House Prices: What Next?

by Investors Offshore Editorial, May 2013, 24 May, 2013

It is now almost five years since that fateful day in September 2008 when Lehman Brothers filed for bankruptcy, triggering the worst financial crisis since the Great Depression and sending real estate markets around the world into a tailspin. In 2013, there are signs that a recovery in house prices is taking hold in many territories – but has the corner truly been turned?


Six years ago, as the house price boom continued in many countries across the world, we asked whether the laws of economics had been repealed. Now, we can see that they remain as true as ever. The air leaked rapidly from the global housing bubble. Beginning with the US, as has been demonstrated time and again with deflating asset bubbles, a wave of price falls spread around the world, attacking in turn each of the countries which had seen particularly aggressive house price rises.

It was the impact of global wealth and global 'feel good' sentiment which drove the upward spiral of real estate prices during the 15-year long boom that ended in 2008, and it was then their absence that drove the downward spiral. Look more closely, though, which is what any aspiring real estate investor must do, and local circumstances can be seen to have had a major impact on the extent of the boom, and then the extent of the bust.

It cannot be denied that the latest boom in house prices was unprecedented in both its extent and international synchronicity, enduring even through a brief period of economic recession in the United States. From 1997 to 2005, house prices escalated by 154% in the United Kingdom, 192% in Ireland, 145% in Spain, 114% in Australia and a stunning 244% in South Africa. Even in the United States, which for years consistently denied the existence of a national housing market or the growing danger of a real estate bubble, prices rose by 73% in the same period – a boom unparalleled at any time since the end of the Second World War. Only in Hong Kong among major jurisdictions did prices fall in that period, by 43%, a testament to the importance of local market factors, although they more or less went sideways in Germany.

Despite constant warnings that the enduring boom was unsustainable, and that allowing it to continue was increasing the chances of catastrophic collapse, politicians paid no attention (they never pay attention to anything except opinion polls and the next election) and allowed the toxic mess that was the sub-prime mortgage market to reach unsustainable proportions. People will be talking about whose fault it was for decades to come, but that is not the purpose of this report, which is simply to try to gauge the prospects for the market in the years ahead of us.

It is history now, of course, that the boom did come to an end in fairly sensational fashion during 2007 and 2008, with horrid consequences for the global economy and the banking sector. Signs of impending disaster were there to see in the US market as early as 2005. The 12-month rate of house-price inflation slowed to 12% in the third quarter of 2005, from 14% in the second. Prices of new homes, however, rose by only 1% in the year to October 2005, down from 16% in early 2004. A glut of new building was forcing developers to cut prices. The best signal of a further slowdown to come was the increase in the stock of unsold homes.

There are some factors which may have been responsible for extending and deepening the asset price bubble, and may act to limit the duration of the bust - for instance the simply huge and constantly growing accumulations of capital which are making people richer (at least in developed countries). Richer people can pay higher prices, and housing is in limited supply, especially in desirable neighbourhoods. In addition, most countries limit supply with zoning or planning laws. This latter factor is unlikely to change: as ever more land is covered with buildings, the pressure from environmentalists to preserve what is left will even tend to lead to more restrictions on new building. On the other hand, the weight of money argument is largely circular: much of people's assets is in the form of houses and financial investments, and in a bust situation their value goes down along with the ability of their owners to pay for them, so that there is a vicious downward spiral to contrast with the virtuous circle which had been pushing up valuations for 10 years at least prior to 2005.

In an attempt to understand why the housing market proved so resilient in 2005 and 2006, we must examine the economic fundamentals that underpin the global market.

The long-term upward trend of the last 20 years was fuelled to some extent by a sustained period of low interest rates. Between 1990 and 2004, the average base interest rate in the United States and its twelve main trading partners fell from 13% to 4.4%. This was of particular significance in the housing markets of Ireland and Spain which had to accept a sharp drop in interest rates after entering the European Monetary Union. Coupled with the growing availability of credit and rising real incomes in most industrialised countries over the last decade, plenty of fuel was thus provided to power demand in the housing market across most of the developed world.

But just as low interest rates helped to sustain house price growth, you would have expected that the continued trend towards higher interest rates in 2005 and 2007 in most countries, certainly including the US and the EU should have quelled the demand for credit and take much of the steam out of the housing market. If this is what finally caused the bust, the effect was very delayed; and interest rates have now rapidly sunk again to levels not seen for half a century or more.

It may be that the impact of higher interest rates was mitigated in some markets due to country specific factors such as the type of mortgage loans buyers hold. These can vary widely from country to country. For instance, in the United States most mortgages are fixed over 30 years, meaning home buyers and the housing market should theoretically be less sensitive to rate hikes. In some other countries, such as the UK, mortgage rates are rarely fixed for such a long term, and tend to float up and down with the prevailing interest rate. In the UK, it is therefore all the more surprising that higher interest rates did not brake demand for lending, triggering a sharper decline in the housing market as witnessed in the late 1980s and early 1990s.

In fact, after several years in which reality stubbornly refused to come into line with the theory, not all agreed that a nasty shock was in store for home owners. Alan Greenspan's successor Ben Bernanke argued that from a US perspective the real estate market tends to be highly localised, and does not suffer from the same irrational exuberance as in the UK or Australia for example. To an extent, this is true. As of March 2004, ratios of incomes to house prices in Mid-Western states such as Illinois, Wisconsin and Kentucky ranged from 2.4 to 1 to 2.9 to 1, whereas in California the ratios were nearer 8.5 to 1 (meaning the average house price is 8.5 times higher than the average income of a Californian household). Nevertheless, research highlighted evidence of property market bubbles in 27 metropolitan areas, mainly in California and in the North East, covering 20% of the total population.

