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New analysis suggests global prime property prices will depend on domestic economies

Price growth in key global prime property markets will continue to be strongly linked to domestic economic performance and wealth creation in 2018, according to new research.

But buyers will need to monitor markets carefully for further policy interventions, which look set to increase in a new phase of higher interest rates, according to the analysis from international real estate firm Knight Frank.

The analysis looks at what has been happening in the world’s prime residential markets since the start of the financial crisis 10 years ago using data from Knight Frank’s recently launched Wealth Report and its Prime International Residential Index (PIRI), which tracks the movement of luxury residential prices in the world’s major cities.

In 2007 prime prices in most of the world’s top tier cities were rising fast. London, Monaco and Hong Kong were all witnessing annual growth in excess of 25% but by 2008 prices in most global markets had tumbled. The US and Europe led the charge with several key Asian markets also badly affected.

For some prime markets, the size of the Lehman Brother’s collapse in fact hastened the revival of their prime property markets now seen as ‘safe havens’ in 2009. London, New York and Miami benefitted most. A drop in interest rates, new stimulus in the form of QE and volatile financial markets saw the appeal of property as an asset class strengthen.

The report explains that currency shifts influenced the direction and volume of capital movements. The weak pound sparked interest from Asia, US and Russia in the UK and in 2010 the ‘safe haven’ era continued and coincided with the Asian economic boom.

Indeed, Asian wealth surged, and combined with buoyant economies, currencies strengthened. This resulted in a wall of capital looking for a home, boosting domestic property markets such as Shanghai, Beijing and Hong Kong. Demand from Asia also shifted overseas to markets such as Vancouver, London, New York and Sydney.

Perhaps counterintuitively, Jakarta led the prime residential rankings in 2012 and 2013 but here its prime residential markets was at an embryonic stage and prices were rising from a very low base.

In 2011 the fallout from the Global Financial Crisis continued. Aside from London, European markets dominated the bottom of the rankings and emerging markets like Nairobi, Bali, Jakarta, Moscow, and Beijing the top.

‘By 2012, two years after concerns were piqued over Europe’s heavily indebted nations, we start to see southern European investors redirect capital to more robust economies in the north, in particular Germany,’ said Kate Everett-Allen, head of international residential research at Knight Frank.

She pointed out that Miami also saw an influx of Latin American purchasers eager to hold a US$ asset in a safe and transparent market abroad and the Federal Reserve announced a third phase of QE.

‘The next phase marked the introduction of cooling measures, with the aim of curbing price inflation using macro prudential measures. Apart from a handful of European markets, where the focus was on attracting not deterring foreign investment in the form of golden visas and investment incentives, policymakers in most prime markets focused on controlling or at least tracking capital flows into and out of their property markets,’ Everett-Allen explained.

‘From Australia to Canada and from London to Hong Kong, higher stamp duties, foreign buyer taxes or moves to track Limited Liability Company (LLC) purchases, as seen in New York and Miami, grew in number,’ she added.

By 2013 Asia was as Jakarta, Auckland, Bali and Christchurch occupied the top four rankings. Europe, by comparison, was trailing. In 2013 some 80% of the markets that registered a decline in prices in 2013 were European.

Residential markets hit hardest by the global financial crisis included Dublin, Madrid, and Dubai saw prime price growth strengthen. Policymakers reacted with local property taxes and by doubling transfer costs to slow the pace of growth and curb speculative investment.

Then in 2014 Asian markets slipped back down the rankings as cooling measures were ramped up. The US markets, buoyed by a strengthening US economy, performed strongly with New York and Aspen occupying the top two positions in the rankings. In 2014, Russia imposed reporting requirements on Russian nationals seeking permanent residence or citizenship in other countries.

QE stimulus continued to shore up property markets across Europe, the UK and the US in 2015 as Governments continued to vie with the increased mobility of global wealth in a bid to monitor and control increased capital flows into their property markets. To limit its exposure to the Eurozone the Swiss franc was unpegged from the euro at the start of the year.

In China, the Government’s clampdown on bank lending pushed capital away from property into the stock market. By June 2015 concern spread that stocks were overvalued and the economy was slowing, sparking Shanghai’s stock market crash. Instead, Chinese capital looks for a home overseas. Vancouver and Sydney topped the index.

In 2016 Chinese cities occupied the top three index rankings as authorities stepped up their monitoring of cross-border capital flows and a new threshold of 50,000 yuan is imposed. The European Central Bank cut interest rates to 0%. Meanwhile, from Vancouver to Sydney to London, measures to control price growth, heighten transparency and increased tax takes resulted in moderate price growth.

Last year, after a decade of weak growth, Europe’s recovery materialised with the region occupying four of the top 10 index rankings. The report explains that a weaker US$ in the second half of 2017 heightened foreign interest in US markets and those pegged to the dollar. Despite the rise in oil prices in the second half of the year, oil-dependent residential markets remained at the foot of the rankings.