Central London used to drive UK house price growth and is now dragging it down – here's why

A market which had shown signs of faltering before the EU referendum softened quickly.

Estate agents Savills found average prices in London's hyper-expensive central boroughs like Chelsea and Mayfair fell 1.3% in the three months to June this year, meaning they are now down 14.4% from their 2014 peak.

Some have speculated that falling prices could anticipate something worse to come: The Mirror newspaper even quoted an academic predicting a 40% crash in UK house prices, spiralling out from the London market.

Most analysts forecast a return to runaway growth which outstrips the rest of the UK — something that has come to characterise London's prime central market. So which factors have driven the slowdown, and which will return it to growth?

What is "Prime Central London?"

Which London districts qualify as "prime central" varies according to who provides the definition.

Loosely it is defined as the boroughs in the very centre of the capital, including Westminster, Kensington & Chelsea, and Notting Hill:

Estate agents do not measure house price average for PCL as a whole, but the average house price in Kensington & Chelsea is now £1,281,400, and £986,400 in Westminster, a

There are also "prime outer" areas, including Prime West London, which includes Hammersmith and Chiswick, and Prime North West, which includes Hampstead and Primrose Hill.

Whats causing the slowdown?

Stamp duty

Prime central price falls in the last two years have been driven largely by tax changes introduced last year.

Following a hike in 2014, a change in April 2016 means stamp duty — a tax levied on every house purchase — was reduced for those buying a house below £1 million, and increased for anyone buying a house worth more than £1 million. If you happened to be buying a second home — as many in prime central were — a further 3% surplus was added to the stamp duty bill.

"The slowdown in essence started in December 2014, possibly a little bit before," said Lucian Cook"I think at that point, there had been a succession of stamp duty increases which the market had broadly been able to absorb, but had slowed levels of house price growth."

The Brexit effect?

Many analysts will point the blame squarely at the impact of Brexit when discussing price falls in Prime Central London. But many analysts, including Savills, forecast a return to growth in 2019, the same year as the UK is scheduled to leave the EU.

So how big an impact has it had?

Foreign investment: "Brexit uncertainty clearly affects overseas buyers"

Prime Central areas like Kensington & Chelsea and Mayfair are now characterised by the glut of foreign investment that has poured into them, with lined with gold-plated supercars.

So have overseas investors been put off by Brexit uncertainty, or attracted by a weak pound which has fallen sharply against the dollar since the referendum?

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A big return to growth? "The core of London as a global financial centre remains unchanged"

Savills forecasts a dramatic return to growth in Prime Central London in the next five years. The 21% growth figure outstrips its 13% prediction for the UK, and its 11% prediction for the whole London region.

What will drive that growth in the same year Britain is charting an uncertain exit from the EU?

"I think people have been more reluctant [to buy and sell] because of certain factors: Slight uncertainty around Brexit, a bit of uncertainty about City employment, but also, some of that currency advantage has been offset by the greater exposure to tax. It takes time for all of that to be absorbed," said Cook.

"And so I think after the price adjustment, you will then have this further period where the market gets used to it, which coincides with two years of Brexit negotiations, and then history tells us that the market returns to growth because the fundamental factors that drive prime central London are still there."

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