According to some economists, the boom had no basis at all in economic fundamentals, and was being driven purely by a similar “irrational exuberance” to that which characterised the stock market bubble in the late 1990s. In other words, houses were being viewed increasingly by people as a short-term money-making vehicle rather than a mere a dwelling or long-term asset to bequeath the next generation. Evidence of speculative activity was certainly displayed in the United States, where turnover in existing homes reached a record 9% in 2004 as buyers and sellers in particular hotspots cashed in on spiralling prices. This bull market mentality meant that the boom in house prices was almost self sustaining and occurred independently of other factors such as interest rates and rising incomes.

In fact, the accusation can be levelled at the guardians of US economic policy that the housing market boom was encouraged to help the American economy weather a period of relative weakness. In each of the five years between 2002 and 2007, roughly one-third of all US home owners refinanced against the rising value of their homes, helping to unlock some USD2 trillion in cash, the lion’s share of which was spent on big ticket consumer goods, acting as a useful prop for the US economy.

Well, if the US authorities hoped for a soft landing, they had failed to take account of the hysterical behaviour of capital markets dining out on toxic mortgage debt, and they are now paying the price for their misplaced optimism, along with millions of dispossessed home-owners.

In view of all these conflicting factors, it would be a brave person who would call the housing market in any of the mainstream economies at this juncture, and that of course is why the markets are paralyzed. No-one wants to buy when prices are quite likely to go lower, and no-one wants to sell at the prices that are on offer.

The Global Market - The Situation in 2012

Knight Frank's Global House Price Index for the fourth quarter of 2012 suggests that the rehabilitation of the world’s housing markets is still "a work in progress," although the overall picture is an improving one, albeit marginally so.

According to the report, house prices around the world rose by an average of 4.3%, but there are of course wide regional and country variations. Of the 55 markets tracked by the Index, prices fell in 20, down from 25 in 2011.

Hong Kong recorded the largest rise, with mainstream prices rising on average by 23.6%. Unsurprisingly, Greece recorded the largest fall in mainstream prices for the second consecutive quarter, with prices falling by 13.2% on average in 2012.

In regional terms, South America saw the strongest gains in 2012, with house prices increasing by 8.4% on average. There was also a marked acceleration in house prices rises in Asia last year, where prices rose by 6.7% on average compared to 2.8% in 2011.

Interestingly, Dubai, a place which came to typify the real estate market boom and the bust, house prices rose on average by 19%, second only to Hong Kong in the index. Knight Frank attributes Dubai's recent "yo yo" house price performance to the fact that it is a market still finding its feet.

However, while the overall trend appears to have turned positive once again, the signals still appear decidedly mixed. Knight Frank's Index says that house prices in the United States were on average 7.3% higher at the end of 2012 compared with the end of 2011. However, prices rose by just 1.8% in the final six months of 2012, and were down, by 0.3% on average in the final quarter of last year. The S&P/Case- Shiller Index shows that in 2012 house prices rose in 19 out of 20 US cities tracked by the benchmark, but, as Knight Frank warned, "tight lending criteria has the capacity to curb the speed and strength of the recovery in 2013."

The Eurozone, which has entered its second recession, is seen as the cloud on the global housing market horizon. Here, Spain and the Netherlands join Greece in the bottom five of the rankings, although things do not now look so unremittingly bleak in Ireland where house prices fell by an average of 4.5% in 2012, compared to 16.7% in 2011.

Since the third quarter of 2008 the Asian markets seem to have performed the best. However, other regions also figures in the top ten best performers, which are as follows: Hong Kong (80%), India (60%), Taiwan (55%), China (50%), Israel (48%), Colombia (40%), Malaysia (30%), Norway (30%), Switzerland (25%) and Austria (25%).

Knight Frank concludes that 2013 "looks unlikely to deviate significantly from 2012’s script." However, the performance of the world’s mainstream housing markets will depend on economic certainty, more relaxed lending criteria and buyer confidence, and Europe presents the main downside risk acting as a brake on global growth.

Muddying the picture still further is the fact that the luxury residential market, which in contrast to the mainstream market has remained buoyant, slowed considerably in the first part of 2013. The average price of luxury homes in the world’s key cities fell by 0.4% in the first quarter of the year, although the annual rate remained positive at 3.6%. Predictably, cities in Europe remain the weakest performers, recording a fall of 2.3% on average; seven of the bottom ten rankings are occupied by European cities. But Tokyo was the weakest market in the year to the end of March 2013, where prices fell on average by a massive 18%. Jakarta, Bangkok and Miami topped the table this quarter, recording annual price growth of 38.1%, 26.1% and 21.1% respectively, and in the main, cities in Asia, North America and the Middle East continue to dominate the top half of the results table.

Knight Frank has calculated that a typical prime property is now worth 21.3% more than it was in Q2 2009 when the Prime Global Cities Index hit its post-Lehman low. The firm expects stronger growth to emerge later in 2013 as buyers continue to search for luxury bricks and mortar as a way of sheltering their assets from the Eurozone’s continuing turmoil and the fragile global economy, although the outlook is by no means certain.

We now look at the state of play in some key individual real estate markets.


In the United States, the picture looks more positive than it has done than at any time in the last five or six years, although it is too early to say for sure whether a recovery in house prices has really taken root.

