A three-bedroom apartment in Oslo, priced at £3.3m with Christie’s International Real Estate
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Talk of a global recession impacting on the world’s property markets post-2007 implies a homogenous waltz of price rises and falls. The reality was far more varied, with different countries, cities, neighbourhoods and even streets experiencing radically different property cycles, from the disastrous to the almost imperceptible.

Nonetheless, a new report published on Saturday attempts to rank 27 countries into three categories: those that are showing symptoms of a property bubble, those that are on solid ground and those where prices have not yet recovered from the downturn and where, therefore, price growth is a distinct future possibility.

The report by Knight Frank focuses on the relationship between average property prices, salaries and rent levels. A property market is deemed correctly valued when local incomes are just high enough to buy or rent an average property, and when average house prices are running close to long-term average levels.

An overvalued market is one where prices and rents are outpacing salaries and prices are above average, while an undervalued market means buyers can comfortably buy or rent an average home at prices below long-term average levels.

“It is a macro indication of the general direction of house prices, showing where there is a capacity for further growth and where there is a likely bubble approaching,” says Kate Everett-Allen, a director in Knight Frank’s international residential research team.

Japan is one of half a dozen undervalued nations where prices are lagging. James Harvey, head of international residential at Savills Japan, has high hopes for price rises in the near future after a torrid three decades. “It is a very exciting time in Japan,” he says.

Japan’s current undervalued status began in the late 1980s when economic growth stimulated an almost-unparalleled property bubble: prices rose by 160 per cent in six years. When the heat went out of the market prices collapsed, ushering in what the Japanese refer to as “the lost decade” of economic stagnation.

Prices appeared to be recovering in the early 2000s only for the collapse of Lehman Brothers to send them into freefall once more.

Last year – in part thanks to Prime Minister Shinzo Abe’s attempts to stimulate the economy through growth strategies including quantitative easing – a new recovery quietly got under way. According to the Land Institute of Japan, prices for Tokyo condominiums rose 8.6 per cent to £287,262 in 2013, from an average £264,591 in 2012.

Harvey puts this growth down to Abe’s policies, a shortage of new stock and, crucially, increasing interest from buyers elsewhere in Asia. About 80 per cent of these overseas buyers are investors, attracted by net rental yields of 4.5 to 5 per cent.

At the end of last month Harvey travelled to Taiwan to launch a middle-market development of 61 apartments being built in Sumida, a rapidly gentrifying suburb east of Tokyo, with prices starting at £226,164. Interest in Adenium Sumida-Honjo and other new developments in the city has, he says, been “phenomenal” with some so oversubscribed that developers are resorting to lotteries to select buyers. “The hungriest appetite is from Taiwan, closely followed by Hong Kong and Singapore,” he says.

Harvey forecasts that if foreign interest continues, coupled with growing domestic confidence, then price growth is likely to continue over the next 12 to 24 months.

At the other end of the scale is Norway, considered by Knight Frank to be the most overvalued nation.

Prices here are high compared with incomes because the country was barely affected by the recession experienced across Europe, says Øyvind Olstad, of Christie’s International Real Estate’s affiliate firm, Regent. House prices did fall, by 4 per cent in 2008, but have since risen almost without pause.

“Norway is kind of hidden outside the EU and not that affected by what happened in the rest of Europe,” he says. “Everyone in Norway has got enough money. Our country is quite rich because of our oil industry and because a lot of people work in government-owned businesses.”

In the last seven months of 2013 Norway’s house prices dropped 6 per cent in response to a tightening of mortgage lending rules. Now the initial shock has worn off, that fall has almost been reversed. At present an average Norwegian property costs £288,202, while property in Oslo costs an average £336,968.

Olstad thinks growth will continue for the next few years, albeit at a slightly slower rate. “Prices have grown between 5 and 10 per cent in the last few years,” he says. “I see more like 5 per cent in the next few years because I think the situation with mortgages will cool the market.”

However, a country’s property market is never uniform and an exception to Olstad’s prediction may lie within the golden triangle of real estate between Oslo’s port, its main shopping district Frogner and Pilestredet Park. An unnamed Norwegian businessman last year spent £34.8m on a 1,000 sq metre apartment in the area, says Olstad, although a more typical triangle apartment would cost between £1.5m and £2m.

A few minutes away in this compact city a similarly sized property would cost an average of about £250,000.

The triangle is desirable, says Olstad, because of its high-end developments with sea views, and the fact that the area is only a few minutes’ walk from Oslo’s financial district. It is also handy for those with coastal summer homes and winter homes in the mountains. With demand from equity-rich buyers still high, Olstad believes prices here could rise by as much as 10 per cent this year.

The relative strength of the Oslo triangle underscores the key weakness of Saturday’s report: its failure to take in national variation. The UK, for example, is considered to be overvalued despite the fact that there are large swaths of the north and east of the country where house prices are falling or stagnant and might more correctly fall into the undervalued category.

Yet the influence of London and its hinterland, where prices have surged in the past year to a point where they could be considered overvalued, is enough to distort the national picture.

Despite this, Knight Frank’s Everett-Allan believes the data in the report offer a valuable overview. “It is useful to be able to take the pulse of a national housing market,” she says. “It gives a good indication of where countries rank in terms of house price movement.”

Switzerland is one of the nations considered to be correctly valued but, like the UK, it too includes a patchwork of different experiences.

Geneva, for example, enjoyed stunning price rises in the years leading up to 2007. Alex Koch de Gooreynd, a partner at Knight Frank, says this growth was thanks to the city’s safe-haven status, high standard of living, the presence of the UN’s European office and many European company headquarters, plus, of course, Switzerland’s beneficial tax arrangements.

Demand plus limited stock meant prices in prime areas like Cologny, a village on the favoured left bank of Lake Geneva, and around the Russian Church in the city centre, rose to unsustainable levels. As soon as the economic crisis hit, domestic and overseas buyers vanished and prime Geneva’s bubble burst.

A three/four-bedroom apartment in Geneva priced at £3.3m with Knight Frank

At the peak of the market, Koch de Gooreynd estimates that a house in Cologny would have cost about £15m. Today that same property will be worth about £8.4m.

During the past few months, however, de Gooreynd has seen encouraging signs of economic morale returning to Geneva. “This year we have had three transactions above £13m; last year there were none,” he says. “Confidence is coming back, and at the same time vendors have become more realistic.”

Yet while Geneva has experienced a cycle of boom and bust, just 80 miles to the west the recession simply hasn’t been an issue on the boutique-laden streets of Gstaad.

This Alpine village attracts the kind of rarefied international buyer who is not much affected by a mere global financial crisis. Many sales are off market, and transaction levels are too low to offer reliable data on prices, but Matthew Hodder-Williams, associate partner of Knight Frank, says values remain steady. The entry price for a modern two-bedroom apartment in Gstaad is about £1.25m to £2.5m. At the top end buyers pay up to £40,000 per sq metre to secure a prime chalet.

“Prices are stable because nobody in Gstaad really has to buy or sell,” says Hodder-Williams. “It is a very chic, discreet and unique international destination, with families who have been here for generations. There are a couple of good schools which draw in buyers and it is somewhere I think you can be really confident will remain an established location.”

‘Global Opportunities Report: Assessing value in housing markets worldwide’ can be viewed at knightfrankblog.com/global-briefing/

This article has been amended since publication to show that the Knight Frank report considers UK property to be overvalued, not correctly valued

In addition, James Harvey is head of international residential at Savills Japan, not head of Savills’ Tokyo office


This article is subject to a correction and has been amended.

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