Knight Frank Global House Price Index Q3 2007

The latest Knight Frank Global Price Index reveals that growth in residential property prices around the world is slowing. On an unweighted basis prices globally rose by 8.2% per annum to Q3 2007 compared to 9.6% 12 months earlier. Rising interest rates have been a major factor in slowing house price growth, together with the tightening of lending criteria seen in many European countries.

The latest release of the Knight Frank Global house price index shows considerable changes from those seen in recent quarters, where the pattern of strong growth in Baltic markets was becoming almost routine. Latvia has been firmly knocked off the top spot by the recent EU newcomer – Bulgaria. Despite numerous concerns over the level of oversupply in a number of locations within Bulgaria – notably the winter ski resort of Bansko and selected coastal resort locations – Bulgaria has supplanted the previously top performing Baltic hotspot at the top of the Knight Frank league.

Latvia - the runaway success at the top of the index for the last ten quarters – has slipped considerably down the table, with price inflation over the 12 months to Q3 2007 at just over 10%. While at face value, this is a respectable rate of growth, prices in certain sectors of the market in Riga have begun to fall. Prices in the apartment market are declining – as a result of the combination of a number of factors: interest rate rises in May this year, undoubtedly some rebound from the unsustainable rates of growth seen over the last couple of years, and legislative changes (affecting stamp duty for owners of multiple properties) targeted at limiting speculative investment. The latter have been successful, with the greatest fall in prices in the capital occurring in the one bed apartment market. Although growth has slowed overall, prices remain stable in the detached house market in the city. However, consumer confidence has fallen and the tightening of credit conditions has undoubtedly had some impact on the Latvian market. The volume of transactions is down for all property types and we expect that sellers of detached properties are reluctant to accept reduced offers. It should also be noted that in the case of new build houses and apartments, developers may offer additional fittings included in the sale price rather than reduce the price of property. Such discounts would not be reflected in a house price index.

Latvia aside, other Baltic locations have also seen growth slowing. Estonia has seen year on year price inflation fall back from the higher levels seen in previous quarters. New build properties have seen the greatest decline in asking prices, while properties in the Tallinn Old Town and in other central areas of the city have remained relatively stable in terms of price growth. Meanwhile, rental values have been increasing, suggesting that demand for property remains strong but possibly that local buyers are being priced out of the market and are forced to rent as property prices are forced upwards by overseas investment purchasers.

While there does not appear to be a price boom on a regional scale to that which occurred in the Baltic states over the last couple of years, growth across much of the Asia Pacific region is relatively robust. Although markets vary in terms of the source and drivers of demand for residential property, the only market which is not experiencing relatively strong rates of growth is Japan. Even there, following on from successive years of residential property price decline, the market situation might even be improving. Or at least, prices have fallen at the slowest rate for a number of years.

The best performer in the Asia pacific region is Singapore, where price inflation has been rising steadily since the end of 2004. Prices in Antipodean markets are also showing strong rates of growth; both New Zealand and Australia having seen prices rise by over 10%. However, growth in New Zealand has slowed, with annual growth to Q3 2007 at 11.8%, compared to 13.8% the previous quarter. Concerns have been raised over the level of affordability in New Zealand markets, coupled with high levels of household indebtedness. Sales volumes have dropped by 30% and marketing times have significantly lengthened. In Australia, price growth has been driven by gains in Brisbane, Melbourne and Adelaide, where in each case, inflation over the year to Q3 2007 has been over 16%, whereas in Perth and Sydney, price inflation has been considerably more muted, with growth rates of 2.8% and 5.2% respectively. Hong Kong also continues it’s reversal of fortunes, with prices up 10%, marginally higher than the 8.8% growth seen in the 12 months to the previous quarter.

Residential property price inflation to Q3 2007 of 14.4% put South Africa in third place in our table. Demand for coastal property remains strong with price inflation in most coastal locations significantly exceeding the national average. The exception to this is the KwaZulu-Natal region, where prices on the southern coast have declined by 3% from Q3/2006. Metropolitan markets in South Africa vary considerably, with growth ranging from 9% growth in central areas of Johannesburg to almost 24% in Bloemfontein. The market in South Africa is expected to slow as a result of tighter mortgage lending conditions prompted by the National Credit Act which came into force in June this year.

The Canadian economy has remained relatively resilient in the face of disturbance in the US residential market, mainly thanks to strong demand for commodities from export markets in Asia. Property price inflation in Canada has hovered around the 10% mark since 2002. To Q3 2007, prices grew by 11.7% over the year. The strongest growth has been seen in Yukon (22%) and Alberta (20%), with major cities generally seeing lower rates of growth than the national average.

Much has been made of the dire housing market prognosis in the US. Despite this, the most recent data from the US OFHEO (Office of Federal Housing Enterprise Oversight) reveals that prices over the last year across the country have risen by 1.8%. Falls in Michigan (-3.7%), California (-3.6%), Nevada (-2.4%), Massachusetts (-2.3%) and Rhode Island (-2.2%) were countered by continued price growth in Utah (12.9%), Wyoming (11.8%), Montana (7.7%), New Mexico (7.4%), and Washington (7%). Over the last quarter, average prices nationally have fallen, with prices 0.4% lower than in Q2.

In Western Europe the previous boom regions have come back to earth with a bump. After seeing property price growth of 15% to Q3 2006, this year has seen the Irish market turn, with prices in Q3 this year nearly one percent lower than in 2006. Prices outside of the capital have been falling at a faster rate than in Dublin. Although the market is seeing negative price growth, this may be the long awaited and much publicised correction to year after year of strong positive price growth. If so, the decline in prices is relatively but when contrasted with the 12% average annual growth over the previous 5 years. Spain, another location where the market has been rumoured to be in freefall, has seen year on year growth of 5.3%: a considerably more sustainable rate than that of 2003-4, which approached 20%.

The UK - also on the receiving end of much negative press – saw robust price growth of almost 11% to the 3rd quarter of 2007. Growth in the UK has been driven by that that in London and the South East, as previously strong performing markets in the north have slowed.

As usual, Germany continues to flounder at the bottom of the league table. Prices have continued to fall. Small consolation for German property owners may be found in the reduced rate of decline in Q3 from Q2: in the 12 months to Q3, prices fell just over 3%, whereas to Q2, prices fell by almost 7%. This actually points to what for German markets should be considered positive news – prices over the quarter actually rose by 0.1%. The improvement in German prices may arise as a result of limited new supply: in the first half of 2007, new construction permits for residential buildings in Germany were over 50% lower than during the corresponding period of 2006.

Other European markets remain robust, notably those in Scandinavia. Of those included in this index (Denmark has been excluded from this release due to a lack of reliable data), Finland’s growth has been the most sluggish with just under 6% to Q3 2007. Norway just pips Sweden into 7th place in the index with price inflation of 11.7%, compared to Sweden’s 10.9%, while Iceland – a new entry into the Knight Frank Global House Price Index – beats all the Scandinavians with a growth rate of almost 14%, despite the central bank raising interest rates to 13.75% by the beginning of October 2007 in an attempt to rein in inflation. Q3 data for Denmark is not yet available although the annual increase to Q2 was negligible, and anecdotal evidence suggests that prices across the country have started to decline.

A number of countries included in the previous Knight Frank Global house price index have been excluded from the Q3 version as a result of a lack of current data. These include France, Lithuania, Denmark, Greece and Portugal.

Courtesy: Knight Frank Residential Research

About The Knight Frank Global House Index

The Knight Frank Global House Index tracks average house prices across a comprehensive list of countries across the world. This unique index is based on an assessment of price changes in the broad mainstream housing markets of the countries covered.

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