Metropolitan area median home prices continued to rise in the first quarter of 2013, with the national gain showing the best year-over-year performance in over seven years, according to the latest quarterly report by the National Association of Realtors.

The median existing single-family home price rose in 133 out of 150 metropolitan statistical areas (MSAs) based on closings in the first quarter of 2013 compared with first quarter last year, while 17 areas had price declines. In the fourth quarter of 2012, a comparable 133 areas showed price increases from a year earlier, greatly improved from the first quarter of 2012 when prices in only 74 metros were up.

Lawrence Yun, NAR chief economist, said many areas are experiencing a seller’s market. “The supply/demand balance is clearly tilted toward sellers in a good portion of the country,” he said. “Inventory conditions are expected to remain fairly constrained this year, so overall price increases should be well above the historic gain of one-to-two %age points above the rate of inflation. If home builders can continue to ramp up production, then home price growth is expected to moderate in 2014.”

At the end of the first quarter there were 1.93 million existing homes available for sale, which is 16.8% below the close of the first quarter of 2012, when 2.32 million homes were on the market.

The national median existing single-family home price was USD176,600 in the first quarter, up 11.3% from USD158,600 in the first quarter of 2012. This is the strongest year-over-year price increase since the fourth quarter of 2005 when the median price jumped 13.6%. In the fourth quarter of 2012 the median price rose 10.0% from a year earlier.

“Some of the previously hard-hit markets like Phoenix, Sacramento and Miami continue to experience a dramatic turnaround, while a new set of areas like Atlanta, Minneapolis and Seattle have begun to show strong signs of upward momentum,” Yun said.

The median price is where half of the homes sold for more and half sold for less. However, some of the elevated median prices reflect a shrinking market share of lower priced homes and greater activity in upper priced transactions. Distressed homes – foreclosures and short sales generally sold at discounts of up to 20% – accounted for 23% of first quarter sales, down from 32% a year ago.

Total existing-home sales, including single-family and condo, edged up 0.8% to a seasonally adjusted annual rate of 4.94 million in the first quarter from 4.90 million in the fourth quarter, and were 9.8% above the 4.50 million pace during the first quarter of 2012. Sales were at the highest level since the fourth quarter of 2009, when they reached 4.95 million as buyers responded to tax incentives.

Optimism also seems to be returning at the luxury end of the market, with foreign buyers now taking more of an interest in high-end US residential property.

According to Knight Frank, prime prices in Manhattan and Miami increased by 6.5% and 35.1% respectively in the two years to September 2012. Foreign demand, the growing status of luxury homes as a ‘safe haven’ and favourable exchange rates for some buyers, have been key drivers for this segment of the market.

Foreign demand for luxury homes in the US has not only increased in volume but the origin of buyers has diversified. In 2009, 109 nationalities searched for US luxury homes on Knight Frank's Global Property Search website; in 2012 this figure jumped to 164 with Europe, Latin America and Asia now heavily represented. Indeed, Miami’s house price growth is attributed to the city's emergence as an investment hub for Latin Americans seeking an accessible, safe and transparent market in which to invest.

Recent research suggests that optimism is growing in the US real estate market. In March 2013, the Bank of America revised upwards its house price forecast for 2013 from 4.7% growth to 8% growth. At around the same time, JP Morgan doubled its prediction for house price growth to 7%, and it anticipates 14% growth by the end of 2015. It remains to be seen though whether reality meets the banks' expectations.


On the face of it the UK property market would also appear to be in its healthiest state since the downturn. According to figures released on May 21, 2013, by the Office for National Statistics, in the 12 months to March 2013 UK house prices increased by 2.7%, up from a 1.9% increase in the 12 months to February 2013. However, this headline figure masks wide regional variations, and recent house price rises in the UK have been concentrated London and the south east of England, save a few other isolated pockets.

The year-on-year increase reflected growth of 3.0% in England and 1.2% in Wales, which were offset by declines of 1.7% in Scotland and 2.0% in Northern Ireland. Annual house price increases in England were driven by a 7.6% rise in London and a 3.3% increase in the South East. Excluding London and the South East, UK house prices increased by just 0.6% in the 12 months to March 2013.

In March 2013, prices paid by first-time buyers were 1.3% higher on average than in March 2012. For owner-occupiers prices increased by 3.2% for the same period.

When looking at the UK property market, London can almost be viewed as a separate economy, and while prices have generally gone down or stagnated in most parts other country, there has been steady growth in London prices, underpinned by foreign demand.

According to Knight Frank, the weak pound has merely served to make prime property in central London even more enticing to foreign investors seeking safe havens and will continue to do so until 2018.

Prime Central London (PCL) property prices rose 0.7% in April, and stand 17% above their March 2008 peak in sterling terms. For those Euro denominated purchasers seeking an investment outside the Eurozone, PCL prices have risen 9%. However, prime London homes for US-dollar denominated buyers are currently 11% below their 2008 level, and these buyers will continue to see a significant discount on London property, according to Knight Frank.

Overseas buyers accounted for 52% of all homes valued at GBP2m or more sold in central London between March 2012 and March 2013.

There are early signs that the choke hold on the UK property market placed by restrictive lending practices is beginning to be released. The Council of Mortgage Lenders (CML) estimated that total gross mortgage lending rose to GBP12.1bn in April, up 4% on March's figure and 21% higher than in April 2012. However, it is too early to say at the time of writing whether the recovery in the mortgage market will be sustained, and the economy of the UK, even though it isn't in the troubled eurozone, remains very fragile. What's more, the CML says that it would be easy to misinterpret April 2013's figures against last year when a temporary stamp duty concession expired and house buying activity fell.


