It's not just a niche: What investors can learn from a resurgent luxury market

by Clayton Jarvis23 Jan 2020

On January 15, Sotheby’s International Realty Canada released its Top-Tier Report, an examination of real estate activity in the $1 million-plus price range in Canada in 2019. The report found that the upper echelon of properties in three of the four markets studied – Toronto, Vancouver, Montreal, and Calgary – saw a significant uptick in activity in the latter half of 2019.

In Vancouver, an increase in sales was seen not only where one might expect – the $1-2 million range, which is still essentially starter-level in the city – but in the $2-4 million segment as well. While sales of the former increased 44 percent year-over-year, sales of the latter increased an equally dramatic 32 percent over the same period. (Upper-tier condo sales, however, have been sluggish.)

Toronto’s luxury market also fared well in 2019, but not to the same extent as Vancouver’s. Sales of properties between $1 million and $2 million increased 25 percent compared to 2018, with those in the $2 to $4 million range edging up by 12 percent.

Gains in Montreal, where the luxury market is the most recent beneficiary of the city’s economic boom, were modest in comparison to Toronto and Vancouver, but record-setting nonetheless. $1-2 million properties experienced a 13 percent increase in activity. Improvements in the $2-4 million segment were more subdued – 7 percent year-over-year – but the $4 million-plus price range saw a 64 percent increase in sales.  

Calgary was the only city studied where top-tier real estate continued to languish. Sales in the $1-2 million category shed 13% compared to 2018 levels; those in the $2-4 million range experienced a 23% decline.

Implications for investors
The increased activity in the luxury segment of the market may feel like a bit of trivia with relevance only for investors with their sights set on big-ticket real estate. But according to Sotheby International Realty president and CEO Don Kottick, numbers like those found in the report can be used like tea leaves by investors attempting to read a market’s fortunes.

“The housing market is a continuum,” Kottick says. “It goes from rental units right through the luxury segment. It’s all interrelated. Usually, when the upper tier is going, it means we’re operating in a very healthy market. People are moving up and that creates opportunity for the investor.”

An active luxury market implies healthy levels of consumer confidence. No surprise, then, that Montreal, Toronto and Vancouver’s upper-tier properties are staring to once again move briskly while Calgary’s is still stuck in the mud.

As prices continue to increase in Canada’s largest cities – semi-detached properties hit the $1 million threshold in Toronto before the end of 2019 – the luxury segment will inevitably begin to make up a greater percentage of sales. “[It] was largely responsible for the recovery we saw in the last quarter of 2019” in Vancouver, Kottick says. Keeping abreast of changes in the space will be necessary for any investor hoping to prove her market expertise in the future.

On a macroeconomic level, a rise in luxury sales can also point to a lack of comfort buyers may have in other forms of investment. The Sotheby’s report states that realtors “in major metropolitan markets country-wide saw a noticeable increase in affluent real estate consumers utilizing top-tier real estate as an alternative to investing in stocks and equities in order to diversify portfolios, hedge against inflation, and buffer against financial market volatility and risk.” Conversely, when money flees the luxury space, it may indicate that high net-worth investors see their bets paying off more handsomely outside of real estate.

Being aware of the activity at the top end of the market, particularly when prices are backsliding, can also provide the opportunity many investors dream of: the big-ticket buy-and-hold. 

“We’ve definitely seen some of our clients opting to go that route,” says Kottick. “It’s not for everybody. It’s a fairly big sum of money, and I don’t think anybody knows, from an appreciation perspective, where things are going.”

Kottick encourages investors to approach luxury properties the same way they would any other form of real estate, by taking a long look at cap rates and neighborhood fundamentals to make the wisest, least speculative choice as possible. When it comes to million-dollar properties, there may be plenty of crystal, but there are never any crystal balls.

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