US property slowdown and global implications

By Neil Behrmann

October, 06:- Global property prices have mostly risen in the past twelve months, but growing numbers of economists fear that the real estate boom is coming to an end.

In the past month, the US residential market has become sticky and there has been a sharp downturn in the construction of new housing.  Sellers  from the West to the East coast of America are finding that they have to mark down prices.  Front page stories about house and apartment price declines in the Wall Street Journal and other newspapers have made the market cautious.

Any global real estate slowdown, however, would come about after extraordinary gains in the past decade (see table).

"Many commentators have been concerned that the boom in global prices would end in tears," says Liam Bailey, Head of Knight Frank Residential agents. "Close attention has been paid to the US and to other European markets such as France and Ireland where price growth continued to expand last year."

Bearish property commentators, however, have been concerned for several years and the market has frustrated their predictions by continuing to rise, Mr Bailey says. A slow down in the UK , Australia and New Zealand in 2003 and 2004 has been followed by a recovery. Mr Bailey expects price appreciation to taper off, but does not agree with views of The Economist and others that there is a serious risk of the property price deflation that has been prevalent in Japan and Hong Kong .  

"Our forecast is that we will see continued slowing of average global house price growth over the rest of 2006 and into 2007," says Mr Bailey. "This broad trend will mask regional hot-spots and investment opportunities."

Knight Ridder's favoured locations are Germany , which has been under performing and should experience sustained growth from 2007.  Following a real estate boom in Latvia , Bulgaria and Estonia , countries with the best potential for further growth in Eastern Europe are Slovenia and Slovakia , the firm contends. Moscow real estate should also do well and will "rival London as the most expensive world city within five years".

Cities which attract a sizeable inflow of high net worth international business people, investment bankers, other traders and high net worth celebrities and other wealthy people,  have very different property markets to the rest of their countries. London is a prime example. The typical buyer of a £ 2 million (S$6m) plus home in central London is now more than likely to be a foreigner, according to Knight Frank. Just over half the houses and apartments in prime London areas have been sold  to
buyers from Russia , the Middle East , Asia , Europe and elsewhere.  Around 50 per cent of expensive properties in Singapore were also bought by foreigners, says Knight Frank. In New York , foreign owners make up 34 per cent of sales in the prime residential market, ahead of Paris , where they account for 27 per cent.  In Hong Kong and Sydney , foreigners contribute 13 per cent and 9 per cent respectively of prime residential deals.

Foreign buying explains why London prices have soared in the past year while the rest of the UK market has stagnated. The local British populace have struggled to afford the surge in prices and are now worried about interest rate rises. Wealthy foreigners don't need to borrow. If an apartment or area takes their fancy, they can buy it for cash.

Global Residential Real Estate Boom

 

Gains since 1997 %

Annual % change at 2006 Q2

South Africa

279

14.3

Ireland

201

9.4

United Kingdom

159

4.8

Spain

154

8.5

Australia

117

3.7

France

96

9.4

US

82

9.4

New Zealand

76

10.6

Italy

69

5.2

China *

23 *

5.8

Singapore *

6 *

5.7

Germany

0.3

0.5

Hong Kong

-45

-2.4

Japan

-31

-2.7

* Gains Since 2004 for Singapore and China

Source The Economist and Knight Frank

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