Ireland's economy has been one of the very few in the eurozone to have grown recently. Unfortunately, cautious optimism over the country's economic prospects has not yet filtered down into the property market, which some economists predict will take many years to fully recover.

In Ireland, prices more than doubled between 2000 and 2006, and by 2007 the International Monetary Fund (IMF) was warning that the Irish housing market was becoming dangerously overvalued. Inevitably perhaps, the market collapsed, almost taking the country's banks, over exposed as they were to property, with it. By early 2012, house prices were back were they were in 2000.

Ireland's Central Statistics Office, which compiles a monthly report on the state of the property market, does not offer much optimism to those buyers now deep in negative equity or hoping for a quick turnaround in fortunes. In the year to March, residential property prices at a national level, fell by 3%. This compares with an annual rate of decline of 2.6% in February and a decline of 16.3% recorded in the twelve months to March 2012.

However, the figures do suggest that the rate of decline is slowing. Residential property prices fell by 0.5% in March 2013. This compares with a decrease of 1.5% recorded in February. Prices were unchanged in March 2012.

There also may be signs of a tentative recovery in the Irish capital, Dublin. Here, residential property prices fell by 0.8% in March but were 1.4% higher than a year earlier.

The price of residential properties in the rest of Ireland (excluding Dublin) fell by 0.3% in March 2013 compared with a decline of 0.6% in March 2012. Prices were 5.8% lower in March 2013 than a year earlier.

In March 2013, House prices in Dublin were 55% lower than at their highest level in early 2007. Apartments in Dublin were 62% lower than they were in March 2007. Residential property prices in Dublin were 56% lower than at their highest level. The fall in the price of residential properties in the rest of Ireland is somewhat lower at 49%. Overall, the national index is 51% lower than its highest level in 2007.

Ireland is on schedule to exit its EU/ECB/IMF-funded bail-out programme on schedule at the end of 2013, and the country's economy appears in better shape than many of its counterparts in the eurozone, despite high unemployment. However, it will be a long time before confidence is restored in the Ireland's real estate market, and a recent Central Bank study concluded that it could take up to 18 years for Ireland's property market to fully recover from the crash.

Hong Kong

Hong Kong is an example of a market where local factors have dictated the movement of property prices, and it has been out of step with wider global trends for long periods over the last 15 years. While house prices in the US, Europe and Australia rose sharply in the decade or more prior to the global financial crisis, Hong Kong's property market entered a slump in the aftermath of the Asian financial crisis of the late 1990s, reaching a historic low in 2003. The market then recovered, before stuttering again at the outset of the global financial crisis in 2008/9. Since recovering from this dip, prices for apartments and houses in Hong Kong have soared, driven partly by an influx of speculative money from China and other foreign investors.

While many markets were in reverse in 2009, property prices in Hong Kong surged by 28.5% over the year, followed by a rise of 21% in 2010, 11% in 2011 and 23.6% in 2012, prompting the IMF to warn recently that a property market bubble represents the SAR's main economic risks.

Hong Kong's situation isn't helped by the fact that a population of 7 million people is crammed into a small peninsula little more than 400 square miles in size, and land for building new homes is therefore at a premium. The Government cannot do much about this problem, but it is trying to curb speculation in the property market in other ways, notably by increasing taxation and tightening lending criteria.

On February 22, 2013 Hong Kong’s Financial Secretary, John C Tsang, announced that the Government was to launch a new round of increases to stamp duty rates for both residential and non-residential properties, together with prudential supervisory measures for mortgage lending and insurance being undertaken by the Hong Kong Monetary Authority (HKMA).

In a statement, Tsang said that: “In an environment of persistent, ultra-low interest rates and abundant liquidity, the local private property market continues to be exuberant. It has been dominated by a firm expectation that property prices will continue to increase. The risk of an asset bubble is increasing.”

“The property price increased by 2% in January, and the momentum is continuing this month. In fact, prices have increased by 120% compared to the recent trough in 2008,” he added. In addition, “the price of non-residential property has also soared. In 2012, the price of retail space surged by 39%, office space by 23% and factory space by 44%. The number of transactions has also increased.”

The two measures introduced by the Government on October 27, 2012, when the Special Stamp Duty (SSD) rate was increased and its restriction period was extended to three years, and the 15% Buyer's Stamp Duty (BSD) was introduced on resident properties purchased by those who are not Hong Kong permanent residents (HKPRs), did help to cool down the residential property market towards the end of 2012.

Transactions in November and December 2012 were seen to reduce sharply as speculative activities and non-HKPR demand subsided. However, Tsang concluded that the continued price inflation early this year “suggest to me that we need to introduce a new round of measures to further cool down the property market.”

With effect from February 23, 2013, the Government has, therefore, increased the cost of property transactions generally by doubling across the board the rates of existing ad valorem stamp duty applicable to both residential and non-residential properties. For transactions valued HKD2m (USD258,000) or below, the stamp duty will increase from HKD100 to 1.5% per cent of the consideration of the transaction.

Exemptions have been granted similar to those available in the existing SSD and BSD regimes. The new stamp duty rates will not apply to HKPR buyers who are not beneficial owners of any other residential property in Hong Kong at the time of acquisition of a residential property.

