THE
WEALTH REPORT

2017: coming soon

Prime performance drivers

Economics, taxation and political priorities influence prime global housing markets


Liam Bailey, Global Head Of Research

As The Wealth Report went to press, one of the dominant issues overshadowing the world’s key residential markets was the fallout from the shift to rising interest rates in the US. In Asia, for example, there will undoubtedly be an impact on buyer sentiment, which our Hong Kong Head of Research, David Ji, believes will lead to a reduction of sales volumes.

This will be the case even though the Federal Reserve’s initial moves are likely to remain cautious and will have only a minimal impact on mortgage payments. The impact of the impending change in US policy was already being felt in the final three months of 2015, with many global markets seeing weaker trading conditions.

The transition to higher rates in the US is likely to be emulated by other strongly performing economies, including the UK, Australia and Canada, although expectations are being regularly pushed further out in time. The expectation of higher rates helped boost the US dollar throughout 2015, which weighed on inward investment into the US.

“A slowdown in demand was inevitable, but the US still remains hugely attractive as a global market,” says Sofia Song, Head of Research at Knight Frank’s US residential partner, Douglas Elliman. It is important to remember that not every market internationally has been waiting for the transition away from ultra-low interest rates – some never experienced them. In Kenya, for example, rates are in double digits.

The main theme in Nairobi is the impact of weaker oil prices, which has undermined demand from employees of oil firms and related businesses, says Knight Frank’s Managing Director in Kenya, Ben Woodhams. This impact has been replicated in other resource-heavy markets, including Australia’s previously booming prime regional markets.

New supply

In addition to interest rates and other economic factors, performance will be influenced by rising supply pipelines. Developers have taken advantage of a combination of rising prices and low financing costs to deliver new homes at a significantly faster rate in many prime markets.

New York, London, especially around the edge of the prime central London market, Sydney and Melbourne have all seen an increase in supply. As the market tilts in favour of purchasers, there will be a reevaluation of pricing potential in many areas.

The opposite trend can be seen in other key markets, notably land-restricted Hong Kong. Here, the low supply of land over recent years has added to the affordability issue. Although the current government is trying to make up the shortfall, the political climate has changed.

Environmental pressure groups hold more influence and local councils are displaying a more protectionist attitude to their land. While prime buyers in Hong Kong still focus on The Peak and Mid-levels, it will be the New Territories where most new supply is delivered. Prices are likely to underperform there. New-build volumes are critical to future performance, confirms Nicholas Holt, Head of Research in Asia-Pacific.

“At the prime end of the market Hong Kong is seeing tight supply. Singapore is too but at much less severe levels.” Similar issues are being seen in Vancouver, with the city experiencing the lowest level of inventory for 25 years. “The number of multifamily developments along the major transportation routes is rising but this is not enough to make up for the lack of prime market supply,” says Kevin Skipworth of Knight Frank’s partner Dexter Associates.

Outperformance

Opportunities still exist in some European markets, many of which are still recovering nearly eight years after the 2008 crash. Well-connected areas in the South of France, especially rural areas within easy reach of the new Eurostar route to Provence, and ski resorts within an hour’s commute of one of the main airports serving the Alps, look well placed for future growth. Most Italian prime markets saw flat or marginal price increases in 2015.

Overall, investors need to be cautious. Price rises are slowing after a strong run in many markets, while interest rates and ownership costs for foreign investors are increasing 

Although prices are not going to jump significantly in 2016, some foreign buyers find themselves in a favourable position given the currency advantage and the selection of properties on offer. Although many markets in the Asia- Pacific region are close to, or at the top of, their cycle, Vietnam, the Philippines and possibly Japan look likely to outperform in 2016, says Nicholas Holt.

Tokyo is seeing strong investment in the run up to the 2020 Olympic Games and Chinese buyers are starting to show an interest. In the US, Los Angeles is set to lead the market, followed by Miami. Lower base pricing and relatively low supply provides scope for price growth in Los Angeles, while demand is still robust in Miami. Overall, investors globally need to be cautious.

Price rises are slowing after strong run in many markets – London and New York are high-profile examples – while interest rates, and ownership costs for foreign investors are increasing. Restrictions on non-residents are even being discussed in markets such as Canada.

Taking a long-term view, investors will do well to maintain their focus on the leading urban centres. Prime city markets tend to bounce back quickest from any downturn and deliver relatively strong liquidity throughout market cycles.