Luxury prices for the world's major cities are expected to slow by nearly half this year, from 3 per cent in 2015 to 1.7 per cent in 2016, according to the latest Knight Frank Prime Cities Forecast. The report said China's economic slowdown is mainly to blame, although rising rates in the US and a slowdown in other emerging markets will also add to the headwinds.
Knight Frank defines the "prime" or "luxury" real estate market as the most expensive 5 per cent of homes in each city.
"We're moving into a different environment where you won't see the level of wealth creation in China that you've seen in recent years," said Liam Bailey, global head of research for Knight Frank, the London based real estate firm.
China's slowdown is expected to hit its domestic housing market hard - as well as nearby markets in Asia favoured by wealthy Chinese buyers. Price growth in Shanghai is expected to fall by more than half, from 10 per cent in 2015 to 4 per cent in 2016. Hong Kong is expected to see prices fall by 5 per cent, making it the worst performing market, followed by Singapore, where prices are expected to fall 3.3 per cent in 2016.
Yet the top global luxury market in 2015 - Sydney, Australia - is once again expected to top the price list in 2016, despite the large number of Chinese buyers in Australia. Sydney is forecast to see prices grow by 10 per cent in 2016, slower than the 15 per cent growth it saw in 2015, but still the best in the world.
Bailey said that while Sydney has a large contingent of Chinese buyers, especially in new construction, demand from Australian buyers remains strong. And while China's slowdown will temper wealth creation in China, it could also drive more capital into certain overseas real estate markets, as the Chinese rich look for safer investments and better returns.
"What we've actually seen is that as you get more economic uncertainty within China, the desire of the wealthy Chinese and even the middle class to diversify their investments outside of China has increased," Bailey said. "It's a bit counter-intuitive but we're seeing more demand for money moving outside of China."
Along with Australia, the US is also likely to benefit from Chinese flight capital. New York is expected to see prices go up 5 per cent in 2016, according to the report, while Miami will see gains of 2 per cent. The US may also benefit from high prices and new, less wealth-friendly tax regimes in London.
"Buyers who were looking in London are now looking harder at New York and Miami and Los Angeles," Bailey said.
The question, he said, is whether those US gains will continue, given the potential for higher interest rates and a stronger dollar, which makes real estate more expensive for overseas buyers.
European markets are expected to remain weak, with Paris seeing price declines of 5 per cent in 2016 and Geneva remaining flat. Monaco is forecast to be a rare bright spot in Europe for 2016, with expected price increases of 5 per cent - due to its attractiveness to the global super-rich and limited inventory of real estate.
"Monaco's status as a private and secure retreat continues to appeal to the world's wealthy," the report said.