A changing market

Will the substantial rises in residential capital values seen in some cities prove sustainable?

18 September 2013, Words by Yolande Barnes


Our latest World Cities Review focuses on the shifting balance of the global property market. Download here.

The absolute gains in residential capital values in some world city housing markets have been very large in the past five years. This is particularly the case in ‘new world’ cities where residential capital growth has averaged 58% since 2008. There are some examples, for instance mainstream residential in Hong Kong, where growth has been even higher (103%) and in Shanghai (70%).

The question is whether this type of growth is sustainable. We have compared fundamental demand for housing, as revealed by rental growth, against the rate of growth in capital values. This analysis reveals that some capital value markets have risen substantially ahead of rental values and this indicates a possible investor bubble. Demand for assets has driven values ahead of the income that might be produced by a property.

Further analysis of this phenomenon looks at the annual income yield from housing in different cities and assesses whether these are high or low in relation to alternative forms of investment. It reveals that some cities are still very fairly valued, or even good value, for investors, producing substantially more income than is available from 10-year government bonds.

The ‘old world’ cities of Tokyo, New York, Paris and London stand out as looking fairly valued because gross yields are still at least 2.5 percentage points above bond yields. In these cities both rental growth and capital growth have more closely resembled each other.

Meanwhile, the ‘new world’ cities of Hong Kong, Moscow, Shanghai and Mumbai look expensive in relation to their rental markets as gross yields are well below the rates available from government bonds. This does not mean that capital values have to fall but does make it more likely that they will be subdued until rental growth raises yields.

The table below shows the current direction of travel in capital values, rents and yields.

The combination of these measures suggests how desirable or undesirable different markets might be to residential investors. By this measure Tokyo, with its improving rental outlook, slight capital value growth and stable yields looks to be one of the more sustainable prospects. New York shows similar promise although recent purchasing activity has pushed capital values substantially upward. However, yields have the capacity to fall much more before this city looks overvalued. Falling capital values in Paris may make this city look more like a good buy for those seeking income. Meanwhile London and Singapore are showing signs of an aging market despite continued capital growth and level rents.

The chart below shows how gross residential property yields differ from bond yields in each country and the direction in which rental growth is currently moving. It illustrates how a combination of relatively high yields and moderately upward rental growth makes the Tokyo and New York residential markets appear ripe for investment while moderately negative rental growth in Mumbai, combined with very low net yields, means that this market will be unlikely to see substantial investor activity and capital growth in the near future.



Subscribe to Savills research


Would you like to be notified via email about new property research?

Key Contacts

Yolande Barnes

Yolande Barnes

World Research

Savills Margaret Street

+44 (0) 20 7409 8899


Paul Tostevin

Paul Tostevin

Associate Director
World Research

Savills Margaret Street

+44 (0) 20 7016 3883