Market forecasts are notoriously challenging – none of us have a crystal ball. But when the press approach us as Bordeaux luxury real estate market leaders it is reasonable that they should expect us to offer a well-informed local Bordeaux real estate market opinion. We believe that Bordeaux luxury real estate is well position to stay relatively stable and then recover quickly, underwriting what we expect to be an active market for 2021.
This morning I read on Bloomberg business that Goldman Sachs have revised its forecast for Q2 2020 growth to an annualized negative -34% with US unemployment increasing to 15%. Nevertheless, the Goldman Sachs economists believe that the collapse we are currently experiencing will be relatively short lived. China is sending out positive messages and new cases of Covid-19 are stabilizing especially in the worst hit areas around Europe and the WHO are saying that the outbreaks in Italy and Spain have peaked while in New York the confirmed cases are now slowing. Goldman Sachs conclude that Q3 2020 will see a strong rebound.
As always there are both macro and micro considerations to debate especially when looking at a forecast in such unprecedented circumstances.
Stable Bordeaux Real Estate Market
Over the past 14 years as I have observed the Bordeaux luxury real estate market, one thing has stood out in stark contrast to the 13 years I spent in the real estate markets of Newport Beach, California and before that central London. Newport Beach and London represent markets that tend to attract highly leveraged purchases – that is, buyers making their purchase with large mortgages or refinancing capital out as interest rates fall (as is happening again now in the USA). I remember attending an economic seminar in Newport Beach late 2006 where the presenter asked us all to consider the current value of our own homes. We all reflected for a moment and then he said, “now raise your hands if you would be able to afford your own home as a buyer in this market” – very few of us could raise our hands. Leveraged markets see ups and down, you can see significant upswings but also heavy drops. In Bordeaux and more generally France, lending is much more conservative, and refinancing is more expensive and almost unheard of. Furthermore, the Bordeaux and South West France luxury market has another dimension, there is a lot of completely unleveraged wealth, meaning that the pressure to have to sell for any reason is significantly lower. So, whilst we of course see market moves up and down, the severity of the moves are considerably shallower with the result that the market remains more stable over the long term.
Inflation and Luxury Real Estate
During the last financial crisis of 2008, governments allowed their budget deficits to expand and they rescued the banking system, the problem then was on the demand side. According to CapX “The coronavirus crisis is different. There is currently a huge hit to the supply side of the economy. Businesses are struggling because workers are ill and consumers are not spending because we’re being confined to our homes. When productive capacity is contracting and the central bank is injecting huge amounts into the economy, this is likely to eventually produce inflation.” As reported in The Financial Times this past weekend there is another argument that supports inflation. “With the rise of populism there are growing calls for monetary finance of increased fiscal deficits — that is, direct financing of government deficits by central banks of the kind currently happening in Japan. Monetary finance has been a precursor of high inflation and while its proponents argue that the risks can be contained provided the quantity of such finance is controlled by independent central banks, central bank independence has been increasingly under threat since the crisis.” With the 20 years Eurobond trading negatively in Europe, debt will be in expensive for the foreseeable future while at the same time the G20 have all committed to massive injections of government money into their economies. We believe that as long as the Covid-19 does indeed stabilize by the summer of 2020 that there will be a cheap money fuelled relief rally to the age-old favourite – bricks & mortar. Inflation does not come without risks, however, controlled stable inflation (as opposed to central banks just printing money) is good for real estate.
Being forced to work from home and getting familiar with using Zoom have shown many people that a lot can still be accomplished without having a traditional office environment. The need to be in London, Paris and Madrid for example will still be there, but we are already seeing an increased interest in the lifestyle that the Bordeaux region offers. With outstanding luxury property in the Bordeaux region rarely exceeding Eur5000/m2 in the countryside and 10,000/m2 in the city of Bordeaux we have no doubt that there will be some that see a significant draw to the luxury real estate inventory we have in the South West of France. We saw these kinds of decisions before the Covid-19 crisis, so we are confident that we will see more decisions to exchange a multi-million Pound/Dollar/Euro property in an urban environment for a place such as this turnkey family home below for under a million Euros
My Christie’s International Real Estate friend and colleague Ken Jacobs writing in an internal executive memorandum to other affiliates leaders put it very well this week. “The most common issue overlooked by property analysts is that residential property is more than an investment category. The home is the core of a person’s lifestyle, a safe place in a rapidly changing world, status, a reward for effort. It offers so much more than the bottom line of the balance sheet in an investment portfolio. It is enjoyed every day by every member of your family. COVID-19 is a game changer on many levels which will impact numerous aspects of life. How will it impact property? I can only speak for the premium end of the market. There will be the usual hiatus, hesitant buyers, concerned vendors who are likely to hold off selling until the dust settles, resulting in a lack of quality stock. That said, some will have no choice or overreact, so there will be some distressed sales. Hindsight shows that people who purchased during, or immediately after, the above tumultuous events were handsomely rewarded. After decades in the industry I have witnessed the reoccurring theme of first mover advantage. Also, market conditions when you buy are less relevant than market conditions when you sell and how long you hold. There is a great deal of panic in the world, but panic is not a component of better decisions making. Property is the true constant of investment categories. As Franklin D Roosevelt said, “Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.” It was true in the great depression and it is true today. The home is the cornerstone of wealth. No doubt there is much emotional and financial pain ahead for the world, but, this too will pass.”