London still outperforms the rest of the country

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at is happening to London prices at the moment?
A <a href="/house-prices">London property</a> continues to outperform the rest of the UK market. The latest official data showed that average house prices across the capital are up 5.1 per cent year on year, compared to a one per cent fall across England and Wales. The average price of a home in Kensington & Chelsea climbed above £1m in April, the first time this has happened in a London borough. There is optimism going forward too – homeowners in the capital are more upbeat than those in other regions that the value of their home will rise over the next 12 months, according to the latest monthly Knight Frank/Markit House Price Sentiment Index.

Prime central London property prices have also risen strongly over the last year. The latest Knight Frank data shows that luxury homes in central London have risen in value by more than 10 per cent over the last 12 months and are now at a record high.

Q Why are luxury home prices rising?
A There is strong demand for homes in London, both from UK and overseas buyers. This demand, coupled with limited supply, is helping prices to advance.

The political and economic environment both in the UK and overseas is also playing a part. It is now a well-worn phrase, but there is no doubt that bricks and mortar in London is seen as a “safe haven” investment class, especially amongst those keen to diversify into sterling denominated assets.

There has been increased interest from buyers from the Eurozone during the financial and economic crisis which continues to dominate in the single-currency area. Interestingly, Greek buyers, who were particularly active last year, have been less dominant in the early months of this year, while Italian buyers have stepped up their activity markedly, overtaking Russian buyers as the top overseas purchasers in Prime Central London in the first three months of the year. French interest in prime central London property has also been high. There was a surge in searches on Knight Frank’s global website for luxury homes in the capital, especially worth £5m or more, when Francois Hollande, now the French president, announced his plans to increase tax to 75 per cent for the top earners in February.

Q How does the rise in value in luxury property in London compare to elsewhere?
A Prime central London saw the biggest price growth of any prime European property market in the year to March, with Manhattan in New York just behind with 9.2 per cent growth in prices. However both were outpaced by the 14 per cent rise luxury property prices in Miami and Jakarta, while all cities were overshadowed by a 25 per cent rise in luxury property prices in Nairobi, albeit from a comparatively lower base. At the other end of the scale, luxury property prices in Mumbai have fallen by around nine per cent in the year to March, reflecting the cooling measures introduced by policymakers in the region.

Q Are the recent stamp duty changes having an impact at the top of the market in London?
A In March’s budget, the Chancellor increased the stamp duty charge on homes worth £2m and more from five per cent to seven per cent for individuals buying a property. The stamp duty charge was raised to 15 per cent for some of those buying property through a company structure.

The move has had little effect on prices so far, but there is emerging evidence that activity levels are being affected. The number of exchanges for properties worth £2m in May this year was 25 per cent lower than in May last year, although there was a rise in transactions of properties worth less than £2m.

Buyers who traditionally chose to purchase through a company structure are examining their options, especially as some elements of the new regime – an annual charge and the widening of the capital gains tax levy – are still under consultation and are unlikely to be finalised until next year.

Q What about the rental market?
A Average rents across London have risen by more than 4 per cent over the last year, reflecting the continued demand for rental property given the constraints in mortgage lending which is proving an insurmountable barrier for many would-be first-time buyers.

The dynamics of the prime rental market in London are slightly different, as more properties have come onto the market recently, diluting demand somewhat and causing recent monthly declines in rents. Yet average rents are still just one per cent below the record high set in September last year.

Demand may well pick up in the coming months as families start thinking about where they would like to be located ahead of the new school year, and overseas students (there are more than 100,000 overseas students studying in London) start to arrive for the new University term in October.

Q What happened to the “Olympic effect”?
A Demand for short-term rentals has so far been more muted and localised than many were expecting. The release of thousands of hotel rooms previously block booked by the London Organising Committee for the Olympic Games (LOCOG) earlier this year means that those looking for accommodation have had more choice.

Q What’s on the cards for the rest of the year?
A We see prices in prime central London rising five per cent this year if the Eurozone stays intact. However a disintegration of the Eurozone may actually push more capital into London’s bricks and mortar in the aftermath of the break-up amid a capital flight to safety.