Price growth in London is at highest rate for five years, according to Knight Frank?s latest survey. The Knight Frank Prime Central London Residential Index for May shows that prices in Chelsea grew by 11.8% in the first four months of 2006 and annualised price growth in prime central London is the highest since March 2001. Meanwhile, Knight Frank claims the demand and supply imbalance is the ?worst for a decade? with supply down by 21% compared to a demand increase of 43%.

Knight Frank?s Head of Residential Research, Liam Bailey believes the London housing market boom is not only continuing but strengthening. The last monthly price fall recorded by Knight Frank was in December 2004. The market boom has now reached a level where an additional 11.8% has been added to the price of a typical Chelsea property in a matter of four months ? an additional £14,978 per month, every month, for an average priced Chelsea flat (average price £507,724),? Mr Bailey explained.

According to Knight Frank the market is being driven by a growth in City employment and rising bonus levels. ?There is also an element of ?catch-up? taking place after the London market underperformed the UK average between 2002 and 2005,? said Mr Bailey.

Supply shortages, according to Knight Frank are caused by a ?complex network of potentially interrelated issues, acting to restrict the flow of properties to the market and lengthen the average turnover time?. These include high levels of investor ownership in certain parts of prime central London preventing the regular release of properties into the sales market and those moving up the property ladder retaining ownership of their former home, placing it in the rental market.

But Knight Frank also admits that rising property prices are placing affordability constraints on the lower end of the prime central London market, hampering homeowners from trading up their smaller, more affordable ?first? homes. ?As a result the supply of properties at the bottom end of the market is being squeezed?, said Mr Bailey.