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As central banks continue to review their respective base rates, the state of the global economy and fears of potential recessions have been in focus for some months now. Central banks have been looking to increase base rates to cool soaring inflation without triggering a recession. This is known as a soft landing, as opposed to a ‘hard landing.’ We see hard landings when the base rate increases to the point that it contracts the economy because disposable income is significantly squeezed; consumers reduce their spending, lenders tighten their lending criteria, consequently borrowing also falls , unemployment rises, collectively causing a sharp downturn or economic slowdown.
‘When it comes to delivering a soft landing, central banks have their work cut out for them, especially in the current economy when inflation has remained stubbornly high for so long, and complex geopolitical developments from the war in Ukraine to troubling unrest in the Middle East continue to pile on top of each other, affecting the global economy,’ says Toby Johncox, Enness Group Managing Director.
Is A Soft Landing Achievable In The Current Market?
The simple answer? It’s difficult to say. Central banks are battling a unique array of factors to bring down inflation from rocketing energy costs, supply chain challenges, inflation and tailwinds caused by COVID.
While delivering a soft landing in the current market may be the ultimate goal, it’s a fine line for central banks to walk and a hard target to hit perfectly. Move too slowly, and they risk keeping inflation high for too long (some corners accuse the Bank of England of moving too slowly to start increasing the UK’s base rate, for example), which potentially creates a protracted cost of living crisis in a high inflation environment. But if they move too fast, populations may be severely challenged by the effects of sharp base rate increases, which can cause severe shockwaves in the mortgage and property markets, skyrocketing unemployment figures and substantial drops in disposable income and consumer spending. From there, it’s only a question of how severe the recession will be and how long it will last.
Ultimately, it’s too soon to know if a soft landing is possible in the current market, and even experts don’t know where economies will ‘land’. What we do know, however, is that the Bank of England, the European Central Bank and the US Federal Reserve are all trying to avoid recession and engineer a soft landing.
What Would A Soft Landing Mean For The Wider Real Estate Market?
As well as the economic outlook, there’s also been plenty of commentary on the potential of a real estate ‘crash’: will property prices simply correct, or will there be a sharp drop in valuations? Will mortgage holders be faced with negative equity? Will prime property hold its value? Will we see different repercussions in the US than in the UK or Europe?
For the most part, it’s impossible to offer resolute answers to such questions this early, but data suggests we aren’t heading for an all-out crash. However, there may be specific geographies, markets or regions where property markets may be harder hit, or where repercussions are yet to play out fully.
Property market trends in Paris, London, and New York show property prices dropping by around 2%-5% in 2023. Comparable price drops in past recessions saw about 12 % to 20% decreases in price, so we’re some way off from these numbers. Perhaps the better way to view the current situation in the property market is a slowdown and correction in property prices, rather than the beginning of a crash.
If central banks can ‘walk the line’ and deliver a soft landing, we’re unlikely to see a real estate crash where property sharply decreases in value. The European Central Bank, The Fed and the Bank of England are increasing (or holding) their respective base rates with the objective of managing inflation by reducing borrowing and consumer spending. So far, they have managed to avoid reversing economic growth, and that will go some way to seeing off a potential property crash (although it’s worth noting recessions and house price crashes aren’t necessarily correlated).
What’s possible is that we’ve now seen the most significant rate hike, and banks will now look to keep rates at current levels until there is more economic stability and inflation is further reduced and steady. This means that while we may not see new base rate increases or such increases will be smaller or less regular than they have been over the past few months.
Prime And Super-Prime Property
Regarding price tags, there is no singular definition of a prime or super-prime property. However, the top 5% of the market is usually considered to be prime property. The top 1% of the market – a handful of the most extraordinary and expensive properties available – tend to be super-prime properties. These will usually hit the market from around £30 million to over £100 million.
‘The prime and super-prime residential real estate markets are in a field of their own, and they simply can’t be compared to any other part of the market, especially in London, Paris and New York,’ says Toby. ‘In London, we’ve seen buoyancy at the top of the market and a relatively small drop in valuations, despite what’s been quite a challenging year in terms of macroeconomic challenges and where we wouldn’t have been surprised by a larger correction in price. This shows the resilience of London’s prime property market.’
Paris has also shown resiliency with a €35 million apartment sold in October – the 2023 record – following the 2022, €200 million sale of the Hotel Lambert. New York saw its 2023 records set by an $80 million penthouse sale for a Central Park south property. The takeaway? At the top of the market, there is still buying power, demand, and there are certainly no bargains.
At the end of December, it was also reported that a £138 million mansion was sold in London’s Mayfair – a record sale of the year and the second highest every property sale in London. In the real estate world, the focus tends to be on transaction volume, but at the top of the market, the sale price can say just as much: ‘The sale of such an expensive property during a time where there are so many open questions about the world economy, shows super-prime real estate continues to be a preferred asset class for high-net-worth individuals, and there is real confidence in these assets and the cities in which you can find the world’s best properties,’ says Toby.
Million-Pound Plus Property
At Enness, we continue to see healthy demand for million-pound-plus properties, with the quality of assets and buyers remaining steady. Lenders are willing to finance million-pound-plus property purchases, and we’ve also seen that those trying to buy in the current market tend to be in an excellent financial position. This includes professionals with good savings, an excellent employment outlook and often significant equity in an existing property, which supports buying even in the light of higher interest rates. But also independently wealth individuals, such as founders and entrepreneurs with multiple sources of income, broad asset bases and existing international portfolios.
However, the good news is that mortgage rates appear to be dropping slightly as we go into 2024, as lenders review their portfolios, meaning the prospects for all those seeking to buying property, or renew existing arrangements are encouraging. . set by sellers.