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No immunity for the luxury sector from the largest interest rate increase for the US since 1994

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With interest rates rising and the stock market reeling, some luxury home buyers may be entering “shock mode.”

In a widely anticipated move to help curb the highest level of US inflation in 40 years, the Federal Reserve raised interest rates on Wednesday by 0.75%, the biggest increase since 1994. It will raise the Fed’s benchmark federal funds rate to between 1.5% and 1.75%, according to The Wall Street Journal. Some expect interest rates to reach at least 3% by the end of the year.

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It’s the latest in a series of interest rate hikes, and there could be another jump of between 50 and 75 basis points in July, Federal Reserve Chairman Jerome Powell said at a news conference Wednesday afternoon. afternoon. And while the move is likely to have more of an effect on the mainstream market, luxury goods shoppers won’t come out of the decision unscathed.


“Even though there tends to be more cash buyers as the price goes up, they are still very aware of what’s going on in the world around them,” said Jonathan Miller, president and CEO of Miller Samuel, New York City. . basic real estate appraisers and consultants.

Additionally, many ultra-high net worth buyers have significant assets invested in the stock market, which is also struggling. The Dow Jones Industrial Average lost 741.46 points on Thursday, erasing a brief rally sparked by Wednesday’s rise, according to The Wall Street Journal. The Nasdaq Composite was also down 4%.

“The stock market crash has put many luxury buyers in shock,” said Lawrence Yun, chief economist at the National Association of Realtors. “Now they’re saying, ‘We can’t buy that second home’ or go from a $2 million property to a $4 million home…[luxury buyers] we are dealing with two major events happening simultaneously.”

Luxury sales are already down 18% compared to last year, according to Daryl Fairweather, chief economist at Redfin.

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Change of financing strategies

It’s not surprising that people at the top of the high-end market are more affected by the rate change than buyers with very high net worth, according to Emily Irwin, senior director of advisory and planning at Wells Fargo Wealth and Investment Management. .

The “biggest change” will be the luxury market entry point, he said, with many who had significant spending power a year ago now facing markedly higher mortgage payments as well as higher borrowing costs.

In fact, “some potential buyers will see mortgage payments go up by thousands a month,” Yun said, adding that it will prevent some buyers from entering the luxury market.


On the other hand, interest rates at record lows in recent years have encouraged many wealthy buyers to take out home mortgages while allowing their cash to earn higher returns elsewhere. That may change with higher rates, Irwin said.

“I think we will see a decline in customers taking out mortgages as part of an investment strategy,” he explained.

Mr. Yun agreed, noting that mortgage rates have now risen to 5.78%, their highest level in 13 years, according to The Wall Street Journal, compared with around 3% a year ago. For the strategy to work, investors need a return of more than 6%, a much more difficult scenario with the stock market falling, he said.

In the meantime, some investors may look to other types of loans to escape higher rates, including intra-family loans, Ms Irwin added.


“It will be interesting to see if high-net-worth buyers in the luxury space turn to their parents or even grandparents for financial help,” he noted.

Higher borrowing costs will certainly deter some buyers and, with less demand, sellers will have to readjust their expectations, Ms Irwin continued. Now they may be more willing to negotiate on price or be more flexible when it comes to “pending items” like services or closing costs, she said.

Just don’t expect home prices to crash.

“We’re not seeing bargains in luxury real estate,” Ms. Irwin explained.

Normalization after a housing boom

With the past few years bringing “one of the biggest real estate booms of the modern era,” a correction in the housing market is due, said Miller, who also authored Douglas Elliman’s market reports on regions including New York. , South Florida, California and Boston.

“We’ve had this frenzy that was not sustainable,” he explained. “This is really a good long-term thing for housing. In most of the markets I cover, bidding wars generally accounted for 25-75% of the markets we track, and that’s not a sustainable condition.”

Lower purchasing power could give inventory time to recover over the summer, which could bring back buyers who left the market due to a lack of quality supply. Inventory is already growing at a faster rate than anticipated, rising 17% year over year in the week ending Saturday, according to a Thursday report from Realtor.com. Also, as international travel opens up, real estate sales to wealthy foreigners may help boost the market, according to Mr. Yun.


Furthermore, the mortgage rate has already risen much more than the Fed’s benchmark interest rate, according to Mr. Yun. That could mean mortgage rates have peaked, he said, even as the Fed continues to raise the benchmark rate over the course of the year.

And while rates may seem high to newcomers to the housing market, those who have been through multiple cycles know better.

“When I bought my first house, the mortgage rate was 8%. When my parents bought their first house, it was 15%,” said Mr. Yun. “For people with a broader historical perspective, 6% is still attractive. Also the mortgage rate goes up, then goes down. When it goes down again, people will have the opportunity to refinance.”

UK raises rates… again

Meanwhile, the Bank of England raised interest rates from 0.25% to 1.25% on Thursday, the fifth such hike in the UK since December, according to The Wall Street Journal.

“Although it was largely expected, [Thursday’s] The decision will cause further turbulence in what has already been a wildly fluctuating mortgage market in recent months,” Jonathan Samuels, chief executive of London-based Octane Capital, said in a statement. “Some lenders have already scrambled and raised their rates in anticipation of this increase, but [its] confirmation will now open the floodgates in this regard, as the sector struggles not only to deal with a rising base rate, but also the extreme volatility seen in the swap rate market.”


Still, the UK housing market boom has been so strong that a higher mortgage rate won’t bring about a complete turnaround.

“The UK property market has held up despite a series of rate hikes in quick succession and so [Thursday’s] the decision is unlikely to divert it from its current trajectory,” James Forrester, managing director of Barrows and Forrester, said in a statement. “Home buyers continue to flood the market, taking advantage of what is still a relatively affordable cost of borrowing, and as long as there remains an insufficient level of inventory to meet this demand, home prices will continue to rise.”


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