How does the economy influence the luxury property market?

How does the economy influence the luxury property market? Manish Khanna
Manish Khanna
Thursday 05 Mar 2015

The luxury property is a pretty resilient market, it manages to stay afloat even when everything around it seem to be sinking, this has been the case in some economies and even now, as the Australian dollar has been on a weakening trend for the past six months, and still counting; we actually see that market getting better and even better. But is it always like that? If so, why?

  • Luxury mansion buyers are mostly wealthy people. They are not people in the single ten million dollar riches, but multi-tens of millions, hundreds of millions and even in the billions. They are people who can buy a luxury mansion just to spend two months of the year and the rest in another luxury mansion elsewhere. These people’s money cache cannot be affected by poor economies, so they can buy whether there is a storm on the market or when it’s sunny.
  • The people who cease property purchases due to low or absent buyer confidence due to the poor economic situations are mainly those buying the mansions or any property for investment purposes mainly. However, we have seen from the point above that the type of buyer we are talking about cannot buy then go through the stressful waiting for the property to sell, they buy for their personal use. This being the case therefore, whether the market is going up or down, it matters not because the house is for keeps.
  • The luxury property pricing seems to be on peak one moment, and then it suddenly drops for a few weeks, and this up and down happens from time to time. If one is patient enough, they can be on the lookout for the drop in prices then pounce and this might be how some luxury property buyers keep the market adrift.

The points above point to the fact that the luxury home buyers are not affected by the economy so whether it’s up or down, they just buy if they want to because the money is there, plentifully. However, the drop in property sales in the years after the 1997/ 1998 World Economic Down turn point to a different reality.  For all the years after the down turn, the Australian property market was struggling the .5 per cent growth in the Australian economy even though not particularly hit by the economic  recession, did not help.  Luxury property buyers were not buying on one end; luxury mansion owners were not selling and waiting for the prices to go a reasonable price up on the other. Some buyers were there with their $15 million to $20 million, here and there more but if someone wants thirty and someone offers twenty-five, that is a huge difference. And then, the luxury home owner really can wait, money is no issue.

The RP Data figures for 2014 show that property sales in excess of $5 million increased by 13 per cent in Sydney and also that in Brisbane, property sales selling for $3 million or more went up to 33 per cent. The information from these two cities proves to us that something in the property market is going the way it should. The Australian dollar, as mentioned earlier, is weakening, what then is leading to the improvement of the market?

  • Foreign buyers seem to be flocking to Australia, particularly the Chinese. They are buying properties in excess of $5 million to raise the speculation that they mainly want to take advantage of the investment immigration policy put in place a few years back. If this is the case, it has nothing to do with the state of the economy but just that the buyers a seeing a welcome chance and grabbing it.
  • Foreign buyers are taking advantage of the weaker Australian dollar to buy because when it weakens, some currencies are gaining strength against it. This means the Australian property market is more lucrative, attractive and more affordable for users of other currencies. This then points to the effect of the economy on the luxury property market.

  • The end of the economic recession of 2007-9 saw a sharp increase in the already vast riches some people had. Some countries started seeing the gap between the rich and poor widening even more. Though it was not so (or maybe not in such proportions) on the Australian front, there was an increase in the numbers of multiple hundred millionaires and billionaires in Australia. If the down turn indirectly made some people richer than they were a few years back and now enables them to buy luxury mansions of add to the ones they already have, then indeed the economy did affect the buying of property, though indirectly.
  • The dollar might be losing a few grounds, and the iron ore prices falling, all this pointing to an economic decline, but this decline has so far not touched the property market. The increased consumer confidence in the market seems to be too high to slump after a few jolts, or could it be that the marketing is being sustained by those just too wealthy to care about buying a luxury home for $45 million?
  • Some hope that this is just a short time thing, the dependability of the Australian dollar in most instances has given them that hope and so believe that there is stability still, in the Australian economy and so are willing to invest in this resilient and powerful market.

The above points point to the indecisive nature of the luxury property market. The two sides of the economic coin as it concerns the effect on the property market seem to indicate that the economy might, and might not affect the luxury property market considering our wealthy friends. At the same time, the effect that the economy might have is also two sided as we have seen both decreases and increases in luxury property sales under not so ideal economic conditions. A common ground is in the matter is difficult to come to.