The value of the 100 luxury residential markets tracked by PIRI increased on average by 1.3% last year, down from 2.1% in 2017 and the index’s lowest rate of annual growth since 2012.
This drop comes as little surprise. As we learn to live without the ultra-low interest rates that have supercharged real estate markets globally since 2008, lower price growth was an inevitable consequence of the shift in monetary policy.
A year ago, 11 cities registered double-digit annual growth; in 2018 only five fell into this bracket. Yet, despite the slowdown, almost three-quarters of the locations in PIRI registered rising or static growth in 2018 compared with 62 in 2017.
European cities are still performing strongly, while cities across Greater China continue to slide down the rankings. However, the world’s emerging markets are seeing divergent performance.
Perhaps counterintuitively, despite domestic economic concerns a number of key Latin American cities have seen price growth, while similarly challenged luxury property markets in Turkey are seeing sharp reversals in value.
Key global wealth hubs such as New York, London and Geneva, as well as cities that one might expect to still be enjoying a post-financial crisis bounce (or a pre-Brexit boom) such as Dublin, find themselves in negative territory.
Edinburgh’s surge follows nearly a decade of subdued growth when the market reacted to political uncertainty and the introduction of higher purchase taxes
Thriller in Manila
Manila tops the index with luxury home prices rising by 11%. This is driven by lack of supply and a thriving economy – annual GDP growth exceeded 6% in 2018 – which motivated some expatriates to grab their own slice of real estate back home.
However, Manila’s performance needs to be put into perspective. In the 12 years we have been compiling PIRI, the top-performing market has yet to record annual growth below 21%. So 11% is quite a departure, but it confirms our view that prime markets are converging and the outliers are disappearing.
Manila receives the top spot
Burgeoning rental demand, limited supply and, in most cases, buoyant local economies mean four European cities, led by Edinburgh (+10.6%) and Berlin (+10.5%) achieve a top ten spot despite slower growth across the euro zone.
But as my colleague Oliver Knight points out, “Edinburgh’s surge follows nearly a decade of subdued growth when the market reacted to political uncertainty and the introduction of higher purchase taxes.”
In Berlin, Till Brühöfener-McCourt, head of research at our German partner Ziegert, says: “The city is still relatively young compared to other European cities and 2019 marks its 30th birthday as a reunified city. As it continues to evolve, its capacity for future growth is significant.”
Once anaemic at best, Europe’s second home markets have steadied. Lisbon (+6%) and the Algarve (+6%) are both correcting after a decade-long downturn. In France, Macron’s honeymoon period may be over, but optimism among prime buyers shows little sign of wavering.
Our data shows enquiries for French homes rose 59% in 2018 compared with 2017. Of the 11 French markets we track, only St Tropez saw prices slip lower, albeit by only -1.5%.
Capital flight, particularly from politically volatile emerging markets, continues to fuel demand. In Madrid, Venezuelan buyers are being joined by those from Argentina, while Turkish buyers are active in Germany and the Middle East. As our second-home ownership chart shows, economic and political volatility seems to be pushing wealth to new markets.
Interestingly, security concerns help to explain Buenos Aires’ 10% rise. A flurry of interest in more secure new-build apartments has helped push luxury prices higher.
Taking back control
Singapore saw prices rise by just over 9%, marking the peak of its current market cycle, according to Dr Lee Nai Jia, our head of research there. The city has experienced in excess of 15 macro-prudential regulations – or cooling measures – since 2010. Last year was no exception, with stamp duty for non-residents rising to 20%.
Auckland (+4.1%), Beijing (+3.9%), Guangzhou (+2.3%), Hong Kong (+1.8%), Shanghai (+0.1%) and Vancouver (-11.5%) also saw policymakers flex their muscles to cool prices.
Measures ranged from a ban on the purchase of existing homes by overseas buyers in New Zealand to a vacancy tax on new developments in Hong Kong to higher mortgage rates and a points-based system for new buyers in some Chinese cities.
Hong Kong has defied the odds for several years with new price thresholds broken year-on-year but as David Ji, Knight Frank’s Head of Research for Greater China explains, 2018 marked a turning point. “The stock market slid 13.6%, its worst decline since 2011, and interest rate hikes influenced buyer sentiment.”
Vancouver, arguably recipient of the most stringent regulations in 2018 – including higher taxes for non-residents, a speculation tax, a school tax and a vacancy tax – is also still absorbing the impact of China’s tightening of capital controls, which up until late 2016 had been an influential source of demand.
Brexit’s impact has been largely priced into the prime London market since the referendum in 2016, with prices falling by as much as 20% in some neighbourhoods.
There is evidence of pent-up demand as buyer registrations build suggesting that when – or if – a deal is agreed, there may be a bounce as those currently hovering on the side lines decide to commit.
The consultation period for a non-resident Stamp Duty Land Tax surcharge is now underway but international buyers, particularly those with US dollars, may be unfazed by the proposed 1% tax if the pound takes a tumble.
In New York, the State and Local Tax (SALT) law, stock market volatility and a strong US dollar, which led some foreign buyers to sit on their hands during 2018, have compounded the underlying structural issue of oversupply.
However, as Andrew Wachtfogel, Senior Vice President of Research and Analytics at our US partners Douglas Elliman points out, with Wall Street bonuses expected to be robust in 2019 and mortgage interest rates still near historic lows, there may be a silver lining.