Richard Donnell of FPDSavills Research says the scale of these price rises have been exacerbated by a combination of pent-up demand and the limited supply of property available for purchase. Average residential values in prime central London have risen by 200% over the last 8 years on the back of strong demand and a highly inelastic supply of property. .

In recent years demand has been fuelled by aspirational purchasers, with only two fifths of purchasers seeking a main residence. The remaining purchasers have bought second homes or property for investment reasons. The more complex nature of demand for housing in central London, (for example, only 40% of purchasers are UK nationals), is compounded by the fact that purchasers tend to use a much high proportion of equity to fund purchases than that seen nationally (those buying property worth over £1m take, on average a 40% mortgage). .

Donnell says: "Such an equity driven market, where the majority of purchasers do not tend to worry about mortgage interest rates and house price to income ratios, means that standard measures of housing values do not exist. Rather the market is very sentiment driven, which means that external factors can play a important role in dictating the direction of values. This was certainly the case at the end of 2001." .

However, rental values for prime central London residential property continued to fall over the first quarter of 2002. Average rents are now -8.6% lower than 12 months ago. Continued increases in rental supply and weaker levels of demand will undermine rental growth over 2002. .

The average net income yield from central London residential property currently stands at 3.1%. Total net returns in the year to March 2001 were 10.4%.

Instant Insights /

London Residential Prices Saw Massive Growth in First Quarter

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