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Global prime property markets prices predicted to fall in 2012

Prices are predicted to fall in 44% of the cities monitored during 2012, with a similar amount likely to experience price rises. Values are expected to remain unchanged in 12% of the cities.

The slowdown in luxury price performance is most evident in Asia, with 60% of cities predicted to see a fall in values. Growth has been curtailed by government fiscal policy measures designed to reduce the risk of spiralling inflation and over heating in property markets.

In Hong Kong and Shanghai, luxury homes have gained in value by just 7.8% and 3.8% respectively over the past 12 months, down from 19.7% and 29.7% a year earlier.

The eurozone crisis is also expected to weigh on prime property prices in nearly two thirds of the cities included in our forecast. Political and security issues present the greatest risk to housing markets in the Middle East and Africa.

Interest rates, high inflation and consumer debt are considered the smallest threat to the world's luxury housing markets. This reflects the affluent, more equity rich profile of buyers in this sector of the market.

‘Given the global economic turmoil, it might seem surprising we are forecasting price rises in nearly half the cities. In many cases the prices are being supported by a lack of quality properties for sale. We expect this trend to continue, particularly in London, Paris, Moscow, Nairobi and Kuala Lumpur,’ said Kate Everett-Allen, International Residential Research at Knight Frank.

‘In some locations, this lack of supply is being compounded by the continuing flow of capital from the world's troubled regions and a desire by the wealthy to target property and other real assets over financial products,’ she added.

Liam Bailey, head of research at Knight Frank, believes that there are three key themes that will determine the performance of prime city markets in the short to medium term – the scale of global wealth generation, the ongoing search for 'safe haven' investments and the growing divide between the prime markets in the West and the rest of the world.

‘This process highlights a key risk, that prime markets will ultimately be undermined by domestic economic reality, with a convergence between prime and mainstream market performance. If the euro was to collapse, or a similar catastrophe was to strike, all bets really would be off and we would expect much weaker performance across all of our prime markets,’ he explained.

‘But in the event that the West simply sees a prolonged period of weak economic growth, I can see how the prime markets could continue to outperform their benighted national marketplaces with a continuance of inward investment from emerging market wealth and safe haven purchases,’ he added.