Will the Fed cut enough to coax US homeowners into moving?
Making sense of the latest trends in property and economics from around the globe
5 minutes to read
In Wednesday's note, I wondered whether the government's proposal to raise Capital Gains Tax (CGT) on the sale of second homes would raise any money considering the inevitable losses in related taxes, like a drop in income tax caused by landlords exiting the business.
Sure enough, reporting in the Times late-Wednesday suggested that chancellor Rachel Reeves will likely limit any rise in CGT to share sales "amid concerns that increasing it [on the sale of second homes and buy-to-let properties] would cost money."
Residential property is unlikely to get away scot-free, however. The Conservatives increased the "nil rate" threshold for paying stamp duty from £125,000 to £250,000 and from £300,000 to £450,000 for first-time buyers. Those thresholds will revert back from March, the paper reported yesterday evening. The government also intends to fulfil its manifesto pledge to increase the SDLT surcharge on foreign buyers. The paper suggests it'll rise to 3%, from where it currently stands at 2%.
A view from the US
In early autumn, New York traders arrived at their desks to find financial markets in meltdown.
The unwinding of a previously little-known ‘yen carry trade’ set off wild gyrations in global markets overnight, and fear was setting in. Investors were questioning whether the Federal Reserve had underestimated the fragility of the global economy and the risk of a domestic recession. Over the course of a few weeks, markets moved from anticipating a single 25 basis point cut from the Fed by the end of 2024 to as many as 125 basis points.
This shift is the key to unlocking the housing market in the US, and I explored the implications for a new Residential Market Insight report, out this morning.
Right now, homeowners remain reluctant to part with mortgages agreed during an era of ultra-low rates. National market data confirms that turnover in the first eight months of the year hit the lowest level in at least thirty years.
Despite a higher prevalence of cash buyers, elevated borrowing costs have weighed on activity in luxury markets, too. Prime buyers tend to have wealth tied up in other asset classes, many of which have been hurt by higher rates. That adds uncertainty, which has been compounded by the November election. Nationwide, just 29 properties sold for at least $50 million during 2023, down 41% in just two years, according to Miller Samuel data.
Cash buyers
Manhattan is one of the few markets where inventory is rising.
There are now more than 8,000 apartments for sale, compared to the 10-year average of about 7,000. This uptick has steadied sales volumes, which are only down by 0.7% in the first three quarters of 2024 compared to the same period a year earlier. At the same time prices are stabilising, with average values down only 1.1% in the same period according to Miller Samuel/Douglas Elliman figures. Though still subdued, higher- value markets have outperformed as buyers utilised cash to avoid taking on debt at rates north of 6%. A record 68% of transactions in Manhattan were funded by cash during the first quarter, up from the long-run average of about 50%.
Sales volumes are likely to begin recovering the week after the election, Jonathan Miller, president and CEO of Miller Samuel, told me while preparing the report. Jonathan authors Douglas Elliman's quarterly closed sales and monthly signed contracts reports and has parsed three decades of data to look for post-election trends:
“From the beginning of July through election day there’s a slowdown, but then there’s a release literally the day after the election. It doesn’t appear to have any impact on prices, it’s more just another variable to process for a consumer, and then there’s a release. Over the next three or four months the deficit catches up.”
The dust settles
New Yorkers have fuelled their fair share of property market activity, but a lot has been funnelled into markets outside their home state.
Movers from New York and the wider northeast of the US helped Florida become the fastest-growing state in 2022 for the first time since 1957, for example. Net population growth of almost 250,000 has driven unprecedented gains in property values in many of the state’s luxury hot spots.
In Palm Beach, average prices have climbed 214% in five years, according to Miller Samuel/ Douglas Elliman. Growth has cooled as inventory has risen and buyers have resisted recordprices. Sales volumes eased 4.5% in the six months through Q2 compared to the same period a year earlier. Average prices dipped 0.1%.
This is less an unwinding of a pandemic-era boom than it is the dust settling on a permanently enlarged luxury property market. Though inventory is rising, it could take years to catch up with demand. Where Miami was once the primary business hub of Latin America, it is now a serious competitor to established finance hubs like Chicago. Citadel, the $38 billion hedge fund run by Ken Griffin, moved its headquarters from Chicago to Miami in 2022, birthing a trend known as the “Citadel effect”.
Almost irreplaceable
Imbalances between supply and demand are likely to linger in most markets that saw the biggest increases in pricing and activity during the pandemic. Between Q1 2020 and Q3 this year Aspen saw prices increase by 67.3%. This has been one of the critical prime markets which has undergone a substantial upwards repricing.
The Aspen market can be divided into three tiers, each with different drivers, says Riley Warwick, co-founder of Aspen-based brokerage team Saslove & Warwick at Douglas Elliman. Similarly to Miami, a permanently enlarged population means the market below US$10 million could be undersupplied for years. Between US$10 million and US$25 million, sales rates have slowed as buyers look for value after sharp recent price growth. At $25 million and above, inventory remains extremely low for homes that are almost irreplaceable. Land is limited and building bespoke homes takes many years, so buyers are happy to pay record prices.
“It takes about a year to design a home, another year to get permits, only then can you put a shovel in the ground to begin the three to four-year build process,” Warwick adds. “People are willing to pay for instant gratification.”
See the report for more on markets including Austin, Dallas and Los Angeles.
In other news...
PIMCO says UK budget unlikely to shock markets (Reuters), UK proposes easing banker bonus rules to boost competitive edge (Reuters), and finally, wealthy French company owners brace for IHT changes (Bloomberg).
Photo by Zac Gudakov on Unsplash