The value of luxury homes in California’s major metropolitan markets rose in the third quarter, on a yearly basis, with the biggest hike recorded in the San Francisco Bay Area, according to the First Republic Prestige Home Index.

The rise in Bay Area luxury home values - a hike of 8.1 per cent from the third quarter of 2011 and 2.4 per cent from the second quarter of 2012 - marks the second consecutive quarter of yearly gains, and also the strongest year-over-year performance since early 2006. The average luxury home in San Francisco is now valued at $2.73 million. 

"The Bay Area economy is healthy, inventory is limited, and multiple offers are increasingly the norm," said Katherine August-deWilde, president and chief operating officer at First Republic. "Historic low interest rates have resulted in an elevated level of activity in luxury markets throughout California." 

In San Diego meanwhile, the average luxury home is now worth $1.66 million, as area values climbed 2.2 per cent year-over-year and increased 0.8 per cent from the second quarter of 2012. 

The west side of Los Angeles is back to pre-financial crisis sales volumes, said Dan Weiser of Coldwell Banker Beverly Hills South, with scarce inventories and high demand. Prices are "probably within 10 per cent of the height of the market," he said, with particular demand for properties in the highest end of the luxury market. 

Overall, Los Angeles area values rose by 1 per cent from the third quarter a year ago, but declined 0.8 per cent from the second quarter of 2012. The average luxury home in Los Angeles is now valued at $2.02 million.

San Francisco Bay Area hits six-year peak 

The 8.1 per cent year-over-year increase in the San Francisco Bay Area marked the highest increase since the first quarter of 2006 and continued to trend higher on a year-over-year basis; prices have increased for the past three quarters, including the 2.2 per cent gain in Q3 compared to a year ago.

"Prices for luxury homes have been strong all year," said Malcolm Kaufman of McGuire Real Estate. "There is limited inventory, the economy here has returned better than anywhere in the country, and employment is up." He added: "Lots of money is being spent on $5 million homes and $10 million homes. For some, it feels like 2005 again."

Meanwhile, in Silicon Valley "people have secure jobs and stable incomes," said Pat Kalish of Intero Real Estate Services in Menlo Park. "Except for the highest end of the luxury market, there is strong competition for properties."

The market was, however, softer in Marin County, which typically lags a quarter behind San Francisco, said Pat Montag of Decker Bullock Sotheby’s International Realty in Mill Valley. "We did see an uptick at the end of third quarter in the $3 million to $5 million range," he said, adding that many people are waiting to see what happens in Washington DC in the first quarter of next year.

Los Angeles Area: new constructions "flying off the shelf"

According to First Republic, real estate agents have said that the most desirable locations in the Los Angeles area continue to experience accelerating demand and price increases. 

"New construction is flying off the shelf, with all cash and multiple offers," said Michele Hall of Coldwell Banker in Brentwood. "We're seeing multiple offers in every price range, and there are fewer foreclosures and short sales. Inventory opened up, but was then snapped up."

The market was also "very active" in Santa Barbara, due to "a lot more activity and closed sales than last year," added Joanne Schoenfeld of Santa Barbara Living Real Estate Brokerage. "Prices continue to rise slightly, and I don't see them going down any time soon. It's a good, strong market."

San Diego 

Sales activity is "picking up" for properties over $3 million in the San Diego area, according to Michael Taylor of California Prudential Realty in Rancho Santa Fe. "To me, that indicates fear has been wrung out of the market," he said. "People are now willing to spend more to buy a home, and they’re getting significantly more home because of the recent price declines. The perception is that we are at the bottom of this market."

But there is more inventory in the $1.5-$2 million range, added Farid Khayamian of Bluxen Real Estate in La Jolla. Khayamian highlighted how there was more inventory a year ago as a result of short sales and foreclosures, but that has now "dried up," he said. "Right now, you have to buy at the asking price. In January, we will have more inventory and possibly lower prices."