Should Luxury Market Numbers Matter to Investors?
This has raised a number of questions about the health of markets, the affordability of certain cities and what's driving this new found demand.
Luxury sales volumes have increased: Vancouver 36%, Calgary 34%, Edmonton 32%, Hamilton-Burlington 31%, Kitchener-Waterloo 27%, Toronto 18%.
Here are some of the over-riding trends that are driving this luxury market demand
- Economic Confidence is very high in those of higher income and higher net worth households. This perceived stability provides them a clearer vision of whether to take the "risk" of upgrading their home/lifestyle
- Many higher-income/net worth families have already purchased their 'second/vacation property' located in the US or Canada during the downturn, so their next move is to upgrade their home lifestyle. This is helping to prop up the higher end market in these key cities
- Tremendously low mortgage Interest Rates allow higher priced homes to be more accessible (on a monthly payment basis) to a larger cohort of Canadians. Yes, this drives up underlying debt ratios.
- The FEAR of mortgage interest rate increases that were spread throughout the year pushed buyers into the market more quickly than underlying economics would normally dictate. So even though the Bank of Canada interest rates did not move up the expectation of it moving drove demand.
- Investment alternatives (savings and bonds for example) are providing higher net worth individuals with lower return, so many are turning to putting that money into their home choices.
- In certain cities, an influx of foreign investment seems to be focused on the higher end of the market
In addition, it is quite obvious why this is occurring in Calgary and Edmonton. Dramatic rise in population, higher than national average incomes and net worths as well as a confidence in the long term viability of the economy of the region.
Because none of the 6 factors above should change in the next year, this trend should continue. Although, because we are starting at a higher base, the percentage increases will not be as large as we witnessed in 2013.
So, all in all, The luxury market will continue to feel strong upward pressure due to the perceived recovery in economies around the world (including US and Europe), this confidence begins to open the taps of those who have been sitting in the safety position of cash or GICs.
With the Bank of Canada clearly stating they will be keeping interest rates low until 2015, the ability for an additional group of Canadians to enter the luxury market remains.
Although most investors do not focus on the luxury market for their portfolio growth, they can use it as just one indicator of market direction. They also understand that when a large number of 'luxury' properties are sold in their target market, it can artificially inflate market performance by skewing the dreaded Average Sale Price.
Awareness of the performance of the high-end of the market is important to investors, mostly to understand and interpret the stats that are released on the whole market.