By June 2011, residential price growth in the new economies of Asia and the Indian sub-continent had totalled between 90% and 155% since December 2005.

There was an underlying expectation at this time in many of our cities that this growth was unsustainable and would eventually slow or correct. That correction or slowdown now seems to be underway in many centres, brought about, in part, by official cooling measures designed to stem the flow of speculative money going into property, and partly by naturally cooling sentiment due to economic uncertainty.

Price falls are currently concentrated in the eastern hemisphere – occurring in Hong Kong, Sydney and Tokyo – while Mumbai and Shanghai prices hover around zero growth.

New world slows

The final half of 2011 saw a change in fortune for our class of world cities. All growth slowed but the ‘old world’, which had lagged behind the price growth achieved in the ‘new world’ until June 2011, saw faster growth in the second half of 2011, driven by global wealth seeking a safe haven for real estate investment. In our ‘old world’ cities (London, New York, Paris, Sydney, Tokyo), the value of SEU property grew by 1.4%, compared to just 0.7% of that in the ‘new world’ (Hong Kong, Shanghai, Singapore, Moscow, Mumbai).

New world volatility

This reinforces our assertion that the ‘new world’ may offer more spectacular price growth, but with significant volatility. Hong Kong is case in point. The value of the SEU here fell by -3.4% in the six months to December 11, having experienced price growth of 87% between December 2008 and June 2011.

Investment sentiment in the city’s luxury residential market cooled dramatically in the second half of 2011, with the lowest transaction volume and the first price decline recorded since the 2008 financial crisis. This comes as homebuyers and investors adopt a ‘wait-and-see’ approach, cautious over the impact of a slowing Chinese economy and eurozone crisis.

Shanghai has seen a similar growth slowdown, with the value of the SEU recording growth of just 0.1% in the second half of 2011, set against price growth of some 144% over the last six years. The impact of government cooling measures, coupled with slowing economic growth and squeezed affordability are at the root of this.

Old world stability

By contrast, the majority of our ‘old world’ cities held up comparatively well. The Paris SEU saw price growth of 5.9% in the second half of 2011, while New York recorded growth of 2%, reversing the -2.1% seen in the first half of the year. London was stable, with an increase of 1% overall and much stronger growth in the high price brackets.

These cities benefit from the ‘safe haven’ effect, remaining attractive to international purchasers. An underlying shortage of stock in mature city centres has been exacerbated by a relative dearth of new development as the corporate sector has reined in debt finance – the lifeblood of developers in these places. Undersupply is particularly acute in central Paris, for example, which is pushing buyers into the Inner and Outer Rims, and suburbs adjacent to the capital. This scarcity has helped to sustain pricing.

The global cities of the ‘old world’ are not immune from global conditions; transaction levels are low, and all (with the exception of New York and Tokyo) saw slowing growth in the second half of 2011.

The city rankings

Our cities divide into three tiers. Hong Kong is in a league of its own, the value of the SEU almost double its nearest rival, due to the weight of money pushing into the city, and physical pressure on the limited developable land available.

London, Paris, Tokyo and Singapore have similar positions on property cost and represent more mature and established global centres. Their similarity in value suggests there is a fair market price for this.

The remainder of our cities are dominated by fast growing emerging cities and economies, with values rising quickly from a low base. The one exception to the rule is New York, a mature and well-established market fallen from grace, which now looks to be extremely good value.

Variance in growth in the final half of 2011 has already impacted on these rankings, with Paris leapfrogging Tokyo to be the third most expensive city in which to buy property.

Taken from
Insights: World Cities Review Spring 2012