While the recent strength of key urban residential markets has been supported by safe-haven and wealth flows the story is much broader.
Cooling measures in key Asian centres continue to weigh on prices and transactional activity, most obviously in Hong Kong and Singapore but also in Beijing and Shanghai. Slightly over half our prime city markets, where we have the comparable data, show an outperformance in house price growth over the five years to early 2014 compared to their wider national mainstream housing markets. Jakarta, Miami and London have led this outperformance.
While New York and Los Angeles appear to have had a weaker recovery compared to their national housing market, this appears to be related to the fact that the wider national house price series takes into account recent distressed sales which have unsurprisingly come from a very low base.
Similarly, while locations like Beijing and Shanghai, with 84% and 65% growth over our five year period, can hardly be regarded as slackers, even this level of growth has been insufficient to keep pace with strengthening prices at a national level.
Looking into 2015 and beyond, there is no doubt that a number of key market supports, which have helped to drive prices higher over the past five years, will be removed. Investors and developers will have to accept that recent returns have been supercharged by government market support, and features like cheap finance, delivered through ultra-low interest rates, and the ability of quantitative easing to hold down the rate of alternative investment returns, will begin to be removed from 2015.
Weak economic growth in Europe is likely to only delay, rather than stop, the inevitable shift to more normal economic conditions.
In short, the ability of investors and developers to enjoy healthy returns from the residential market from 2015 will require a greater investment in the search for outperformance.
In lots of markets, which have prices well ahead of pre-crash peak levels, average returns will be less exciting in the next five years compared to the previous five.
How will investors secure outperformance in this new ‘post-stimulus’ world? There will be some opportunistic plays. For example, we believe Cape Town will be a market to watch in 2015.
The weaker rand is attracting buyers from Europe and elsewhere in Africa, including wealthy Nigerians. Activity is strong on the Atlantic Seaboard and limited stock below US$470,000 is expected to lead to stronger price growth.
Economic growth will drive some markets. If we take Dubai as an example, the fact remains, that by international standards, Dubai’s prime residential property market is relatively inexpensive. This, combined with the fact that the UAE economy and employment continues to grow strongly, suggests that the prime residential market in the Emirate is likely to see ongoing expansion despite new market controls, such as the doubling of transfer fees to 4% and newly introduced mortgage caps.
For other centres, the battle to secure investment returns will increasingly turn to micromarket outperformance. While the removal of stimulus will take away a key support platform from global residential markets, our view is that in most centres the return of sustainable economic growth, especially in Europe, means the outlook for the key world centres for 2015 and beyond remains positive.
Our forecast table, which considers the prime city residential price outlook for 2015, identifies only Hong Kong as being at risk of a price decline next year – although several markets will be at risk of flat price growth. Overall, key urban markets are set to weather changes to the macro-economic environment relatively well.