The trapping of housing wealth in global cities is causing a dislocation between a few select “super cities”, where international money moves markets, and national counterparts that are still closely linked to economic inertia. This separation has become marked over the past two years, with stellar price growth in some major capitals belying modest gains or stagnation elsewhere within their countries.
Leading cities now merit comparison with each other rather than to their countries. This is particularly true when analysing the upper ends of the property market, with buyers as happy to live in any one, and often in more than one, of the narrow sub-market of functioning city states.
Yolande Barnes, director of research at Savills, pictures a “virtual global continent where billionaires move markets”. Meanwhile Liam Bailey, head of research at Knight Frank, points to the clear separation in values of the playgrounds of the wealthy: “The next property cycle has already started, and is seeing the emergence of a top tier of global city markets where the top addresses will become ever more fought over by wealthy buyers as stores of value and secure investments.”
Sluggish economic growth, along with the expiry of the stimulus packages designed to save western economies from recession, has slowed many housing markets in the past year – while some never really recovered from the crash in 2008. Crucially, the difference between the best and the worst markets generally comes down to a simple case of over-supply during the property boom.
This was seen at its most extreme last month at the Spanish embassy in London, where scepticism hung heavily in the air as its government set up stall to sell second homes to a disbelieving Europe. The UK was the first stop on a roadshow of European countries designed to drum up demand for homes in Spain. But investors walked out shaking their heads after an hour-long sales spiel for a housing market where overreliance on a tourist economy has meant that a third of the market is now a second or holiday residence.
Over-supply of homes has become a hindrance to the future of many housing markets. In China there are ghost towns built in backwater areas in the expectation of economic migration, and in downtown Derry, Northern Ireland, prices remain at near their post-crash bottom. Swathes of the US regional market are dominated by having too much residential property in the wrong locations, an overhang expected to be aggravated as banks and other distressed sellers offload more homes, but this is a factor that can just as easily be seen in northern cities in the UK.
This is the legacy from a boom in global property that led to too many homes being built for too few people in the wrong (and generally cheaper) areas. The markets that suffered the worst during the crash were also those where the building was most exuberant, and least based on local sustainable demand. But while the supply of homes could well undermine such markets for years to come, it is a lack of suitable residences that has helped underpin price growth within the leading global cities.
“The simple fact is that with a few infill exceptions, the opportunity to build another Eaton Square or similar is almost non-existent,” says Bailey. “Or in Paris, look at the ‘Triangle d’Or’ bounded by Avenue George V, Avenue Montaigne and the Champs-Elysées, or Avenue Henri Martin, Ile St Louis or Place des Vosges.”
Equally, he says, tight supply constraints have met surprisingly resilient demand in international financial capitals and an expanding wealthy population, which has helped accelerate this decoupling effect from national markets. All the factors sapping national housing markets – a malfunctioning mortgage market, the end of the quantitative easing programme that helped pump equity into economies, rising interest rates and unemployment – have less of an impact on prime cities where equity-rich overseas investors and domestic professional services are key.
The strength of Hong Kong’s market has been driven by Chinese mainland investors looking for a safe haven for their emerging wealth. Prices were higher by some 80 per cent from the low point of 2008 by the end of last year. There is also a link between Chinese wealth and London or Paris, as Asian residents look for a base in Europe, and investors look for a safe haven to invest in mature and high-performing markets. Robert Bartlett, chief executive of Chesterton Humberts, said that was an “insatiable demand” from investors in Asia and the Middle East for prime property to act as a store of wealth, with London top of the list followed by Paris and New York.
Foreign nationals accounted for 60 per cent of all buyers in the prime central London market, according to Savills, and 70 per cent of houses valued at more than £10m in 2010. Moreover, prime housing in London has a correlation with the price of gold and equities as much as any underlying national economic outlook, as house price growth is stoked by the growth in the wealth of the world’s richest people.
It is already possible to spot the correlation between the oil prices and the value of real estate in Moscow. An increase in the price of oil by $1 per barrel triggers an increase in the price of a square metre of prime Moscow real estate by $200, according to Savills. When global demand for energy resources dropped off in 2008 and 2009, the value of properties fell by around 40 per cent from the 2007 peak. The average price of real estate in Moscow was $5,700 per sq m in the first quarter of this year – more than three times the Russian average – even if the end of the rebound has meant some price declines over the past year.
Alexander Shatalov, chief executive of Intermark Savills, says Moscow is to Russia what London is to the rest of the world, given the significant influx of buyers from the rest of the country seeking real estate as an investment. However, as wealthy Russians feel even wealthier with the increase of both their business and housing interests, they are also turning to the south of France. Home owners in Monaco could do as well looking at the price of gold or oil as at the economic growth of the principality.
Compared with provincial cities, the bigger, more international cities have seen bigger rises in house prices – especially over a five-year period. Data from Savills show that London prices rose 26 per cent, against a national average of 6 per cent; Hong Kong by 95 per cent, against a Chinese market growth of 59 per cent, and a flat market in New York against a 26 per cent decline around the rest of the US.
Data compiled for the FT by Knight Frank also point to a widening divergence between key cities and their domestic markets based on this supply and demand imbalance. This is particularly true of prime property in Paris, London, Manhattan, Zurich, Geneva, Hong Kong and Helsinki, according to Liam Bailey. The top end of these markets, he says, appeals to global buyers as much as to domestic wealth, which means that their prices are capped not by national factors but by global trends. Those markets do not necessarily move as one but are aligned on a similar curve, he found.
Nationality does play a part when it comes to currency, particularly where people are buying flats more as investments than as places to live. London prices have been boosted by an additional currency advantage, given the value of sterling – something that has held back the Manhattan and wider US prime market. Overseas buyers account for only 15 per cent of the prime market in Manhattan, for example, and this is in part why it has not seen the same sort of growth as in the UK.
Wealthy cities are not immune to the global economy, of course, and there are risks from any economic shock and fall in stock markets or commodities. There have been some falls already as houses have come off their rebound highs and reacted to localised events such as the Japanese earthquake.
The decoupling effect appears to be true as long as the upper levels of the international wealthy remain so. Even cash-rich investors like to use debt where possible, and the mortgage constraints and interest rate rises remain a broad impediment to housing growth. There are specific dangers in the sovereign debt in the west as well as the potential for deflation following a housing bubble in the east.
Even so, Bailey points out that all these factors have subdued growth, rather than reversed it, and fundamentally strong demand will continue to lift prices. He predicts that the £10,000 per sq ft barrier will be breached at some point this decade, having reached £6,000 per sq ft last year in London and Hong Kong. Barnes agrees that her “virtual continent” of the wealthy is unlikely to falter too much: “The creation of wealth in emerging markets over the next decade will ensure that they grow – regardless of domestic market conditions.”
Daniel Thomas is the FT’s property correspondent