Prime global city markets are likely to outperform their mainstream national counterparts, but don’t expect all prime markets to deliver positive growth. Kate Everett-Allen of Knight Frank International Residential Reserach examines the numbers. Worsening sovereign debt conditions in Europe, weak banking sector performance and a sluggish global economy are weighing heavily on global housing markets. Price growth in the world’s mainstream housing markets averaged 0.9% in the year to September, down from 3.5% a year earlier.

With national markets flagging, conditions in the world’s luxury city markets are holding up a little better. As our map on page 4 shows, in 2012 we expect prices to either rise or remain flat in around half the cities we monitor. Following the 2008 credit crunch, the relative outperformance of prime residential property has meant that it continues to be viewed favourably by wealthy investors. This has become more evident as the list of alternative investment options open to investors has shrunk.

While the prime markets may be outperforming their mainstream peers, they are in no way immune from weakening confidence and deteriorating market conditions. Cities across Asia-Pacific are at the sharp end of this process, with weaker sales volumes in many cities starting to feed through into price growth. Twelve months ago average prices for Asia’s luxury homes were rising in value by 16.3% annually. At the end of September this year, the comparable figure was closer to 2%. Of the cities covered in our forecast, 32% are expected to see luxury house prices fall in 2011, 25% are tipped to remain unchanged, and the remaining 43% are expecting prices to end the year higher than they started. Jakarta and Nairobi are forecast to be the strongest performers in 2011, with prices rising by up to 20% over the year.

Positive price movements this year can largely be attributed to rising cross-border demand from wealthy individual investors (especially in London and Paris), a lack of new supply (Moscow) and strong growth in domestic wealth (Beijing). For those cities where prices are falling this year, weaker economic activity is a contributory factor in the majority of cases (Geneva, Hong Kong and Sydney), but weakening demand in the Middle East (Manama) and monetary tightening (Mumbai) also feature.

The Year ahead for prime and luxury property
For 2012 our forecasts point to a relatively even split, with price falls expected in 44% of cities, no change in 12% and rising prices in 44%. The detailed breakdown of our forecasts by city can be viewed on page 6. Perhaps the most interesting trend is the lack of homogeneity across the continents. In Europe, Geneva and Madrid will, we believe, see prices decline in 2012, but we expect Moscow and Paris to be among the strongest performing markets.

Similar disparities can be observed in Asia. Hong Kong is forecast to see luxury prices decline by between 5% and 10%, while prices in Beijing are expected to rise by a comparable amount. Seven Asian cities are expected to see negative price growth in 2012. In most cases these price falls have been partly driven by government regulation, which was brought in after 2008 in an attempt to cool housing markets before they experienced US and European style crashes. These steps were bolstered in recent years, as concerns over speculative investment rose and rising household wealth created price pressures. The measures have proved hard-hitting and have included curbing multiple home ownership, halting bank loans for uncompleted projects and increasing interest rates.

Away from government intervention in Asia, the main reason for price falls in 2012 is the growing global economic uncertainty emanating from the Eurozone and extending to other parts of the world. Given the seriousness of the economic threat facing the world economy, some might find it surprising that we are forecasting positive growth in 44% of our key global city markets. Limited supply in several markets is the pivotal factor, and it is expected to push prices higher in London, Paris, Moscow, Nairobi and Kuala Lumpur. Price growth in 2012 will continue to be underpinned by the flight of capital from troubled world regions, a factor which has certainly aided demand in locations like London, Paris, Singapore and Geneva. Equally important is the desire of wealthy investors to target property and other real assets over financial products, certainly for as long as the current financial turmoil continues.