Safe haven seekers underpin 'old world' city house prices

Monday 20th February 2012

A combination of cooling measures in Asia and the threat of a double-dip global recession has led to a slowdown in many housing markets in "new world" economies, according to international real estate adviser, Savills.

This created conditions in the second half of 2011 that favoured the old world markets in a reversal of a five-year outperformance by new world city markets.

The top ten "world class" cities saw values rise by just 1.0% in the second half of 2011, according to the Savills World Cities Index, a slowdown from the 5.5% in the first half of the year. This brings total value growth to 6.5% in 2011.

The Savills index measures a basket of properties, dubbed the "Savills Executive Unit", representative of the dwellings needed to accommodate a small international business unit.  This allows for a true comparison of values across very divergent locations and markets.

"Modest growth levels in an uncertain world should come as no surprise," said Yolande Barnes, head of Savills residential research.

"But the outperformance by the more stable 'old world' markets of London, New York, Paris, Sydney and Tokyo compared to the 'new world' markets of Hong Kong, Shanghai, Singapore, Moscow and Mumbai is a pattern we expect to be repeated over the coming year.

"There is now clear evidence that the high performance, which saw new world markets grow by an average 95.4% in the five years to June 2011, comes at the price of higher volatility.

"It is ironic, then, that wealth generation in the new world has created a flow of investment activity from East to West in search of wealth preserving safe havens and this is now underpinning values in the world’s most established old, 'world-class' city markets."

The variance in growth over the past six months has already impacted the rankings within the top 10 rankings in the Savills index, with the sharp 5.9% growth in the second half of 2011 meaning that Paris leapfrogged Tokyo to take third place in the cost rankings behind Hong Kong and London.

Hong Kong remains well ahead as the most expensive city in the world in which to buy real estate – with the cost of the executive unit almost twice that of London.  But it also stands out as the most volatile city market in the index, falling by -3.4% in the second half of 2011, having risen by 87% between December 2008 and June 2011.

In contrast to the old world markets, particularly London and Paris, investor confidence in the city’s luxury residential market cooled dramatically in the second half of 2011.  Shanghai value growth has also slowed dramatically and is not expected to escape further falls.

Moscow stands out as a new world trend bucker, with half year growth of 4.1%.  Meanwhile, Mumbai values look set for a correction, having more than doubled over the past five years, with falls of between 10-15% considered possible in 2012.

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Mike Jones