Secondly, while stamp duty was charged when a conveyance on sale of non-residential property is executed, the arrangement has been amended so that stamp duty is charged on an agreement for sale and purchase of a non-residential property. This amendment will standardize the stamp duty regime for both residential and non-residential property transactions.

Tsang believed that “the two new measures, together with the enhanced supply of flats, will help cool down the overheated property market,” both residential and non-residential. However, Hong Kong’s Chief Executive, C Y Leung, emphasized that “the Government will continue to monitor the property market. If the market continues to get overheated, we will introduce further demand-side management measures in a timely manner.”

The stamp duty changes were taken simultaneously with housing finance measures announced by the HKMA, which issued tougher guidelines to banks in a new round of prudential supervisory measures on their property mortgage business.

In stress-testing mortgage applicants’ repayment ability, banks are now required to assume a mortgage rate increase of 3%, instead of the previous 2%, applying to all mortgage loans for residential, commercial and industrial properties; the maximum loan-to-value (LTV) ratios of mortgage loans for all commercial and industrial properties is lowered by 10%; and the maximum LTV ratio of mortgage loans for standalone car park spaces is set at 40% and the maximum loan tenor at 15 years.

In addition, the Hong Kong Mortgage Corporation Limited has revised the eligibility criteria for the Mortgage Insurance Programme (MIP). Previously, properties with value at or below HKD6m were eligible for the maximum MIP cover of 90% LTV, but, after the revisions, only mortgage loans of properties with value at or below HKD4m are now eligible for that maximum.

Properties with value above HKD4m and below HKD4.5m are now eligible for MIP cover up to HKD3.6m, being 80-90% LTV; while properties with value at or above HKD4.5m are only eligible for a maximum MIP cover of 80% LTV. The cap on the value of properties under MIP will remain unchanged at HKD6m.

The Government's twin strategy of increasing property taxes and tightening lending criteria appears to have succeeded in cooling the real estate market by significantly reducing the number of property purchases.

Hong Kong's Land Registry recorded 4,387 sale and purchase agreements for all building units in April 2013, down 35.9% on March, and 59% year-on-year; and the total consideration for those agreements stood at HKD31.9bn (USD4.1bn), a 28.3% decrease on March and 47.6% annually. The public made fewer than 376,400 searches of land registers during the month, 6.7% down on March, and 9.3% less year-on-year.

In mid-2013, house prices have yet to fall in any meaningful way in Hong Kong, but economic commentators are now lining up to predict when this market will crash. The law of economics dictates that there must be some sort of correction, but some in Hong Kong's property business now fear that the Government may have applied the brakes a bit too hard.


For several years, the economy of Dubai racked up almost miraculous rates of growth that regularly exceeded double figures. However, the economic downturn and the subsequent property market correction proved that not all that glitters in Dubai is gold. As was the case in many overbought markets, Dubai gorged itself on an abundant supply of cheap credit. But confidence in Dubai among international investors took a severe blow after Dubai World, the city-state's real estate vehicle, announced a debt moratorium for at least six months in November 2009. At the time, the total debt of Dubai World amounted to USD59bn, and it is was unable to finance one small short-term component of that, falling due in December 2009. The news however, sent shockwaves across the world's stock markets, which tumbled as a result.

By the start of 2012, property prices in the once-booming emirate had shed about 50% since the market hit a peak in late 2008. However, the market showed signs of recovering in 2012, and this has been sustained into 2013.

According to Jones Lang LaSalle's (JLL) overview of the Dubai real estate market for the first quarter of 2013, all sectors of the market are positioned in the recovery stage of their market cycle for the first time since mid-2008.

A major factor depressing the property market in Dubai was an over-supply of real estate as new residential and office developments struggled to find buyers. Things appear to be changing however with the Government predicting stronger economic growth and investor confidence seemingly on the rise.

A number of major projects have been announced recently, the most ambitious of which is the Mohammad Bin Rashid City which includes the world's largest shopping mall, around 100 hotels and a Universal Studios theme park, which is being developed over the coming decade. Other major developments launched recently include the AED6bn Bluewaters project, a mixed use development off the coast of Dubai; a AED1bn (USD270m) four-tower hotel and hotel and residential complex in the Downtown area which includes 540 hotel rooms and 1,400 services apartments; and the 100,000 square metre Nakheel Mall.

The total residential stock in areas monitored by JLL stood at around 357,000 in the first quarter of 2013. Around 2,200 residential units were handed over in the first three months of 2013 including Spirit Tower in the Sports City, Lakeside Tower in the Jumeirah Lakes Towers area, Bay Central in Dubai Marina and the Al Furjan Villas by Nakheel, developer of the famous Palm Islands and The World offshore residential projects. A total of 28,000 dwellings are expected to be completed in 2013, with a further 40,000 residential units scheduled to enter the market over the next two years.

Data from the Dubai Land Department shows that GCC nationals invested AED17.7bn in Dubai's real estate market in 2012, with UAE nationals the biggest group of investors, spending AED13.3bn. Foreign nationals also continued to invest in Dubai's market, including Indians (AED9bn), Britons (AED5bn), Pakistanis (AED4bn) and Iranians (AED3bn).

As to prices for residential property, the REIDIN general Residential Sale Index was up by 18% year-on-year at the end of the first quarter of 2013, with the villa sale price index and the apartment sale price index gaining 17% and 18% respectively over the year. Both segments of the market remain below their 2008 peak values recorded in the third quarter of that year (8% and 22% respectively).

