With 10% price growth Sydney tipped to lead the world in 2016: Knight Frank

Events in the world’s two largest economies look set to dominate proceedings in 2016.

The scale of the slowdown in China and the speed of further US interest rate rises will determine the performance of property markets across developed and emerging markets alike over the next 12- 18 months.

Last year we correctly anticipated that Sydney and New York would outperform in 2015 rising by 5%-10%.

Sydney has exceeded expectations, prime prices in the city look set to end 2015 15% higher.

At 5%, price growth in New York has been strong but mitigated to some extent by the strength of the US dollar which has curtailed foreign demand.

By the end of 2015, we expect the strongest and weakest performing prime markets to be separated by around 20 percentage points, in 2016 we forecast this figure will slip to 15 points as price growth converges.

Whilst luxury price growth looks set to converge, monetary policy globally is likely to follow a divergent course.

The US and UK will be tightening monetary policy whilst the Eurozone, Japan and China are expected to either loosen policy further through additional stimulus measures or are likely to stick to the status quo in policy terms.

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This year our Risk Monitor assesses the likelihood and impact of ten key scenarios on each of our cities.

As we take the pulse of city markets in December 2015, it is perhaps no surprise that the Fed’s recent rate rise and the impact of terrorism/geopolitical tension on the world’s top cities, are currently considered the highest risks to luxury city markets.

In previous years, the Eurozone and its potential break-up was the top threat to economic and property market stability but jitters over its demise have subsided as the ECB has announced an extension to its QE programme. Instead, emerging markets and the risk of potential deflationary cycles represent the major headwinds for the global economy.

For most cities, low income growth and a slowing domestic economy are considered the lowest risks to luxury markets.

There is a chance that the recent 0.25% US rate rise and resulting strong dollar could spark a new wave of safe haven capital flows from emerging markets to first tier luxury residential markets. However, with new supply in several markets expanding (Hong Kong, London, Miami, New York) we think it’s unlikely we will see prices respond in the same way they did post-Lehman. 

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Of the ten cities analysed in our forecast, only three are expected to see prime prices decline in 2016; Hong Kong, Singapore and Paris.

In both years, Sydney is expected to come out on top, although the pace of price growth is expected to slow from 15% year-on-year in 2015 to 10% in 2016. Australia’s economic slowdown, weaker stock market performance in recent months and the introduction of foreign investment fees explain the lower rate of growth in 2016.

Only London, Paris, Geneva and Singapore are forecast to see stronger price growth (or a slower rate of decline) in 2016 than in 2015.

London’s upturn is marginal, from 1% in 2015 to 2% in 2016. Higher transaction costs (a 3% increase in stamp duty for buy-to-let properties and second homes), political risk around the Mayoral election in May, and ongoing affordability concerns explain our muted forecast.

The recent terrorist attacks in Paris will undoubtedly affect buyer sentiment and will mean some buyers delay investments. With a Presidential Election less than 18 months away, however, we do not expect any radical shake up to the tax structure for foreign buyers and the city remains competitively priced compared to other top global cities.

Overall, prime prices across all ten cities are, on average, expected to have increased by approximately 3% in 2015 but average annual growth is forecast to slip to 1.7% in 2016. This confirms our view that lower returns will become the norm in the short to medium term.

Of the cities analysed, Hong Kong is forecast to overtake Singapore as the weakest-performing luxury residential market in 2016. A number of new developments are due to come to the market in 2016, this new supply coupled with a strengthening HK Dollar (pegged to the US Dollar) will see prime prices soften.

The price decline seen in Singapore’s prime residential market is expected to persist at least until the end of 2016 following the government’s assertion that it has no plans to relax its property market cooling measures. However, the drop in price of luxury properties has presented pockets of investment opportunities. We expect sale volumes to increase in 2016 and, due to the shrinking inventory of high-end homes, price falls within the prime sector will be less pronounced than those across the island as a whole. 

In the current climate of heightened political tension and ongoing tax fluctuations, Monaco’s status as a private and secure retreat continues to appeal to the world’s wealthy. With supply severely constrained on the two-mile wide principality we forecast steady price growth of 5% in 2016 as demand and sales activity picks up.

The Geneva market, along with Switzerland as a whole, has been characterised by levels will keep prices from rising over the next 12-18 months, hence our forecast of 0% growth in 2016, but more stable trading conditions seem likely in 2016 and beyond.

In 2015, the demand for New York’s luxury homes cooled from the frenetic pace observed in 2013 and 2014 due to the strength of US dollar and weaker economic conditions worldwide, although it is not expected to impact price trends until 2017. With the US federal and presidential elections due in November 2016 both New York and Miami are likely to see buyers adopt a wait-and-see approach.

South American currencies and the euro will influence demand/capital flows.