PRIME GLOBAL CITIES FEEL THE CHILL OF INTERNATIONAL HOUSING DOWNTURN

By Sandra Gordon

Traditionally, property has been viewed as an inflation hedge – an asset which provides protection against rising prices. However, in the decade since the global financial crisis, property has increasingly been viewed as a safe haven – an asset which allows an investor to safely store their wealth during times of market turbulence.

This has been particularly true for high-end properties in prime global cities like London, Hong Kong and New York – since house prices in these cities appeared to be immune to housing market cycles.

As investment trusts and private-equity firms began purchasing properties in growing numbers, the price of homes in prime global cities began to move in tandem – as investors increasingly viewed high-end residential properties as a distinct asset class, much like gold, equities or bonds.

This meant that house prices in such cities were increasingly driven by global factors rather than by local conditions. This global influence was particularly evident in financial centres that are open to global capital flows – cities such as Sydney, Toronto and London. However, over time this also extended into smaller European cities, like Amsterdam.

Demand for high-end properties in these cities also grew from emerging markets like China and Russia. Emerging market investors were willing to pay elevated prices to secure a safe place for their savings or even a bolthole for themselves and their families. The trend grew so pronounced that political trouble in Russia, parts of Africa and the Middle East was increasingly associated with an increase in the price of prime London property, according to recent research published in The Economist.

Foreign demand typically had a “spill-over” effect on the broader housing market. When an ultra-wealthy buyer purchased a high-end home in a prime global city, the prices of smaller properties in surrounding areas would also experience a rise in price.

As international investors poured cash into the largest, most-expensive housing markets, prices rose ever higher. This saw foreign buyers, particularly from China, being identified as a driving force behind the housing booms in major cities across Canada and Australia.

An IMF working paper released in late-2018 warned that the tendency of housing prices in global cities to move in sync made global housing markets vulnerable, since a shock in one market could ultimately destabilise other housing markets around the globe.

Concerns that soaring prices were ultimately unsustainable prompted several governments to implement a series of measures aimed at reducing foreign purchases and/or the deterioration in affordability in their local housing markets. These actions have already caused house prices to stall or fall in cities such as Sydney, Toronto and Stockholm, according to a recent report from Fitch Ratings.

Similar dynamics are playing out in housing markets around the world. In Manhattan, the median price of an apartment slipped below $1 million for the first time in three years, while home values in Hong Kong are enduring their longest losing streak in a decade. Prices in outer London neighbourhoods have fallen for the first time since 2011.

Home sales in Vancouver fell by 32% in 2018 from the previous year as a series of new taxes, stricter mortgage rules and rising interest rates bite. House prices in Auckland have declined for the first time in a decade, after the New Zealand government started restricting foreign buying that it believed was partly responsible for escalating housing costs.

But it is not just government policies aimed at cooling prices that are weighing on global housing markets. Local dynamics, such as Britain’s planned exit from the European Union, are also increasingly impacting on global house prices. Uncertainty around Brexit has made London a place of political risk rather than a refuge from it.

Similarly, tighter capital controls in China are local factor with an international impact, as the effects of the marked reduction in Chinese investments are being felt in high-end housing markets around the world.

After decades of enjoying a synchronised boom in house prices, luxury residential prices are currently growing at the slowest rate since 2012, as the so-called “housing flu” spreads across global cities once considered safe havens.

The message seems clear, no single country should take the housing downturn personally.

If you are considering selling, buying or letting your home, it is times like these that require the most expert advice. We recommend contacting Pam Golding Properties to find out more about your area and to obtain a market evaluation where needed.

Posted by Niki Jackson