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News: Risk of global house price crash falls away

Knight Frank have recently released the second quarter 2006 results of their Global House Price Index which they claim to be the first serious attempt to analyse pricing trends in residential property across the world on a standardised basis every quarter.  The main finding is that global house price growth has continued to slow from the recent peak reached in 2004 and overall 18 out of the 30 countries covered have seen price growth slow over the last 12 months.  Average global house prices stood 8.5% higher at the end of June 2006 compared to the same period 12 months earlier, the index shows.

Liam Bailey, Head of Knight Frank Residential Research, comments: "The most notable trend is that house price growth is continuing to slow across the globe. [...] Higher prices in most parts of the globe are a result of lower finance costs and increased wealth following strong economic growth in recent years.  Slower house price growth globally suggests that affordability constraints have been hit in more locations."

However, Knight Frank does not see this as the start of a global crash in prices.  Bailey said:
"Many commentators have been concerned that the boom in prices which has been seen in many countries would end in tears.  When price growth began to slow in Australia and the UK, in 2003 and 2004 the belief was that this was the beginning of a house price slowdown which would influence consumer confidence, spending and economic growth."

Bailey continued: "A stable slowdown appears to have taken place in the UK and Australia with both countries sitting well down the price growth league table. [...] Our forecast is that we will see continued slowing of average global house price growth over the rest of 2006 and into 2007.  However this wider trend will mask regional hot-spots and investment opportunities."

The hotspots are still out there...

The overall slow down in property growth around the globe has not been a uniform process and some markets have been rocketing ahead regardless.  Knight Frank's data indicates phenomenal annualised growth rates in Latvia (45.3%), Bulgaria (20.5%) and Denmark (15.4%)

Bailey commented: "New data for Latvia reveals huge growth in prices over the past two years, with prices for apartments in Riga and the surrounding area over 45% higher in a year.  Why has this market performed so well?  A levelling up situation is affecting all markets in the former Eastern Bloc – especially those which have joined the EU in recent years.  Wage inflation, growing prosperity and access to less constrained mortgage finance have all contributed to rapidly rising prices." 

Bailey continued: "The same process has been seen in Bulgaria – with a classic combination of catch-up, speculation, second home interest and slow but sustained economic growth underpinning prices."

Knight Frank's current favoured locations are:

  • Germany – Knight Frank believe that Europe’s largest economy, and the world’s largest exporter is still underperforming and will see sustained growth from 2007
  • Slovenia and Slovakia – Knight Frank tip these two as the countries with the best potential for further growth in Eastern Europe
  • Cyprus – Knight Frank believe this country has potential for growth over the medium term – once the VAT changes are implemented and settle down
  • Russia – Although Knight Frank are effectively talking about Moscow, which they believe has the potential for more growth and will eventually rival London as the most expensive world city within five years.

...Now for the bad news

Knight Frank's optimism comes at a time when the large investment bank Morgan Stanley is predicting a global slump in response to rising inflation and interest rates.  According to Morgan Stanley, the recent property boom was triggered by a prolonged period of low interest rates around the globe but this trend is reversing and rates are on the rise.

Morgan Stanley economist Andy Xie said in a note: "As inflation picks up simultaneously around the world, interest rates are rising everywhere, and the property boom is turning into a bust.  [...] Bonds began to decline first.  Property, equity and commodities are following."

Xie continued: "A soft landing for global property is possible but not assured. [...] The seemingly soft landing in Australia and the US in the past two years has lulled investors into believing that other markets will follow the same pattern.  The difference is: these markets began to soften in a strong global economy.  The global economy has peaked out and could provide little support for growth engines like China and the US when their property markets turn down."

In Knight Frank's data, the slowest annualised price growth was experienced in Serbia (-5.1%), Japan (-2.7%) and Hong Kong (-2.4%).  The sharpest reversal of fortune was experienced in Hong Kong moving from 22.5% growth in mid 2005 to -2.4% falls in mid 2006.

Knight Frank Global House Price Index - annualised house price growth and country rankings

Annual % change at
2005 Q2

Annual % change at
2006 Q2

Rank as at 2005 Q2

Rank as at 2005 Q2

Position change 2005 Q2 to 2006 Q2

Position change from 2006 Q1 to Q2

Latvia (Riga)

73.5

45.3

1

1

0

10

Bulgaria

43.8

20.5

2

2

0

2

Denmark

15.3

15.4

9

3

6

-1

Belgium

18.9

14.9

7

4

3

13

South Africa

25.2

14.3

3

5

-2

0

Estonia (Tallinn)

19.9

12.9

6

6

0

-5

Sweden

7.7

12.8

19

7

12

3

Canada

9.5

11.8

16

8

8

8

Greece

10.4

11.8

14

9

5

4

New Zealand

13.4

10.6

12

10

2

-7

US

14.1

9.4

10

11

-1

-3

France

15.3

9.4

8

12

-4

-3

Ireland

10.1

9.4

15

13

2

-6

Spain

14.0

8.5

11

14

-3

-8

Lithuania (Vilnius)

21.7

7.0

5

15

-10

-3

Finland

4.8

6.7

21

16

5

2

Norway

9.1

6.4

17

17

0

N/A

China

8.0

5.8

18

18

0

1

Singapore

2.4

5.7

24

19

5

2

Italy

11.2

5.2

13

20

-7

-6

Hungary

1.3

4.9

26

21

5

N/A

UK

6.1

4.8

20

22

-2

-7

Australia

1.9

3.7

25

23

2

-1

Switzerland

0.8

3.4

27

24

3

-1

Austria

3.9

3.2

23

25

-2

0

Netherlands

4.4

2.0

22

26

-4

-6

Germany

0.2

0.5

28

27

1

-1

Hong Kong

22.5

-2.4

4

28

-24

0

Japan

-4.8

-2.7

29

29

0

-2

Serbia (Belgrade)

-14.8

-5.1

30

30

0

-1

Source: Knight Frank Residential Research

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