However, while established residential communities in central Dubai are expected to see further price growth in 2013, JLL cautions that developments in more remote areas will need more time before seeing increased demand and price performance.


House price inflation in France was already on a steady three-year long decline when the financial crisis struck in 2008 and prices plunged by some 10%. The market rebounded strongly in 2009, however, and prices rose by 4.3% during 2011, according to the National Institute for Statistical and Economic Studies. These house price movements now look like temporary peaks in what is turning out to be a longer down trend however.

A couple of years ago, figures suggested that the French property market remained particularly strong in areas favoured by foreign buyers. According to independent UK regulated mortgage brokers, research produced by the state-regulated Notaires de France (conveyancing lawyers) and mortgage bank BNP Paribas revealed that in the 12 months to the end of June 2011, prices rose in all of the key areas favoured by UK buyers, namely Paris, the Cote D’Azur and Bordeaux regions.

The study revealed that prices rose the strongest in Paris, which recorded a 23% increase in prices and a 2% increase in the volume of sales, whilst prices in the Bordeaux area rose by a more modest 3.5%. Activity in Provence and the Cote D’Azur was also encouraging, with a 6% rise in property prices over the 12 months period in question.

However, nominal house prices fell by 1.1% year on year in the third quarter of 2012, and by 2.7% in real terms, although prices remained static in the Paris region where they only declined by 0.2% in the fourth quarter of 2012. Total transactions are falling more sharply, and new housing sold plunged by 23.7% to 20,530 units in September 2012 from 27,335 units in September 2011.

Driven by the weak economic environment, including rising unemployment and decelerating wages, house prices are expected to fall by 5% in both 2013 and 2014, according to Standard & Poor's.

"We think weak business confidence, fragile household consumption as a result of a weaker labour market, and increases in income taxes will keep the economy at a standstill and the housing market depressed in 2013," the ratings agency said at the start of 2013. "Looking at this year and next, with the unemployment rate expected to reach 10.7% in 2013, confidence among potential buyers is likely to remain low."

Some are more optimistic, hoping that mortgages being offered at historically low interest rates will help to revive the market. French mortgage broking specialists reported in February 2013 that with Euribor rates touching some of their lowest ever levels, mortgages are available in France from 2.90% for those with a 40% deposits. For those seeking larger loans of over EUR100,000, rates can be even lower – 2.40%, with 10 year fixed rate loans available from 2.80%.

However, S&P warns that its prediction of a 5% fall in houses prices in 2013 and 2014 represents a "relatively benign correction" after a long period of continued increases between 2000 and 2007 (10% per year on average). "Indeed, we believe that soft sales transactions will more directly reflect the weak overall economic environment."


House prices in Spain have fallen by almost one third since hitting their peak at the end of 2007. Unfortunately however, this is a market that remains in decline.

In September 2012, the IMF noted in its annual report on the Spanish economy that house prices in Spain are still overvalued and "potentially by a significant margin." This conclusion suggests that prices will continue to fall in the short to medium-term at least. Indeed, with a large stock of unsold housing and a flood of repossessed properties entering the market, supply looks likely to outstrip demand for some time to come. According to the IMF, between 700,000 and 1m unsold homes were on the market in 2012. However, other source put the figure even higher; Madrid consultants RR de Acuna said last December that there were almost 2m properties waiting to be sold.

Unfavourable economic trends will only exacerbate the problem, and high unemployment (now around 25%) coupled with the Government's fiscal consolidation policies are also fueling the house price plunge in Spain.

S&P anticipates that it will take four more years for supply and demand to balance out in Spain's housing market, with prices expected to fall a further 20%, although the ratings agency cautioned that there could be "some degree of overshooting in house prices" before they return to their long-term

RR de Acuna anticipates some of the largest house price falls to occur in Spain's largest cities, with prices in Madrid likely to fall by another 30%. However, prices in the popular holiday resorts where many expats – mostly British – bought properties during the boom, could continue to fall for another decade before the market rebalances, the firm warns.


After all the negatives, there is one bright spot on the European real estate map and that is Germany.

While home prices in most other European markets are falling or stagnating, German residential property prices are rising. After growing modestly between 2010 and 2011, housing prices gained momentum in 2012, rising by an estimated 8.6% year on year.

There has been little correlation between house prices in Germany and other mainstream European markets for a number of years. Between 1999 and 2008, a time when house prices were rocketing in many parts of Europe, they actually went down in real terms in Germany. This can be partly explained by an over-supply of new housing in the aftermath of reunification when the Government offered subsidies for owner-occupiers (these have since been removed), and the market has taken several years to rebalance itself. But now, with with incomes having risen and unemployment having fallen on the back of an export-driven economic recovery, and with interest rates at historic lows, German homes are becoming more affordable than at any time in the recent past. These factors therefore are expected to sustain rising house prices in the near future.

S&P has calculated that the German housing market is undervalued by 16%. However, the Budesbank has already expressed concern at the prospect of the market overheating, and has hinted that measures might be put in place to restrict lending if it deems that house prices are rising too fast, although this is a development that analysts see as unlikely within the next few years.

To Buy Or Not To Buy? A Basic Guide To International Property Investment

If you are in the right place at the right time, investing in real estate can be one of the most profitable and enjoyable forms of medium to long term investment there is. Depending on your circumstances, international real estate investment may prove preferable, for a number of reasons, despite the additional challenges it can sometimes pose. Diversifying your investment portfolio by buying property in several different countries, for example, can help to cushion you against downturns in any one particular market. Even if you cannot afford to do this, you may find that you will be able to snap up an incomparable bargain in an up-and-coming country which would never have been available in your country of residence. (Unless you happen to have the good fortune to be resident in a newly popular emerging market country, of course!)

