Central London property prices continued to rise in October, with speculation regarding bonus money encouraging buyers to act quickly. The latest Knight Frank Prime Central London Index showed prices in prime central London grew by 2.1% in October ? the eighth consecutive month of price rises. Annual price growth in the area is at its highest level since June 1988 when prices were growing by 26.8%.

The current stable economic system is prompting Knight Frank to forecast continuing demand for prime London property into 2007. ?Should the economy continue to remain stable, with low unemployment and low inflation, demand for property in central London will continue at a very high level through the remainder of the year and well into 2007,? explained Liam Bailey, head of Knight Frank residential research. ?We are forecasting an additional 10% growth in prices in Prime Central London in 2007, and 12% for the most expensive properties.? Savills Research department agrees, adding there is no mechanism for house prices to fall at present. ?The sort of falls seen in 1989 and the early 1990s just aren?t on the cards at the moment,? said Yolanda Barnes of Savills Research.

Chronic supply shortages have been a persistent feature over the last 12 months, coupled with a strong rise in potential purchasers. ?Annualised price growth is expected to surpass 25% next month, in doing so taking us back 18 years to an era where prime property prices were growing by 26.8% in mid-1988,? Mr Bailey said. ‘This time last year, speculation regarding record breaking bonus payouts began to emerge after very strong performance in the City. It is estimated that last year?s bonus pool was in the region of £19 billion representing an increase of 16% on the previous year?s figure.’

Early indications, according to Knight Frank, suggest last year?s city bonus records will be broken, with over £20 billion paid out in early 2007. ?Taking into consideration the time lag between bonus announcements and pay outs, bonus season lasts from December through to April, but now appears to impact the prime London market from October (as bonus levels are anticipated) until July (when most deals have been put to bed),? Mr Bailey maintains.

Only interest rate rises could put a dampener on the London property boom. In the run-up to the Monetary Policy Committee?s (MPC?s) decision on UK interest rates this Thursday (9th November), Savills Research predicts a rise to 5% will not have a significant effect on the UK housing market.

‘We think that interest rates would have to rise to around 6.5% before house price growth would start to slow,? Ms Barnes explained. ?A significant external economic shock might provide one but the next rise in interest rates is unlikely to be significant enough to precipitate falls. Our analysis shows that it would take interest rates of 6.5% to threaten our house price forecasts for the next 5 years?.

Savills forecasts for price growth are an average of around 7% per annum this year for the UK housing market as a whole.