2018: Global Luxury Real Estate to Feel Tax Impact

The Big Apple saw luxury sales increase over the course of 2017, as sellers chopped down asking prices to attract buyers—a trend likely to continue into 2018.

Those discounts caused luxury sales to increase 7% last year and average sales price to decline by the end of the third quarter, according to the most recent report by appraisal firm Miller Samuel. The city’s median sales price was down 6% to $6.42 million in the third quarter, according to the firm, which defines luxury as the top 10% of the market.

Greater sales and bigger discounts look poised to carry into 2018, according to data from Olshan Realty. The firm, which publishes weekly statistics on pending luxury sales, has reported a rebound in activity this fall after a sluggish summer, and price cuts remain a staple feature of the market, particularly at the highest end.

Trying to grab at the highest possible value for land, developers are pushing forward with ultra-luxury towers despite the slide in prices and the increasing risk of oversupply. A slew of super-prime towers are in the pipeline around Central Park—all catering to an ever smaller billionaire buyer pool.

New buildings include Central Park Tower, at 220 Central Park South, where the average price per square foot is estimated at over $7,000; neighboring 111 West 57th Street with prices pegged at around $5,700 per square foot; and 220 Central Park South, which is selling a quadruplex for $250 million.

“With next year’s building boom promising to expand luxury market woes at the very top of the market,” StreetEasy Senior Economist Grant Long said, “2018 will mark slow price growth across multimillion-dollar price points and a landscape in which high-end buyers enjoy the upper hand in negotiations.”

The prime property market in the British capital has bottomed out and will begin to see prices start to rise again, though the onerous stamp duty will continue to have a dampening effect at the highest end, experts said.

An increase in Stamp Duty in mid-2016 paired with the unexpected vote to pull from the European Union, the fall in the value of sterling and the resulting economic flux dampened activity in one of the world’s biggest luxury hubs. The latest data from brokerage Knight Frank shows that prices in prime central London fell 3.6% over the year ending in October and in prime outer London 1.4%.

But by the end of 2018, Knight Frank estimates prices will begin to rise again, albeit by a modest 0.5% in prime central London, and will flatline in the prime neighborhoods of outer London.

“The sales market in prime central London continues to move towards recovery mode as pricing adjusts to higher transaction costs and political uncertainty,” wrote Tom Bill, head of London Residential Research for Knight Frank in the firm’s 2018 outlook.

The market for properties worth £5 million (US$6.7 million) or more were hit particularly hard in the wake of stamp duty increases but is now recovering more rapidly—a trend Knight Frank expects to continue.

One of the biggest factors moving forward will be tight supply, as owners are reluctant to market homes during a depressed prime market. The particular dearth of larger homes in prime locations has buyers looking to alternative locations, including Surrey, according to Gary Hersham, managing director and founder of Beauchamp Estates.

The biggest single obstacle to growth in the prime market, however, remains the stamp duty, Mr. Hersham said.

The tax is “hampering people’s ability to move home and restricting the natural flow of changes in property ownership,” he said. “The transaction costs are making many reconsider their next move, whether moving up or down.”

The Bay Area’s luxury housing market bounced back in a major way in 2017, following a price correction—particularly among condos—the previous year.

Sales of luxury single-family houses and condos hit new highs and prime prices were up 5.5%, according to Knight Frank Prime Global Cities Index.

With tech stock soaring, next year is looking like more growth, particularly in the first part of the year, said Patrick Carlisle, head of research at Paragon Real Estate Group.

“It looks like 2018 will be a very strong year at least in the initial period,” Mr. Carlisle said. “My guess is that the stock market will go crazy over what is being labeled as ‘tax reform’.”

Booming tech stocks have recently helped fuel Bay Area wealth. The S&P Information Technology index, which includes Google (Alphabet), Apple and Facebook, is up 40% year-over-year.

“There are a lot of people feeling a lot wealthier,” Mr. Carlisle said.

