Prime London house prices have recorded an unprecedented two and a half years of steady annual growth between 0% and 10%, marking a period of stability not seen since our index was established in 1979.

Annual price growth across all prime London now stands at 4.7%. In the first three months of 2013 values rose 2.2%. This represented a noticeable increase on the 0.8% growth seen in the final quarter of 2012, as the market defied Labour’s mansion tax rhetoric. This said, double digit annual price growth has not been seen in prime London since the heady days of 2009/10.

Since then, we have seen sustained demand for prime London property from both wealthy Londoners and the 34% of buyers who are from overseas. Yet, with stamp duty increases keeping price growth in check, this has not resulted in overheating with noticeably less volatility than in some other prime world markets.

Growth in outer prime

Prime central London has marginally underperformed the wider prime London markets over the last 12 months, with total growth of just 3.0%. However prices in £5million+ market are still over one third higher than they were prior to the 2008 downturn, having been fuelled by international demand that has accounted for 67% of purchases.

By contrast prices in the prime markets of South West London are 17.6% above their former peak.

Over the past 10 years we estimate that over £3billion of bonuses from the financial and insurances services sector have been pumped into the markets of the boroughs of Hammersmith and Fulham, Wandsworth and Richmond. Both the recycling of historic bonus money from the City and the introduction of new bonus money from the West End have contributed to this performance post downturn.

Combined with a ripple of demand from central London this has led to annual house price growth of 5.6%, with 3.0% seen in the first quarter of this year alone.

Other prime locations popular among young financial sector renters such as St John’s Wood, Islington and Canary Wharf, have seen renewed interest from investment buyers. This has gone beyond the established trend of Asian investment in new build stock, though it has a distinct international component.

Forecasts

In the autumn of 2012 we anticipated price growth in prime London would flat line for 2013 due to the market facing a number of short term challenges, particularly the impact of increased taxation. However, as demand from both international and domestic buyers continued to focus on London, a steady rate of quarterly growth was seen in the first three months of this year.

This can partly be explained by the unexpected falls in the value of sterling, meaning London still looks relatively cheap on the world stage, particularly set against rises in the costs of buying and owning in other world cities.

Continued modest levels of price growth across prime London now look more sustainable. We gave a probability of 20% to our positive scenario for prime central London at the end of 2012. If this scenario were to occur, it would mean an increase in values of 4.0% over 2013 and would result in a five year growth figure to the end of 2017 of 32.5%.

However, the spectre of a mansion tax remains which indicates it is too early to make that call just yet.