Some Effects of The Federal Reserve's Actions On
The Luxury Second Home Real Estate Market
Over the past couple of months the Federal Reserve of the United States, and other Federal Reserve Organizations around the world have implemented and plan to implement unprecedented levels of liquid into the financial system of the United States. These actions have been critical in abating and battling against a death spiral of broad asset deflation and investment de-leveraging. To combat rapid asset deflation it makes sense to implement a broad array of inflationary measures. In simple terms, when assets are deflating in a distorted manner due to system risks and a lack of confidence outside of normal economic cycles, at a speed that could cause an economic depression, every effort to stop it is necessary.
However, implementing inflationary measures of this size and scope is a tricky game as once the deflationary cycle is forced to bottom; global economies could be faced with an issue of inflation. Inflation is a battle that the US Federal Reserve knows how to battle very well, and at this time would be a welcomed change.
The effects of decreased credit and liquidity overall has had a dramatic effect of both the price and availability of real estate in many different sectors. For the purposes of this post we will focus on the effects on global pre-construction luxury second home – investment real estate since this sector is our core business.
The immediate effect has been the lack of new mid-tier developments being launched in the countries in which we represent pre-construction real estate. Developers that planned or had planned to embark on new real estate projects and were depending on bank financing and or leverage to be able to build have mostly postponed or cancelled their projects for the present time period.
Because of stricter qualification levels and unfavorable lending terms it has become nearly impossible for many developers to secure available lines of credit and financing to begin a new real estate project. If possible, many developers in the mid-tier level ($300k - $500k per residence) have decided and/or been forced to wait to begin pre-sales and real estate development until the credit markets open more and better financing becomes available.
Real Estate project postponement and cancellation has happened less in higher end developments ($500k - $3M) and those that have already broken ground with secure funding. These real estate projects are the highest end developments in the most desired locales globally, and continue with construction and sales at a consistent level. Believe it or not, several of the real estate opportunities we represent outside of the US, have just implemented across the board price increases due to rapid sales and the launch of new phases.