Sydney is set to see the strongest prime residential price growth in 2016, rising by 10% year-on-year according to Knight Frank’s Prime Cities Forecast. The report which assesses the performance of ten prime city markets in 2016 also predicts that three cities are expected to see a decline in prime property prices; Hong Kong (-5%), Singapore (-3.3%) and Paris (-3%) with Hong Kong overtaking Singapore as the weakest-performing luxury residential market in 2016. 

Kate Everett-Allen, Partner, Residential Research at Knight Frank comments; “Of the ten cities analysed in our forecast, Sydney is expected to come out on top. However, 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. London, Paris, Geneva and Singapore are forecast to see stronger price growth – or a slower rate of decline in 2016 than 2015.”

David Ji, Director, Head of Research & Consultancy, Greater China, Knight Frank believes the impact of rate increase on the Hong Kong property market is limited. This small rate increase is also not going to significantly increase homebuyers’ monthly mortgage payment. Luxury residential prices will see a relatively mild drop in 2016 by up to 5%.

The Forecast 2016: 

• London:  A marginal upturn is forecast here, from 1% in 2015 to 2% in 2016. A rise in transaction costs, political risk around the Mayoral election and on-going affordability concerns explain the muted forecast. 
• Paris: The recent terrorist attack will undoubtedly affect buyer sentiment in Paris. The rate of decline in prices is forecast to lessen slightly from -5% in 2015 to -3% in 2016. 
• Hong Kong: Forecast to be the weakest-performing luxury residential market in 2016. A number of new developments are due to come to the market; this new supply coupled with the strengthening HK Dollar will see prime prices soften. 
• Singapore:  We forecast the market will see marginal price growth from -3.5% in 2015 to -3.3% in 2016. The drop in price of luxury properties has presented pockets of investment opportunities. 
• New York: 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 the US dollar and weaker economic conditions worldwide. We predict there will be growth in New York in 2016 of 5% similar to that of 2015. 

Risk Monitor: 

The Knight Frank Prime Cities Forecast Report also provides a Risk Monitor which assesses the key risks to the world’s prime residential markets. 

Kate Everett-Allen comments, “The Fed’s recent rate rise and the impact of geopolitical tension on the world’s top cities are currently considered the highest risk to the 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 25 basis points 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. 

Point to note: As this report was produced in November, the 2015 price change was estimation only (page 5) and the actual 2015 annual prime price change for Hong Kong was -4%.