Stellar stock market gains also has renewed IPO chatter among San Francisco-based companies like AirBnB, Uber, Palantir and Pinterest. If any one of those companies were to go public, there would be scores more millionaires in the Bay Area looking for housing, Mr. Carlisle said.

“When someone becomes a millionaire, the first thing they do is look for a new house or condo,” he said. The San Francisco luxury market sees only about 600 units trade hands each year, meaning a windfall for a local tech company would have a major effect on the housing market.
Outside of the U.S., Chinese investors have fallen out of the San Francisco market as the government puts more capital constraints on money leaving the country, though that has had a negligible effect on the luxury housing market there

Luxury hunters once headed for Miami are steering north to Fort Lauderdale, where luxury condo development is booming.

Take Hallandale, about halfway between Miami and Fort Lauderdale, where developer Shahab Karmely is building a 64-unit luxury condominium, 2000 Ocean, comprised of half- and full-floor apartments on the beach with prices starting at $2.5 million.

While coastal Miami has seen its luxury prices and sales dip over the past year, Fort Lauderdale’s luxury market is moving faster as it draws snowbirds from the Northeast, Canada and Brazil. Fort Lauderdale ranked No. 6 for real estate investment in PricewaterhouseCoopers’s 2018 “Emerging Trends in Real Estate” report, the largest upward movement of any city ranked in the report.

Miami and its submarket, Fort Lauderdale, have risen to the top of PwC’s list as primary luxury markets like New York and Los Angeles become prohibitively expensive.

South Florida, which already benefits from buyers fleeing high-tax states like New York, Connecticut and Illinois, is likely to see an uptick in interest thanks to the U.S. tax overhaul, Mr. Karmely said. The law caps a federal deduction for state and local income and property taxes at $10,000, giving people more incentive to look for tax homes in places like Florida or Texas where there is no income tax.

“I’m a believer in Miami, in the continued growth of Miami as a city and as an international hub in the long term,” Mr. Karmely said.

The race for buyers in South Florida has developers offering better and more exclusive amenities and lifestyles, said Oscar Rodriguez, principal at ROVR Development. ROVR is in the middle of building a boutique condo development in the lush residential area of Coconut Grove, which will open in summer 2019.

“They don’t want to live with 400 other people,” said Mr. Rodriguez, adding that Miami’s luxury buyers are much more cognizant of the finishes, from kitchen cabinets to amenity spaces than they once were. “It has driven the development industry to produce a much more premium product.”

This year, Sydney joined a growing list of global cities imposing greater taxes and regulation on foreign and pied-a-terre buyers in response to rapid price growth—changes that already have had a cooling effect in the luxury market, brokers say.

On Aug. 1, the state government doubled the stamp duty in New South Wales to 8% for foreign buyers, raised the annual land tax to 2% from 0.75% and introduced a so-called “ghost tax” on properties left vacant for six months of the year. In addition, there was already a roughly 5% to 7% tax on homes over $3 million.

The most expensive home to sell this past year was a Point Piper estate that went to a local Aussie buyer, Atlassian founder Scott Farquhar, for A$71 million (US$53.6 million). Had it sold to a foreign buyer, however, he or she would have had to cough up more than A$10 million (US$7.52 million) in stamp duty thanks to the increased stamp duty, said Ken Jacobs, a luxury broker with Christie’s International Realty. That’s not to mention another A$1.9 million annually in land taxes.

Tax hikes on foreign buyers and investors—whether in Sydney, Toronto or Hong Kong—have been a quick-fix response by governments responding to homebuyer frustration over a tight and unaffordable housing market. In Sydney, the measures have primarily hit the prestige market, which has seen prices climb more than 11% so far this year, according to Knight Frank’s Prime Global Cities Index.

Sydney’s once-less-expensive luxury market has been catching up with its peers, logging double-digit annual growth for the past three years. But that heady price run is grounding to a halt under the new regulations. In the third quarter prices grew a paltry 0.7%, according to Knight Frank.

“We’re getting back to what we would call a normal market,” Mr. Jacobs said, “and that should continue into next year.”