Mainstream house prices tipped to outperform prime again in 2013

Residential property prices throughout most of Asia have risen strongly during the past decade, buoyed by rising incomes and higher wealth. Although some markets saw a correction in the immediate wake of the Lehman Brothers collapse in 2008, they soon recovered.

But a “startling trend” identified by Knight Frank, a leading London-based global property consultant, is that mainstream markets across Asia (excluding Japan) have outperformed the prime end of the market, especially during the past two years. The one exception is in Jakarta.

This trend is likely to continue — and in contrast to many other regions of the world, according to Nicholas Holt, Asia-Pacific research director, and author of the firm’s Residential Review for December.

Government measures to dampen asset price bubbles and broaden affordability have had the biggest impact on the most expensive properties, he wrote. These include restrictions on financing, the introduction of additional taxes for foreign buyers and penalties on early (speculative) sales.

For instance, loan-to-value ratios in Hong Kong are now limited to 50% for properties over HK$10 million ($1.28 million), and last October a 15% stamp duty was imposed on overseas buyers of residential property in Hong Kong. Home prices have almost doubled since the beginning of 2009.

“Many of these measures have targeted the high-end residential market, but more often they have been introduced to penalise multiple home owners at the expense of first-time buyers, which disproportionally impacts the prime residential markets,” wrote Holt.

Partly as a result of these official tactics, “an increasingly mobile, educated and well-travelled class of property owners in the Asian region” have turned to prime property markets elsewhere in the world. Indeed, the “lifestyle choice of having a second home abroad, for personal or for children’s educational use is proving to be one of the key narratives” of wealthy Asian buyers.

It also diversifies their investment portfolio into a luxury property whose price might have slumped, and could also prove to be a profitable currency play.

However, perhaps the most significant reason for the relative strength of the mainstream residential market is actually the behaviour of increasingly numerous and affluent middle classes in Asia.

The “absolute growth in the number of middle class, first-home buyers in developing Asia is staggering,” Holt pointed out. A property-buying group, reinforced by greater urbanisation and a movement towards smaller family units, is boosting demand. Yet supply often struggles to keep up with demand, as planning, infrastructure and land use issues often hold up development.

“The reality is that even though we are seeing a large number of prime buyers emerging, this number pales in comparison to the number of new entrants into the mainstream market,” according to Holt.

Of course, assuming that economic activity and wealth in the region continues to grow, the longer term “forecast for prime residential property remains unanimously positive”.