2012 saw a significant slowing of house price growth in central London despite strong international demand, as three and a half years of high growth leave average prime central London values 23.9% above their former 2007 peak. The market over £5 million stands even higher - at 32% above peak, according to latest analysis from international real estate consultant, Savills, as sales volumes at this level remain strong.

In the autumn of 2011, Savills research anticipated a slowdown in price growth for 2012 and the spring Budget provided the catalyst for this. Annual price growth in 2012 was at its lowest level since the beginning of the recovery in 2009.

After growth slowed to 0.6 per cent over the past three months, prime central London residential values have risen by an average of just 5.3 per cent this year. This is substantially lower than the annual growth of 21.3%, 6.7% and 14.2% per cent seen in 2009, 2010 and 2011 respectively. Prime central London price growth has totalled just 1.5 per cent in the last three quarters compared to 3.7 per cent in the first three months of the year, marking the Budget as the point at which the market entered a new phase.

In the past quarter, only Knightsbridge and Chelsea have continued to show price growth of 1.0 per cent or more, rising 1.9 and 1.0 per cent respectively. Along with Mayfair and Belgravia, these core prime central London locations have outperformed all others over the past five years, with Knightsbridge setting the pace, rising 8.6 per cent in 2012 to end the year 41.1 per cent above peak.

This reflects the fact that these central areas have continued to attract ultra wealthy overseas buyers in search of a safe haven store of wealth, with sales of super prime properties particularly in demand. Analysis shows that that despite the uncertainty caused by the tax changes which suppressed transaction levels in the £2m-£5m market, it is expected that 2012 will be a record year for the number of £5million+ sales in London.

In the first 11 months of this year, analysis by Savills suggests that there were 343 sales in the market over £5 million compared to 319 in the first 11 months of 2011. The total for the whole of 2011 was 352.

"London is an equity-driven, highly discretionary market and some volatility is inevitable at this stage in its recovery, particularly against the backdrop of wider global economic uncertainty," says Yolande Barnes, director of Savills world research. "We had therefore been forecasting a short-lived slowdown for some time, but were not clear until the Budget what the catalyst would be.

"Buyers should now expect price growth to hover around zero next year, particularly as the market absorbs the impact of increased taxation, but there are still clear global reasons to invest in the real estate assets of a mature market and confidently forecast renewed growth from 2014, totalling 25.6 per cent by 2017."

Price growth around London

Prime London is not all equal
There is further evidence of a market fuelled by overseas capital - whether through new buyer activity or a ripple effect as domestic equity is displaced out from the prime central locations - and a real difference between international big ticket trophy hunters and the yield-seeking investment buyers.

This is leading to discrepancy between the very core locations in prime central London and the outer prime zones, and between locations dominated by international equity and those predominantly reliant on domestic buyers.
In core locations, interest in large, high value trophy homes has boosted the value of super prime (£5m+) homes by 6.4 per cent this year and 31.2% since peak. "After a period of uncertainty post Budget, we expect overseas buyers - such as Middle eastern and CIS nationals - to build the extra cost of ownership in London into their calculations, now that the tax changes for properties over £2 million have been crystallised in the finance bill."

Very different international buyer behaviour is being seen in the East of City markets, where investor buyers, most notably from Asia, are buying lower value stock for income. This activity has absorbed much of the overhang of stock created by the downturn and the prospects for capital growth now look sound.

Without a significant injection of city bonuses, the more domestic markets of prime south west London and prime north London are likely to become more reliant on a spill out of demand from central London.

Fulham in particular - a good value alternative to neighbouring Chelsea - is showing the impact of rising international demand, with values up 2.8 per cent in the past three months, putting it ahead of all other locations. On average, prime south west London values rose by just 1.0 per cent in the quarter and prices in these largely domestic markets are now expected to be flat next year.

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