home ownerships in greater numbers. Home as safe haven became the rallying cry for our time” reports Michael Altneu, Vice President, Coldwell Banker Global Luxury.

The importance of the number of individuals joining the ranks of the HNW category cannot be overstated. Wealth itself may increase the demand for more expensive properties and even shift trends within the luxury home market, but alone it would not have created the staggering spending potential that a near 20% growth in the number of HNW individuals has achieved.

As the number of wealthy people increased over the last 18 months, coupled with the new lifestyle choice of ‘home’ being one of the most crucial requirements in an affluent’s portfolio, the exponential increase in demand for luxury real estate instantly becomes clearer.

According to Wealth-X, HNW home ownership between 2019 and 2021 increased 180.1% for homes valued at $1 – 5 million and 102.4% for homes valued above $5 million. In the U.S., ownership of a luxury property above $1 million is now at 85% for HNW individuals, but even more enlightening is their propensity for multiple home ownerships; with 70% of HNW owning at least two properties, and 46% of them owning three or more.

Internationally, according to CBGL’s report, during 2021 the ratio for primary versus secondary home purchases could have been as high as 2:4 — where, for every two primary homes there were four secondary homes purchased.

This new wealth factor has proven to be life-changing for the many individuals entering the HNW category during 2022. They can now afford homes that are more luxurious and/or living between multiple properties. However, of greater significance is that both these home purchase trends are expected to become long-term influences.

While extreme situations, events, and circumstances — such as the pandemic — will often create equally extreme results in the short to mid-term, it must be recognized that the growth or decline of the HNW population and by extension their wealth will be the actual long term determinants of demand in the luxury real estate market.

According to Wealth-X, the global population of HNW individuals, as well as wealth itself, is predicted to continue rising throughout the world’s most influential cities over the next five years. It should also be noted that trends over the previous five years show that despite localized or international influences that both luxury real estate clients, their wealth and by extension the luxury real estate market have remained resilient, bouncing back, or even making extraordinary gains despite their prior predicament.

The art of selling and buying in this market needs a critical and analytical approach. Understanding the realities and setting expectations accordingly will ensure that goals are achieved. For homeowners looking to buy or sell in today’s market, we recommend working with a realtor who can capitalize on the preferences, trends, and demands in this dynamic and evolving environment.

*Published in the Institute of Luxury Home Marketing