As temperatures dip, so will London house price growth

Few things affect residential property prices more than a change in government or interest rates, and both are inevitable within a year.

The resulting uncertainty is causing price growth to slow and demand to cool in the £1 million-plus ($1.6 millon) London residential property market.

A general view of Egerton Crescent in the Royal Borough of Kensington and Chelsea.
Dan Kitwood, Getty Images News
A general view of Egerton Crescent in the Royal Borough of Kensington and Chelsea.

This dampening effect has been reinforced by a crescendo of warnings about a price correction, regardless of their validity.

Such concerns are relatively prosaic compared to the period between 2009 and 2012, when the fallout from the financial crisis sparked inflows into London property from global investors seeking a safe haven.

The result is that short-term uncertainty has superseded the financial crisis as the biggest external influence on the prime London market.

Prices are not falling but buyers have become more wary.

The number of new prospective buyers was down by a quarter in July 2014 versus the same month in 2013 and the number of viewings fell 10 percent, resulting in fewer sealed bids and open days.

Read MoreProperty sales and demand fall 'sharply' in London

The data did not paint a uniform picture, however, and the mood of caution has not yet put a dent in sales volumes. The number of exchanges between January and July was 3 percent higher than 2013.

One of the principal reasons is that vendors have sensed the change and lowered asking prices.

It is particularly true in higher price brackets and there were more £10 million-plus deals in July than the same month in 2013. Annual growth for £5 million-plus properties has been in single digits and falling since March 2012, when the government announced a series of tax changes including new stamp duty thresholds.

Political rhetoric is likely to rise after the summer lull and that is when the market is likely to enter pre-general election mode, which will cool growth further.

We believe annual growth in prime central London could slow from its current level of 7.9 percent to zero next year but forecast cumulative growth of 20 percent between 2014 and 2018 as supply continues to fall far short of demand. This structural imbalance that Bank of England Governor Mark Carney has alluded to will keep upwards pressure on prices and suggests any sudden or marked correction is unlikely.

Tom Bill is Head of London Residential Research, Knight Frank