The enduring appeal of prestige property

While core property prices dipped as Australians took their first tentative steps out of lockdown, the country’s prestige market has been riding a wave of success that’s tipped to continue over the coming year.

Prestige property – defined as the top 5% of homes by value in any given market – witnessed “incredible growth” through COVID-19, according to Knight Frank partner and head of residential research, Michelle Ciesielski.

“We saw a lot of ultra-high-net-worth (UHNW) clients staying home when they perhaps would've taken a European holiday in that regular July to August period,” she said.

“We saw two years of staying at home and as a result, I guess those clients were considering their options. They had time to think about not only their property portfolios, but also how they want to live their life.”

In Australia’s major luxury markets, this enthusiasm for prestige property translated to 4.1% growth in Gold Coast prices, 3.5% in Melbourne, 1.3% in Perth, 1.1% in Sydney and 0.2% in Brisbane.

Prestige homes well-insulated

Australia’s prestige property market is tipped to keep growing in almost every major city, bucking the trend set by the core property market.

According to ANZ senior economist, Adelaide Timbrell, core property prices in Australia’s major cities are expected be similar in price at the start of 2023 and end of 2023.

High inflation has pushed up the cost of living for most Australians and cash rate hikes implemented by the Reserve Bank of Australia (RBA) - in a bid to control that inflation - have driven up mortgage costs. Ms Timbrell expects the cash rate to peak at 4.35% from August 2023 and stay at 4.1% until late 2024. This is because it is expected to take some time for the effects of the higher cash rate to reduce inflation.^disclaimer

It’s the combined effect of these two factors, Ms Timbrell said, which drove the downturn in core property prices through 2022 and early 2023.^disclaimer

Ms Timbrell commented that low levels of supply and stronger than expected demand look to have trumped the impact of higher mortgage rates over recent months, which has led to some increase in overall housing prices since mid-February. Though further increases in prices through 2023 and 2024 should be limited by the impacts of lower borrowing capacity among households.

While this ‘cost of living crisis’ has had an immediate impact on core property prices, several features unique to the prestige market protected it from the 2022 downturn.

Notably, almost half of UHNW buyers globally are cash buyers, according to Knight Frank’s data.

“Mortgage rate rises definitely impact sentiment, and we've seen that across most residential markets with that slow down,” Ms. Ciesielski said.

“But when this cohort is looking at another purchase, it may not necessarily be such a driver that mortgage rates have gone up because they're buying with cash, or they’ll have a smaller mortgage than perhaps someone in the core market may require as a proportion of their loan.”

Ms. Timbrell agreed, noting that while price swings in the top 25% of properties by value tend to be more volatile than their more affordable alternatives, this same behaviour isn’t true in the very top of the market.

“When you’re talking about a $20 to $30 million property, the borrowing capacity of the average Australian family is irrelevant.”

Current projections even suggest that prestige property prices will increase in most Australian cities in 2023, led by the Gold Coast where gains for the year are expected to hit 3%, with Perth also tipped to climb 1%. In Sydney, prices are expected to remain flat for the year.^disclaimer

Melbourne is the only city where prices are expected to dip (down a modest 1%) but Ms. Ciesielski was quick to note that the expected dip reflects the higher volume of prestige new builds entering the market in recent years.

Property price movements in the Victorian capital also tend to lag the rest of the country by 6 to 12 months, Ms. Ciesielski said, meaning some of the weakness across the market already experienced by other Australian markets may be still to come there.

Resorting to resorts

The types of properties UHNW clients are purchasing have changed since the pandemic lockdowns. Notably, many buyers have opted to upsize, buying larger properties which boast resort-like features.

These properties typically include space to work in, entertainment areas, and backyards that can be (or have been) divided into different ‘zones’ for inhabitants to enjoy. For example, one part of the yard may sport a tennis court while another has waterfront views – giving the occupants different ways to enjoy their property.

Having space to house luxury collectibles remains a popular feature of prestige homes, with art and classic car investments climbing 29% and 25% respectively throughout 2022.^disclaimer

Another emerging trend within the prestige property market is the rise of ‘co-primary living’, Ms. Ciesielski added.

“Traditionally, UHNW clients would have their main residence, which was typically their larger residence, and a holiday home they might visit perhaps once a fortnight,” she said.

“What we’re seeing now is families spending equal time – if not more – at their secondary residences.”

The privacy and home security offered by individual properties is another significant concern among buyers, as these properties are typically bought to serve as a family home rather than for investment purposes.

Knight Frank’s data shows 36% of UHNW clients’ portfolios were tied up in their primary and secondary residences, meaning homes which don’t generate income for their owners.

Tips for prospective buyers

Those looking to purchase a prestige property in the coming year will need to be prepared to act quickly. UHNW buyers rarely sell their current properties to fund the purchase of a new home, so many sales are existing owners expanding their portfolios.

There is also a notable lack of new builds in Australia which would meet the needs of prestige buyers – a feature of the market which keeps many foreign buyers out.

Under the current laws, non-resident foreign investors are “generally prohibited” from purchasing existing housing stock, and while temporary residents are able to buy established homes if their visa lasts more than a year, they are required to sell their property within three months of their visa’s expiry.^disclaimer

As a result, Australian prestige property is tightly held and when these luxury homes become available, they usually change hands via private sales. Few ever make it onto public listings.

Ms. Ciesielski noted that available properties rarely stay on the market for long so when an ideal property does become available, buyers will need to move fast.

“Five years ago, prestige homes could be sitting on the market for a whole year. We’re not really seeing that anymore,” she said.

“It's really about being in the right place at the right time - if an opportunity does present, there's probably not going to be a similar opportunity again for some time in an area that you may be looking at.”

You can read Knight Frank’s full Wealth Report 2023 here.