London house prices will jump nearly 40% by 2014

London will escape falling house prices next year while the rest of the country faces a setback in the values of most properties.

According to estate agency Knight Frank, house prices will end this year 2% higher than they were at the beginning of the year led by the recovery in London and the South-East. But the agency predicts that throughout next year prices will fall 3% nationally — the classic “W”-shaped recession — although London will continue to grow with prices rising by 3% next year and by 9% in 2011. Five years out, by 2014, London prices will be 38% higher than today while the national gain will be just 19%.

Knight Frank's head of residential research Liam Bailey said: “We believe that the future improvement in market conditions will continue to be led from London and southern England, particularly from the higher price brackets. Strong demand from UK and international buyers will ensure that the central London property market in particular will continue to outperform in 2010.

“The key reasons for our confidence with regard to this market are: uniquely in the UK — London will benefit from the global economic recovery, which is likely to considerably outpace that seen in the UK; sterling is set to remain relatively weak into the medium-term, encouraging international demand; the economic prospects in central London are brightening more rapidly than elsewhere in the UK.”

Bailey pointed out that prices have fluctuated in London more dramatically than in the rest of the country with a two-year rise of 60% in the two years to March 2008 followed by a fall of 24% over the next 12 months.

His comments coincide with a report from the Royal Institution of Chartered Surveyors which says that a lack of supply continues to underpin the house-price recovery. It said the net balance of surveyors reporting house-price rises rather than falls reached a positive reading of 22 in September, the highest figure since May 2007.

The closely watched sales-to-stock ratio — a measure of market slack and a lead indicator of future prices — edged upwards a little further. It has now risen for nine consecutive months and stands at 29, its highest level since December 2007.

“A lack of supply is still underpinning the rise in house prices,” the institute's spokesman Ian Perry said. “Despite the problems first-time buyers are continuing to encounter in securing finance, the level of inquiries from potential purchasers is increasing. This imbalance between demand and supply suggests that house prices will move higher in the near term,” he added.

Knight Frank's Bailey said that nationally next year would see weakness but “not Armageddon”. He said: “It would be wrong to expect a continuation of the current rapid recovery in the housing market — the economy is not in a position to permit this in the short-term. Similarly, it would be wrong to expect carnage.”