2019: The Year of the Vanishing Home Buyer

Contentious politics, rising interest rates, punitive taxes and talks of recession will make luxury purchasers scarcer in the coming 12 months

Where have all the buyers gone?

It’s a tune sellers in many key luxury real estate markets will be singing in 2019, as political and the economic uncertainty put a damper on sales from London to Los Angeles. Would-be buyers in the U.K. will be waiting for the worst of the Brexit process to clear, while sellers in New York City will have to lure shy buyers with discounts of as much as 10%, according to analysts and real estate agents.

“It comes down to uncertainty about external forces,” both political and economic, said Jonathan Miller, chief executive of New York-based appraisal firm Miller Samuel. In the U.S. the slowdown won’t be a crisis of the likes of the Great Recession, rather a “modest reset” for many major housing markets across the country, Mr. Miller said.

“It’s not a black hole, it’s the market doing what it should do,” Mr. Miller added.

Meanwhile, Dubai, the Middle East’s luxury housing hub, will be hoping to find buyers among the city’s massive population of expatriate renters following the introduction of a 10-year residency visa for high-earners.

Here’s a look at how seven of the world’s top markets are expected to perform in the next 12 months:

London

British home buyers are queuing on the sidelines in wait for some political and economic clarity, as lawmakers enter the final sprint before the U.K. leaves the European Union in March, according to agents and real estate analysts.

The highly contentious Brexit decision in mid-2016, in addition to two hikes to the property purchase tax, known as stamp duty, in 2014 and 2016, have now hampered the London housing market for over three years. Prime central London home prices have slipped 10% to 12% during that time, according to data from Knight Frank. While the official breakup between the E.U. and U.K. next year is unlikely to bring a magic cure to the market malaise, real estate agents expect a bump of some degree in London transactions by the spring.

“It’s not a sort of virtuous point that come March of next year” Brexit will be over and the everything will go back to the way it was prior to 2016,” said Charlie Smith, founding partner of London Real Estate Advisors. “It is something that is going to be with us for some time.”

But at some point, would-be home buyers will have to jump back into the market, especially given the strong underlying economic fundamentals over this past year, Mr. Smith said. A very low unemployment rate, historically low interest rates, wage growth and an advantageous exchange rate for overseas buyers support the case for a resurgence in activity across the U.K. once there’s more clarity surrounding Brexit.

“The general sort of feeling is now let’s jolly well get on with it,” Mr. Smith said. “You’ve got to get on with life.”

London-based brokerage Knight Frank has reported a growth in pent-up demand for homes in prime central London in recent months. Across its branches in the city, interested buyers registering for help in their house hunt rose 7% increase in the 12 months through November compared to the same time period last year, according to its most recent prime London market report.

For those affluent house hunters who do enter the market, 2019 will be a buyer’s market with the greatest discounts and negotiability on flats priced up to £5 million (US$6.3 million), according to the latest prime London price index from Knight Frank.

Sydney

Like London, a mixture of politics and tax policy are likely to stymie Sydney’s home sales in the first part of the year, as Australia gears up for federal elections, expected in mid-May.

“It just brings uncertainty into the mix,” said Ken Jacobs, a luxury real estate broker with Christie’s International Real Estate.

Over the past 12 months, sales and prices cooled significantly in Sydney, which only two years ago reigned as the world’s hottest luxury housing market with prices climbing by more than 10% for several consecutive years. The average home value across all price points in the city declined around 8% in the year through November, according to the latest report from data firm CoreLogic. And the once white-hot luxury market has also eased to around 4% annual price growth, according to the latest prime cities index from Knight Frank.

Today’s subdued activity is the result of an array of new tax levies, particularly on sales to non-resident and foreign buyers, enacted halfway through 2017.

“That’s clearly impacted our market with expats and foreign non residents,” Mr. Jacobs said.

Nevertheless, a strong economy continues to sustain Sydney’s luxury market, which logged around 100 sales over A$10 million (US$7.18 million) in 2018 as well as Australia’s first home sale over A$100 million.

“In the prime areas, there are less buyers but there are also less properties coming on the market, which together are keeping the market relatively steady,” said Mr. Jacobs, who expects 2019 to be “more of the same.”

Dubai

Dubai, the financial capital of the Middle East, is now entering its fifth consecutive year of declining home prices.

But a variety of popular government measures aimed at converting the city’s enormous transient foreign population into homebuyers, paired with the run-up to the 2020 World Exposition are expected to pay off for the property market.

The new government reforms will, for the first time, offer 10-year residency to certain expatriates, which make up 80% of the city’s population. Those eligible for these long-term visas include property investors, certain retirees as well as science and technical field workers.

“The direct impact on the real estate sector would only become visible after it has been implemented, which is expected in early 2019,” wrote real estate analysts for Cavendish Maxwell in the firm’s most recent Dubai market report.

Manika Dhama, associate partner of strategic consulting and research at Cavendish Maxwell, said the firm expects home values will begin to rise again by as early as the second half of 2019. Others estimate it could take until the World Expo is officially underway in October 2020 for prices to creep up again.  

Whatever the case, it is firmly a buyer’s market, with virtually every neighborhood teeming with apartments or villas for sale, and prices down another 3% to 4% in 2018 alone.

New York

Sales and prices have cooled in Manhattan over the past two years, a hyperlocal downturn that some predicted would have improved by now.

But broad economic factors like rising interest rates, renewed stock market volatility in 2018 and tax reform, which removed key tax incentives for homeowners in expensive, high-tax states like New York, have piled on new market pressures and exacerbated the city’s already sluggish sales.