Now, if you decide that international property investment is for you, there are several different ways of going about it. Those with neither the time nor the inclination to become landlords, or who simply want to diversify a top-heavy portfolio, might choose to invest indirectly, using one of the many real estate related funds available. Ground rent funds, for example, are proving increasingly popular with investors, and offer a relatively low risk and secure investment with the possibility of high returns. As with all mutual fund investments, there are specific advantages and disadvantages, but if you are interested in the growth possibilities in this market and would prefer a less 'hands on' approach, then this may be for you.

On the other hand, you may not even have an investment portfolio - you may just be looking for somewhere nice and sunny to retire to. Or you may be an expat looking to supplement your income. Or you might have been relocated by your employer, and need somewhere to live. Or… well, the list goes on. There could be any number of circumstances, both personal and financial, driving you to consider investing in property overseas.

International mortgages - Do I need one?

One of the primary considerations, when purchasing property either domestically, or on an international level, is raising the necessary amount of money. Unless you happen to have enough ready cash just lying around (down the back of the sofa, for instance…), chances are you will need to take out a mortgage. There are several options:

1) Taking out a mortgage with a local bank. You may, however, find yourself constrained by exchange control rules (where they still exist). Even in jurisdictions where exchange controls have been lifted, such as Spain, you may find that domestic banks and building societies will charge non-resident foreign nationals higher rates of interest.

2) Taking out a mortgage or loan from a bank or building society in your country of origin.

3) Taking out the mortgage offered by the developer. Sometimes, with new complexes, developers will offer their own mortgages in order to increase sales

4) Taking out a mortgage with an international institution. Even if you are confident in your understanding of the processes involved in purchasing property in your country of choice, this is probably the most sensible option, for the simple reason there are likely to be issues involved in dealing with an expatriate client which a local provider may not have the expertise to cope with.

There are a growing number of international mortgage brokers and relocation specialists offering international products tailored to meet the needs of expatriate property investors, and although it is possible to go it alone, you may find that enlisting the services of a professional company experienced in dealing with international markets eases a purchase considerably, as they are likely to be well versed in the processes and legislation applicable to non-resident purchasers, and can often mediate between yourself and the local entities involved.

What sort of mortgage?

There are several different sorts of mortgages available, so you should really shop around to make sure that the international mortgage broker or IFA you choose to handle your affairs offers a wide range of products, from a varied group of international providers. Below is a basic rundown of the different types of mortgage available, although not necessarily all for your country of choice, so you need to check:

1) Repayment mortgages. With this type of mortgage, you pay a little of the interest and a little of the capital off each month, so that at the end of the term, the debt has been repaid completely, and the property is yours. Although in the early years, very little of the capital is repaid, as the amount of capital owed decreases, so does the amount of interest which accrues, so towards the end of the term there is a kind of 'snowballing effect' in terms of the amount of capital which can be paid off at a time. This is generally considered the safest bet in terms of mortgage loans, although it is usually more expensive than an interest only mortgage.

2) Interest only mortgages. With one of these, your payments to the lender simply pay off the interest on the loan, and the capital is paid off at the end of the term. Monthly payments are (obviously) lower than they would be for a repayment mortgage, and the idea is that you put the money you save on repayments each month into an investment fund, so that by the time the term ends, you will have accumulated enough to pay off the mortgage. Or that's the theory. If your investments do well, you could be in a position to repay the mortgage early, or have some money left over at the end of the term. However, in order for that to happen, your investment fund needs to bring you returns which are higher than the interest you are paying on your mortgage, otherwise there will be a shortfall at the end of the term.

3) Endowment mortgages. These used to be used quite a lot in conjunction with interest only mortgages. They are designed to guarantee that if you die before the end of the term, the mortgage will be repaid, and to provide a means of paying off the capital owed at the end of the term. However, there is no guarantee that an endowment will repay the loan in full at the end of the term, and as with many pensions and life assurance products, there are high 'front-end' costs. Where there is preferential tax treatment for life assurance premiums they may still be of some use, but as the majority of expatriates are excluded from the benefits of domestic pensions investment, they are rarely suitable.

Usually, international mortgage providers will offer both repayment and interest only mortgages at fixed, variable, capped and sometimes discounted interest rates, all of which are fairly self explanatory, and have specific benefits and disadvantages.

International home-owning - The logistics…

Several of the problems you may encounter if you decide to purchase property in a country other than that in which you are resident are likely to be logistical. Okay, so you can afford to take time off to find a property in your country of choice, and maybe even visit a few times a year, but that is likely to be all. This is where designated international organisations come into their own.

For example, in Spain, the completion of a mortgage must take place in front of an appointed notary, and all parties to the purchase including the vendor, lawyers, the buyer, and a representative of the lender. However, if you are unable to be there due to previous commitments (or simply geography!) an international broker should be able to help you obtain a power of attorney, allowing someone else to sign on your behalf.

Renting your property out when you are constantly on the move can be a bit of a headache, but hiring a letting agent qualified in dealing with international clients could take the pressure off. They can help you find suitable tenants, prepare a letting agreement, take the security deposit, deal with utilities bills, collect the rent (the important bit!), visit the property on a regular basis, check empty properties, and undertake property maintenance during a tenancy.


