Higher interest rates exert pressure on luxury house prices
Making sense of the latest trends in property and economics from around the globe
3 minutes to read
Luxury house price growth around the world is slowing under the weight of higher interest rates.
Price growth in our basket of 44 cities in Knight Frank's Prime Global Cities Index slowed to 2.9% in the year through Q3, down from 3.4% in the first quarter and well below the 10-year average of 4.6%. Recent rate cuts have supported growth over the past few quarters, but the slowdown in annual growth suggests that further cuts are needed to sustain future price increases.
The European Central Bank’s rate cut in October, coupled with the Fed’s substantial cut in September and an anticipated reduction in early November, indicate that interest rate constraints on the global housing market will ease as we move through 2025.
A hotspot for price growth
A majority of cities (29 out of 44) saw prices rise compared to last year. This positive trend was similarly reflected in quarterly comparisons, with most cities (31 out of 44) reporting price increases over the previous quarter.
Manila continued to thrive, with remarkable growth of 4.6% over the past three months and an annual increase of 29.2%, driven by strong economic growth and rising consumer confidence. Tokyo, despite a 2.8% quarterly decline, maintained robust annual growth of 12.8%. However, with the Japanese Yen strengthening and the Bank of Japan among the few central banks expected to raise rates, the housing market may face slower growth in the coming quarters.
Dubai, a hotspot for price growth since the pandemic, is transitioning to more sustainable growth patterns. Prime residential prices have steadily increased by 0.5% over the past quarter, resulting in a total price growth of 16.9% over the past year. The emirate's remarkable performance is evident, with Dubai’s prime market soaring by an astonishing 190% since early 2020, outperforming all other cities in the index during that period.
Budget nerves
The UK's mainstream housing market is proving resilient, but Budget nerves are clearly weighing on activity.
Mortgage approvals for house purchases, a good indicator of future borrowing, ticked up by 700 to 65,600 in September, the Bank of England said yesterday. That's the highest since before the mini-budget and is in-line with the months leading up to the pandemic, but easing mortgage rates should support a fuller recovery during the months ahead.
Consumer sentiment has fallen to its lowest level since March ahead of the Chancellor's speech later today. There is a fair amount of nerves among the lenders too. Barclays announced a raft of mortgage rate cuts earlier this week, but other major lenders including Nationwide have been notching rates up, according to colleagues at Knight Frank Finance.
The Bank of England is very likely to cut the base rate by 25 basis points to 4.7% when the Monetary Policy Committee meets next week. Whether we'll see another cut before the end of the year is unclear - two thirds of economists polled by Reuters expect no move in December.
Finding a level
The South East office market continued to record consistent activity in the third quarter, with leasing volumes reaching 866,000 sq ft, in line with the 10-year quarterly average, according to Knight Frank's M25 & South East Office Market Report.
During the quarter, 79 occupier deals were completed, the highest number so far in 2024 and well above the long-term quarterly average of 63. Take-up in every quarter of 2024 so far has surpassed 800,000 sq ft for the first time since 2019. Consequently, take-up for 2024 year-to-date has reached 2.69m sq ft, more than a third ahead of the equivalent period in 2023 and is the highest total at this stage of any year since 2019.
Investment volumes totalled £237m, which is 70% above the same period in 2023 but still 65% below the 10-year quarterly average. Prime yields remained at 7.00%, with pricing at the top end of the market unchanged throughout 2024.
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