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2013-06-14 07:22:02
Andrea Murad
The London, Hong Kong, Sydney and New York real estate markets are hot, fuelled
by low interest rates and demand by foreign investors looking for safe places
to park their cash or quick returns from flipping properties in markets where
prices seem to only be going up.
Investors like these markets for their geography, educational institutions,
lifestyle and economic activity, according to Knight Frank, a global real
estate consultancy. New York and London were the top contenders in the
Association of Foreign Investors in Real State s (AFIRE) 2013 survey, with the
United States and United Kingdom providing the best opportunities for capital
appreciation. What s more, the US, UK and Australian markets were ranked as
having the most stable and secure real estate investments, with China ranked as
one of the top emerging markets.
Global property is a safe haven amid political and economic uncertainty, said
Gr inne Gilmore, head of residential research at London-based Knight Frank.
You can touch and see your assets.
But as foreign investors pile in, owning has become an expensive proposition
for local residents, even as some local governments worried about overheated
housing markets take measures to cool prices. That presents a host of
questions for people who simply want to live in the city where they work, from
how long the price run-up will last to whether they should buy, rent or sell to
the highest bidder.
In these four cities, among others, the inventory of homes for sale has failed
to keep up with demand. Local residents bid for what they can find but,
especially at the high end of the market, they find themselves competing with
all-cash offers from foreign investors who are more concerned about their
portfolio than about living someplace.
When the market s moving, houses get flipped daily, sometimes two to three
times in a day. Dennis Ma
Contributing to the housing price increases had been a housing shortage fuelled
in part by a slowdown in new construction in recent recessions. Housing in
these cities tends to be expensive to begin with because of land costs and
zoning restrictions.
While construction is ramping up again, new housing won t be completed for a
few years and the new supply may have little impact on home prices overall
because demand will still outstrip supply, said Adam Challis, head of
residential research at Jones Lang LaSalle, a financial firm specialising in
commercial real estate services and investment management based in London. In
London for instance, Challis said that new building represents less than 1% of
stock and around 11% of transactions currently, he wrote in an email.
A look at what is driving prices, how governments are responding and how
regular buyers and sellers should position themselves in London, Hong Kong,
Sydney and New York:
Cityscapes and price controls
While some countries have high taxes for foreigners purchasing real estate,
others go out of their way to encourage foreign investment. Australia recently
introduced changes to its capital investment requirement for residency and now,
a AUS$5 million ($4.71 million) real estate purchase will fast track a visa
application, said Ruth Stroppiana, chief international economist at Moody's
Analytics in Sydney.
Sydney hasn t experienced a sharp correction like other highly developed
countries but it certainly stagnated after growing strongly, said Stroppiana.
The real increase in housing market activity has been above AUS$1 million
($942,200) with all-cash purchases by overseas buyers. Home prices increased
3.6% year-over-year in the first quarter of 2013, according to the Australian
Bureau of Statistics.
Meanwhile, home prices in Hong Kong have doubled since 2008. When the market s
moving, houses get flipped daily, sometimes two to three times in a day, said
Dennis Ma, local director of Greater Pearl River Delta Research at Jones Lang
LaSalle in Hong Kong.
To cool its market, the Hong Kong government instituted higher duties, or
taxes, on properties valued at over HK$2 million ($257,610) and lower
loan-to-value thresholds for mortgage lending. A special stamp duty hold,
introduced in November 2010 was extended from two to three years in October
2012. There is a duty of 20% of the sale price if the seller owns the home six
months or less, 15% for homes held between six and 12 months, and 10% for homes
held between 12 and 36 months. To break even, home prices have to appreciate
above these amounts within these periods.
These measures appear to be working in Hong Kong s luxury market. Even though
taxes are surmountable by most international wealth, after introducing a 15%
stamp duty on non-resident purchases, the portion of buyers from mainland China
has dropped from about 30% in October 2012 to 9% in January 2013, according to
Knight Frank.
London has made a similar change by raising the stamp duty to 15% for
properties valued above 2 million ($3.1 million) that are purchased through a
company structure, a tactic that helps wealthy buyers achieve anonymity and
avoid capital gains and inheritance taxes. But prices in London are on the
rise. The average asking price for homes is above 500,000 ($778,600) for the
first time ever, according to UK property website Rightmove.
In the US, a decline in real estate prices has turned around and in cities like
New York, foreign buyers are helping to drive luxury home prices well into the
millions of dollars. Although no organization tracks foreign real estate
investment sales in US cities, nationally, the average sale price of all homes
was $212,000 in 2012, but for sales to international buyers, the average price
was $400,000, according to the National Association of Realtors.
In some respects, the US is the most desired market because of the way capital
can flow and the regulatory environment is more conducive to capitalism than
most other countries, said Doug Bibby, president at the National Multi Housing
Council, which represents the interests of prominent US apartment firms and
advocates their interest on legislative and regulatory issues.
Implications for buyers and renters
In the US market, even though foreign buyers are most interested in the high
end, this demand trickles down, said Michael Corbett, of Trulia, a residential
real estate website. When there are 100 people willing to buy $68 million
properties, there are a thousand people buying at $3 million, Corbett said.
This drives prices up and reduces inventory in housing markets, said Corbett.
When all the $3 million homes are gone, houses that cost $2.5 million now cost
$3 million.
This type of home price appreciation is good for homeowners building wealth or
looking to sell, but also makes buying a challenge: houses cost more, mortgages
require higher down payments and local buyers have to compete with all-cash
offers.
In New York, rising home prices in the city will likely push more people to
move outside the five boroughs and further into the suburbs, said Andres
Carbacho-Burgos, senior economist at Moody's Analytics in Philadelphia. Renting
can be just as difficult. Average rents in Manhattan were $3,815 and vacancy
rates were an almost non-existent 1.58% as of April 2013, according to Douglas
Elliman, a real estate brokerage.
Hong Kong has started to zone more land for development which could help ease
supply in three to four years, but in the meantime, renting and buying are
equally expensive, said Ma. With the limited supply now, selling a home while
simultaneously buying is nearly impossible, he said. To scoop up a new home, a
buyer might have to purchase quickly, even if his or her sale has not gone
through. In Hong Kong, that means this buyer would be classified as an investor
for purchasing a second home, triggering a larger down payment.
What s more, the upside in prices is going to be limited, Ma said. Experts
say that a correction of between 10% and 15% is possible as US interest rates
begin to rise, according to Jones Lange LaSalle. Previous down-cycles have seen
residential prices correct by 30% to 40%.
Sydney, on the other hand, is earlier in its green shoots recovery, said
Stroppiana of Moody s. Despite a supply shortfall, there s strong immigration
growth, low interest rates and a tight rental market, which are both driving
price increases and demand. The low interest rates have also helped make even
pricier properties more affordable. Even so, experts say double-digit price
increases are unlikely, making Sydney a more stable market for average buyers.
Buying a second house and renting it out is quite attractive, Stroppiana
said.