Ignoring taxation (which we deal with in more detail below), and quite apart from the cost of the mortgage itself, there are other expenses to bear in mind when arranging a mortgage for your investment property, and these vary considerably from country to country. For example, in France, the fee level can be affected by the age of the property (as newer properties attract lower charges), the number of people involved, and how many outside agencies (e.g. estate agents, lawyers, brokers, letting agencies) are involved.

The tax implications of international property investment

The tax implications of your foreign real estate investment will vary in complexity and impact according to where it is located, and to a certain extent, what you intend to do with the property when you have purchased it. As a general rule, in the majority of countries if the tax authorities believe that the purchase was made as a 'commercial' investment (i.e. if you habitually buy, renovate, and sell on, or if you have bought undeveloped land with a view to building a housing complex or leisure facility), they will view you as a property dealer, and tax your investment accordingly at a higher rate.

Where taxes are levied on international property investment, they will usually fall into the following categories:

1) Taxes on the purchase, acquisition or transfer of the property or land, such as capital acquisitions tax, inheritance tax, stamp duty and property transfer tax.

2) Taxes on the ownership of and/or residence in the property, such as local and national property taxes, and land tax.

3) Taxes on rental income. (If you choose not to live in the property, be aware that there may be additional taxes imposed on non-resident or foreign landlords. Not necessarily devastating, but still a factor to be considered if buying to let overseas.)

4) Taxes on disposal of the property, such as capital gains tax, gift taxes, and death duties

As previously stated, property taxation regimes vary widely from country to country, and you may feel that low, or no-tax jurisdictions are the ideal choice for you. However, in some (although not all), due to limited resources and space, property investment opportunities are limited only to the very wealthy, who must be willing to contribute substantially to the local economy, and purchase luxury real estate. Other jurisdictions limit the number of foreign nationals permitted residence or work permits in order to maintain the standards of living, and protect the employment chances of existing residents.

Governments in non-tax haven countries tend to impose fewer restrictions on property purchase for investment or residential purposes by foreign nationals. However, in such countries, the likelihood is that you will face more taxes on your investment. Some property investors choose to purchase international property via an offshore company or trust in order to bypass some of the taxes levied in high tax countries, and although this can be a valid option, it is not suitable in all circumstances. We will discuss this in more detail later.

Where you decide to purchase property is, in the final analysis, a personal choice, and will need to be based on your circumstances, resources, and eventual goals. If you have your heart set on retiring to a beachfront house in the Bahamas, you are unlikely to be satisfied with a one-bedroom apartment in Cyprus. If, however, you are looking to subsidise your income by providing affordable housing to expatriates and other professionals, the latter would be ideal. It all depends…

Although tax shouldn't necessarily be the most important consideration when choosing a property, there is no denying that it's certainly up there at the top of the list for most people.

Offshore Companies and Trusts

The country in which you choose to locate your property (as well as your country of residence if different) will almost certainly have an impact on the amount of tax payable by your estate in the event of disposal of the property, or of your death.

In order to alleviate some of the tax consequences involved in the ownership of foreign real estate in high tax countries, some investors may choose to purchase property through a non-resident company or trust, often established in a low tax jurisdiction. Trusts in particular can sometimes be effective in protecting the investors and their beneficiaries from punitive estate and death duties. In countries where there are no provisions in the country's tax legislation to facilitate the taxation of the underlying assets of a foreign company, an offshore company can often be a tax efficient and effective vehicle in which to hold property investments.

However, although in some countries (for example Spain, Portugal, and Australia) non-residents are encouraged to make their real estate investments through an offshore company, this form of tax planning may not be effective (or even possible to implement legally) everywhere, so again it depends on your chosen location. The United Kingdom for example, has introduced a 15% stamp duty on residential property purchased by offshore companies. This measure, announced in the 2012 Budget, is designed to discourage the use of offshore structures for the purposes of avoiding tax on real estate purchases.

Although double tax treaties are of more interest to corporate and commercial international property investors, they can sometimes have an effect on the amount of taxation that an individual's real estate investment income is subject to, especially if they are resident in a country which taxes world-wide income, or are planning to purchase property in a country which does this. Certain double tax treaties may enable you to claim tax paid on rental income from overseas against your domestic income taxes, or to receive dividends at a lower rate of withholding tax. However, the number of different tax treaty models, and the sheer volume of treaties in force on a global level make it impossible to give a comprehensive picture of the likely consequences of a double tax treaty in any given circumstances. We would therefore strongly recommend that you take advice as to the potential implications from a qualified professional before making a decision as to the location of your investment property.

So - Is it worth it?

The answer to this question will depend on your personal circumstances, what you hope to achieve by investing, and how much you can afford to spend. There is a vast spectrum of opportunities available within the property investment field, ranging from the ridiculously expensive to the nicely affordable, and with the help of an international broker or IFA, you should be able to find something suited to your tastes and pocket.

Investing in a 'real' asset, as opposed to an intangible one can sometimes provide more stability, and in spite of recent falls, property tends to hold its value better than other commodities. You do need to be aware that the overall liquidity and health of the property markets, and possible fluctuations in interest rates and inflation can affect the value of your investment, but generally it is possible to achieve a very healthy return on your investment.

But – and it is a big but – this is a very special moment in the history of housing markets. We cannot offer advice, and don't do so, but right now you may want to exercise especial caution and patience. Of course, if you are buying a property to live in for the remainder of your days, you may feel that price is unimportant. Anyone who expects to see a profit on their investment, however, may take a different view.

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