California glamour takes prices to giddy heights – but can it last?
We’ll send you a myFT Daily Digest email rounding up the latest Life & Arts news every morning.
Homeowners and buyers in California’s coastal communities may be forgiven for feeling giddy: just two years ago the property market here showed its first significant price increases since 2007 yet already this spring, the word on the lips of some analysts is “bubble”.
After rises of 15 to 25 per cent in 2013, local housing markets were hit over the winter by a statement from credit rating agency Fitch Ratings suggesting that homes along the coast’s resorts and cities were overvalued by a fifth or more.
“Twenty per cent gains, in an economy that’s still not better than it was pre-crisis, are not sustainable,” says Fitch director Stefan Hilts, who has analysed house price, income and mortgage data along the coast. He warns of two tell-tale signs: first, a surge in the proportion of cash sales, which are approaching 50 per cent in some areas; and, second, the return of old-fashioned “flipping” with homes bought and sold at a profit within a few weeks. All of which makes for stormy housing conditions along an 800-mile coastline beloved by wealthy north Americans for its glamorous beaches and cities.
California’s waterfront runs from the small ports at the northern border with Oregon to “SoCal”, the southern stretch known for its beach resorts, between Los Angeles and San Diego, before the coastline runs to Mexico.
Along the way lie some of the world’s best-known and most beautiful high-end coastal addresses: the sailing and watersports havens around San Francisco bay, the artistic communities and golfing sets at Carmel-by-the-Sea and Monterey Bay, Highway 1 running along the Big Sur and exclusive SoCal beaches such as Malibu, Santa Monica, Newport and La Jolla. Local realtors hope the fame and reputation of these glamorous locations, plus California’s still-growing IT business, will prove the Fitch Ratings analysis wrong.
“Prices have fully rebounded from the downturn,” says Alex Buehlmann of McGuire Real Estate, a San Francisco agency that is now an associate of Savills. She says prices in the area’s most exclusive enclaves – Pacific Heights and Presidio Heights in San Francisco itself, or Atherton, Hillsborough and Palo Alto to the coastal south – rose 9 per cent in 2013, taking them to 13 per cent above their pre-downturn 2007 level.
“Throughout the Bay area the upper end is driven by the technology industry. These homes are popular due to their proximity to Silicon Valley and San Francisco, as well as size and status,” says Buehlmann. She believes the technology sector is more diversified now than a decade ago when it suffered from the dotcom meltdown and knocked housing demand and prices as a result. She says there are more international buyers in central coastal California, too, coming from Canada, China, Russia and the UK.
At Otter Cove, just south of Monterey, Buehlmann is selling a renovated oceanfront property with 3,850 sq ft of interior space on two acres of land within a gated community. It has a hot tub, wine cellar and media room and is priced at $10.7m.
Further south towards Santa Barbara, realtors admit the high-end market has faltered in the first quarter of 2014. “Prices under $1m are getting multiple offers. $2m to $5m is normal with good inventory and sales. The luxury market above $5m is a bit sluggish,” says Renee Grubb of Village Properties, a Santa Barbara agency.
This area, particularly between Montecito and Hope Ranch, is second-home territory for wealthy Americans with principal properties in Chicago, New York or Florida, plus some who live in urban Los Angeles and San Francisco and who want a coastal retreat. “We also have a large population of retirees or people who can work from anywhere,” she says.
Village Properties is selling a three-acre, beachfront estate in Montecito, with 300ft of water frontage, a three-bedroom house and foundations for a 13,000 sq ft residence for $28m.
To the south, the coastal stretch approaching greater Los Angeles is seeing greater demand, even higher prices and more overseas interest. “Malibu probably has more multi-home owners than anywhere on [California’s] coast with buyers from Russia, China, Brazil, India and the Middle East,” says Zackary Wright of Christie’s International Real Estate.
“The most popular homes are one-off trophy properties for which people are prepared to pay a premium. Recently I was involved in a transaction for which there were five buyers, four of which were cash,” says Cory Weiss of the Douglas Elliman agency in Los Angeles, an associate of Knight Frank. He says the average asking price of homes in the area last year was $12.7m; so far in 2014 the figure is $16.4m. Back in 2007 the average sold price was $12m; today it is $13.5m.
On Malibu beach is a striking five-bedroom, 3,360 sq ft modernist house designed by the late local architect John Lautner and built in 1968 from timber and concrete. It has a 37ft private beach, large deck and pool, and is on sale with Cory Weiss for $22m.
Realtors along the coast reject the suggestion that such high prices and spiking sales volumes could be speculative rather than sustainable. They cite the fact that values are only now edging ahead of 2007 without taking into account inflation, while saying planning constraints and limited space combine to make it hard to build many new homes.
“With so many dollars chasing too little inventory, the market keeps churning,” says Zackary Wright of Christie’s. Meanwhile, international interest is strengthening: London-based Savills has signed two coastal realty companies as associates.
Even so, doubts remain as to the market’s true strength. Research from the California Association of Realtors shows a sharp drop in those who can afford “median-priced, single family homes” from 48 per cent at the end of 2012 to 32 per cent just nine months later. The worry is that too few buyers will be able or willing to pay rising prices for much longer, and that the waves along this part of the Pacific coastline may just contain a bubble or two.
● Between July 2012 and June 2013, there were 2,850 reported crimes per 100,000 residents in California
● Average annual temperatures on the coast range from 5C to 29C
● Buyers pay a 10 per cent deposit, while transaction fees are about 5 per cent of purchase price
What you can buy for . . .
$1m A four-bedroom home just in from the coast in San Clemente
$5m A coastal home with a small area of land on San Francisco Bay
$15m A gated property with large grounds in a prime area like Malibu