Values for prime property in central London increased by 8.2% in 2005, according to Knight Frank?s Spring Residential Review. The rise is almost quadruple the growth seen in 2004 and the highest annual growth since 2001, prompting Knight Frank to label the prime London sales market as ?booming?.

In December Knight Frank noted a break from traditional end of year slowdown, with the number of transactions 13% higher than usual. ?The main reason why the market performed so well last year relates to very strong demand not just from UK residents but also from overseas buyers, illustrated by the fact that half of all properties bought above £2 million were sold to foreign purchasers,? explains Liam Bailey, head of residential research at Knight Frank.

According to Mr. Bailey, a shift in confidence during 2005 helped drive the market forward. At the start of the year the market was depressed but by June interest rates were on their way down and confidence levels began to rise.

A shortage of stock remains a significant feature of both the prime sales and the lettings markets. Knight Frank offices report a substantial register of applicants looking to buy and to rent. However, in general people are reluctant to part with their properties. Considerable price growth over the past decade, together with significantly higher transaction costs such as stamp duty and legal fees, has led people to make best use of the low interest rate environment by improving their own houses instead of moving, thus further restricting supply.

Knight Frank?s figures for 2005 also indicate that houses continue to outperform flats in terms of price. Although both have performed well, houses have seen 9.5% growth in capital prices and flats approximately 6%.

The success story of the prime central London market in 2005 proves it is one of the best performing property sub-markets. Although the area only represents a small proportion of the total UK housing market, it has wide influence and a strong performance in this market generally indicates a strengthening of the wider UK housing sector.

?The very strong performance of the prime central London market in 2005 underpins our forecast that London, and in particular in the top end of the market, will outperform in 2006,? says Mr. Bailey, ?Our forecast is that prices will grow by 7% in prime central London in 2006 compared to 5% for the overall Greater London market and 2.5% for the UK.?

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