“We’ve just had this malaise,” said Darren Sukenik, a broker with Douglas Elliman who works primarily in downtown Manhattan. “In April it’s going to be two years.”

When it comes to open houses and showings, Mr. Sukenik said he’s as busy as he ever was, but would-be buyer simply aren’t taking the next step.

Part of the issue is too much overpriced housing stock, especially with a new development pipeline promising another 2,000 units in 2019, said Donna Olshan, president of Olshan Realty and author of a weekly luxury market report that tracks contracts signed at $4 million and up.

“Most of the market is overpriced by at least 10%,” Ms. Olshan said. “Then you have the structural change of the tax law putting downward pressure and you have interest rates rising. In a sense, you would call that a perfect storm.”

“It’s like the city’s standing on a banana peel and it’s either going to slip or it will stabilize,” she continued. “Right now, the perception and the reality is that it’s a buyers market.”

San Francisco

Luxury buyers will likely continue to drive San Francisco sales, as the Bay Area consistently ranks as one of the fastest growing areas for homes over $1 million.

“It is encouraging to see that despite the financial market’s volatility and the impacts on tech companies, higher-price buyers are still encouraged and moving forward,” said Selma Hepp, a chief economist at Compass in San Francisco, in her latest report.

Sales of homes priced over $2 million have grown by 16% from a year ago in San Francisco, according to the same report. Growth in luxury transactions has increased even more in San Mateo County, which makes up part of Silicon Valley.

Shifts in the tech industry could provide the fuel that keeps the luxury market moving through 2019. The IPO pipeline is amassing an impressive list of companies ahead of the new year, as major San Francisco-based firms like Uber, Lyft, Slack and Airbnb file plans to go public next year.

“When startups go public, they can pour additional, immense quantities of new wealth into the pockets of founders, investors and employees—and then into the surrounding economy,” said Patrick Carlyle, another market analyst with Compass, in a report from December.

By contrast, things have slowed at the margins of luxury, where rising prices and a 75-basis point rise in mortgage rates over the past year have hit buyers in the market for homes around $1 million with a one-two punch. Some have had to lower their budgets, while others dropped out of the market completely, said Polaris Pacific’s Managing Partner Garrett Frakes.

Nevertheless, Mr. Frakes said: “We’re seeing a lot of resiliency at the medium to high end, and it’s not affecting people coming in with all cash.”

Prices will likely continue rising in the city’s limited and pricier single-family home market, while the less expensive condo market may see some softness in both sales and price growth in 2019, Mr. Frakes said.

Miami

Federal tax reform that went into effect in 2018 will continue to pay off for low-tax states like Florida, which has seen a bump in home sales in places like Miami-Dade County and Sarasota that real estate agents and analysts attributed to the state’s tax advantage.

Florida is one of the few states with no state income tax, an enticing policy for wealthy U.S. residents from places like New York, Connecticut, California and Illinois, which pay some of the highest state and local taxes in the country. The new tax code greatly diminished a key write-off that allowed taxpayers to reduce their federal bill by the amount paid in state and local taxes, giving Florida’s no-tax policy renewed cachet.

As a result, high-end sales activity in Miami and the surrounding markets of South Florida beat expectations quarter after quarter in 2018. That trend is expected to continue, as more out-of-towners seek to make the state their new tax home, said developer Ryan Shear, principal of Property Markets Group in Miami.

“2018 was an OK year, definitely better than 2017. Our construction has picked up,” said Mr. Shear, adding that 2019 still “won’t be the year people talk about.”

It’s a stockpile of luxury condo inventory, specifically along the beach and neighboring barrier islands, that continues to weigh on the market and keep downward pressure on luxury prices. In the third quarter of 2018, there was still 45 months-worth of luxury supply along coastal Miami, according to the latest market report from Douglas Elliman and Miller Samuel.

Mr. Shear believes sales activity will continue to strengthen in 2019, setting the stage for significant construction, sales and price growth in 2020 and 2021.

Los Angeles

When it comes to luxury home prices in La La Land, the sprawling metropolis in Southern California is living up to its nickname.

In 2018, Los Angeles offered the U.S. housing market two of the most expensive pieces of property in the county: the former Bel-Air estate of the late billionaire Jerry Perenchio, priced at $245 million, and a 157-acre hilltop summit overlooking Beverly Hills, asking a whopping $1 billion. (Both are still on the market asking the same price.) Meanwhile, the average price across a broad swath of affluent Los Angeles, including Downtown and the Westside, saw the average sales price hit a record $1.525 million in the third quarter of 2018, an increase of 6% from a year ago, according to the latest market report from Douglas Elliman and Miller Samuel.

That soaring price growth simply can’t continue in 2019, given that drop-off in sales in the last six months, said Mike Akerly, vice president and director of Polaris Pacific in Los Angeles.

“We’re looking at a snapshot in time that won’t be sustainable,” Mr. Akerly said, adding that the dichotomy of rising prices and declining sales “can’t go on forever.”

“Fewer sales will have an impact on pricing,” he said.

Discounts will be most prevalent at the higher end of the Los Angeles market, according to Knock, a real estate analytics site, which predicts 90% of homes sold in the first quarter of next year will sell for a discount.

A report from the UBS Chief Investment Office predicted the divergence between housing markets on the East Coast versus the West Coast will begin to even out in 2019.

“Los Angeles and San Francisco have been buoyed by tech company expansion,” according to the report, but “looking forward, we consider it likelier that the gap will narrow because of the West Coast market weakening rather than the East Coast strengthening.”