The $1.5 Million Studio

In the world's most expensive property markets, $1.5 million still doesn't go very far despite some softening in real estate prices

How much house can you buy for $1.5 million? Depending on where you look, it might not be very much.

Despite global economic concerns, the credit squeeze, and rising commodity prices, properties in the world's most expensive neighborhoods are still commanding ferocious premiums. While $1.5 million in Cleveland or Tampa would probably purchase a substantial house, with four bedrooms, a multicar garage, and maybe even such amenities as a swimming pool and media room, in London's Belgravia or on Manhattan's Fifth Avenue, it would buy you little more than a glorified shoebox.

Using data from London-based real estate group Knight Frank, identified the 20 most expensive markets in the world and what you can buy in those cities' prime areas with $1.5 million. In London, where at $6,191 the average price per square foot is the highest in the world, your $1.5 million would buy only a small studio in the smartest parts of town. In Venice, on the other hand, despite limited building space, your money goes a bit further, getting you a two-bedroom apartment or more near the Grand Canal. (Of course, in less illustrious neighborhoods, your money goes further still.)

Slower Growth, but Sustained Strength

And it looks as though, despite the general economic malaise, these top markets are likely to remain relatively strong for the foreseeable future, even if they won't see the extraordinary growth of the past few years. Liam Bailey, head of residential research for Knight Frank, says prime markets had a relatively good year last year but are "on the tail end of a boom."

For example, in the fourth quarter of 2007, prime real estate in once-booming Dublin fell 15% from the same period the year before, according to Knight Frank. Prices in other markets such as London and Tokyo continued to rise through 2007 but softened a bit this year. Luxury property prices in St. Petersburg at the end of last year were 38% higher than the year before, but that's nothing compared with the 95% price growth in 2006.

London remains one of the world's most robust markets, thanks in no small part to its position as the financial capital of Europe. Prices for prime real estate jumped 29% in 2007. But the city's strongest price category has narrowed from £1 million ($1.98 million) and higher to more than £10 million, Bailey says. In other words, only the very top of the market is still seeing growth.

The sustained buoyancy of cities such as London and Paris and resort areas like Monaco or Gstaad is partly the result of their appeal to newly minted millionaires from Russia, China, India, the Gulf states, and elsewhere. Like wealthy Americans and Europeans, they don't feel as affected by the changing economic conditions. In fact, many are actually helped by the downturn, especially in the U.S. where the dollar is trading at a discount to currencies such as the euro.

Confidence Issue

But even the most expensive markets aren't immune. "You see price growth at the very best locations. If properties are perfectly positioned, if they have no faults, if they are perfect, you will see perfect price growth," Bailey says. "Most markets are tailing off."

David Michonski, CEO of Coldwell Banker Hunt Kennedy in Manhattan, says the softening of international real estate markets is a "normal correction in a major long-term bull market that started 10 years ago." He adds: "I don't believe it's a function of the credit crisis. It's a confidence issue at this point.… Everybody in the world has been told that wherever the real estate markets are, they're going to fall."

In Tokyo, prices began to soften soon after the subprime problems in the U.S. came to light, says Ryuichiro "Drew" Iwanami, director of global business development for Japan Sotheby's International Realty. But Tokyo, which experienced a "mini-boom" from 2003 to early 2007, is also dealing with an oversupply of condos that were built in the low-interest-rate environment of the last few years, he says. The mini-boom followed Japan's real estate collapse in the early 1990s, when prices for some rural properties fell to 10% of their peak price. "You're beginning to see a slump in the sales of high-end condominiums…[and] the rate of price increases is stabilizing," Iwanami says. "You may see more of that in the next 12 months."

Still, the softening of real estate markets has at least one silver lining, especially in hard-hit cities such as Miami. Buyers from Canada, Europe, and South America are flocking to neighborhoods such as South Beach and Coral Gables, where home prices are tumbling. For Europeans, Miami's declining condo prices are "like Americans handing them the gift of the century," says Michonski. "The sun has not stopped shining. The beaches aren't any less white, and the whole thing costs them 30% or 40% less."

Check out the slide show to see how far $1.5 million goes in the world's most expensive luxury markets.

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