The Lopsided Market for Luxury Properties [Chart]
Which world-class cities are the ultra rich scrambling to get into?
The Chart of the Week is a weekly Visual Capitalist feature on Fridays.
The global market for high-end luxury properties is a volatile one.
For example, during the tumultuous year of 2009, there was an astonishing 97 percentage point differential in the price changes of high-end real estate. Some markets may have been up 30%, but others were down over 60% – that’s a wild margin for multi-million dollar properties in some of the most world-class cities in the world.
This is according to the latest iteration of the Wealth Report, an annual publication by the global real estate consultancy Knight Frank that focuses on the world’s ultra-rich.
High-end Real Estate in 2015
The market for luxury properties last year was obviously less volatile than the aforementioned example, however the spread is still significant.
In Vancouver, which is currently engulfed in a real estate mania that we covered in-depth yesterday, luxury properties jumped up in price by 25% throughout 2015. This is not an exception to the trend. Royal Lepage, another realtor, covered Canadian luxury markets in more depth, finding that properties increased in price by a total of 125% from 2005 to 2015. That compares to 69% increases in Toronto over the same period, and 58% increases in Montreal.
The biggest decrease in the price of luxury real estate was in Lagos, Nigeria. The African metropolis of 16 million is the continent’s largest city, as well as the fastest growing city in the world. There, high-end properties divebombed by -20%.
In terms of more so-called “world-class” cities, the “Paris of South America” – Buenos Aires – saw the largest decline of -8.0%. Knight Frank notes this decline is based mainly because of currency and affordability issues. The market there could be an interesting one to watch for awhile, as new Argentinian president Mauricio Macri recently took the country’s reins in December 2015.
The North American Market
San Francisco was a distant second place from Vancouver, with an increase in high-end property values of 10.9%. Toronto was up 8.0%, while Los Angeles and New York both held modest gains of 4.7% and 2.4% respectively.
Chicago was the worst performing North American city in Knight Frank’s index with a 0.0% price change in luxury properties throughout 2015.
Recession Risk: Which Sectors are Least Vulnerable?
We show the sectors with the lowest exposure to recession risk—and the factors that drive their performance.
Recession Risk: Which Sectors are Least Vulnerable?
In the context of a potential recession, some sectors may be in better shape than others.
They share several fundamental qualities, including:
- Less cyclical exposure
- Lower rate sensitivity
- Higher cash levels
- Lower capital expenditures
With this in mind, the above chart looks at the sectors most resilient to recession risk and rising costs, using data from Allianz Trade.
Recession Risk, by Sector
As slower growth and rising rates put pressure on corporate margins and the cost of capital, we can see in the table below that this has impacted some sectors more than others in the last year:
|Sector||Margin (p.p. change)
|🏡 Household Equipment||-0.9|
|🚗 Automotive Manufacturers||-1.1|
|🏭 Machinery & Equipment||-1.1|
|🖥️ Computers & Telecom||-2.0|
*Percentage point changes 2021- 2022.
Generally speaking, the retail sector has been shielded from recession risk and higher prices. In 2023, accelerated consumer spending and a strong labor market has supported retail sales, which have trended higher since 2021. Consumer spending makes up roughly two-thirds of the U.S. economy.
Sectors including chemicals and pharmaceuticals have traditionally been more resistant to market turbulence, but have fared worse than others more recently.
In theory, sectors including construction, metals, and automotives are often rate-sensitive and have high capital expenditures. Yet, what we have seen in the last year is that many of these sectors have been able to withstand margin pressures fairly well in spite of tightening credit conditions as seen in the table above.
What to Watch: Corporate Margins in Perspective
One salient feature of the current market environment is that corporate profit margins have approached historic highs.
As the above chart shows, after-tax profit margins for non-financial corporations hovered over 14% in 2022, the highest post-WWII. In fact, this trend has been increasing over the past two decades.
According to a recent paper, firms have used their market power to increase prices. As a result, this offset margin pressures, even as sales volume declined.
Overall, we can see that corporate profit margins are higher than pre-pandemic levels. Sectors focused on essential goods to the consumer were able to make price hikes as consumers purchased familiar brands and products.
Adding to stronger margins were demand shocks that stemmed from supply chain disruptions. The auto sector, for example, saw companies raise prices without the fear of diminishing market share. All of these factors have likely built up a buffer to help reduce future recession risk.
Sector Fundamentals Looking Ahead
How are corporate metrics looking in 2023?
In the first quarter of 2023, S&P 500 earnings fell almost 4%. It was the second consecutive quarter of declining earnings for the index. Despite slower growth, the S&P 500 is up roughly 15% from lows seen in October.
Yet according to an April survey from the Bank of America, global fund managers are overwhelmingly bearish, highlighting contradictions in the market.
For health care and utilities sectors, the vast majority of companies in the index are beating revenue estimates in 2023. Over the last 30 years, these defensive sectors have also tended to outperform other sectors during a downturn, along with consumer staples. Investors seek them out due to their strong balance sheets and profitability during market stress.
|S&P 500 Sector||Percent of Companies With Revenues Above Estimates (Q1 2023)|
|Real Estate ||81%|
Cyclical sectors, such as financials and industrials tend to perform worse. We can see this today with turmoil in the banking system, as bank stocks remain sensitive to interest rate hikes. Making matters worse, the spillover from rising rates may still take time to materialize.
Defensive sectors like health care, staples, and utilities could be less vulnerable to recession risk. Lower correlation to economic cycles, lower rate-sensitivity, higher cash buffers, and lower capital expenditures are all key factors that support their resilience.
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