Apartment prices in "prime" central London rose by a staggering 33 percent last year, according to a report out on Wednesday, thanks to reforms to the taxes levied on homebuyers.
As a result, the average home price in prime central London—which includes some of the world's most desirable addresses in the Royal Borough of Kensington and Chelsea and the City of Westminster—hit £1.74 million ($2.65 million), reported the London Central Portfolio (LCP), an asset management firm which invests in residential property.
The U.K. housing market showed mixed signals during 2014, after the introduction of schemes designed to make homebuying more affordable—particularly in London—piqued fears about another property bubble. Investors worried about the future of the market, hitting the number of transactions.
"Contrary to popular reporting in 2014, prime central London (PCL) has continued to show very strong price growth," said Naomi Heaton, CEO of LCP, in the report.
"PCL continues to benefit from its safe haven status in the face of global political and economic volatility. Despite being hit hard by the various taxes introduced during 2014, it continues to attract investment as one of the most globally desirable centres in the world."
Reforms to "stamp duty" on residential properties were introduced last year to make homebuying more affordable for the masses. The new rates—which came into force throughout the U.K. but were largely aimed at cooling the overpriced London market—meant that 98 percent of homebuyers paid less tax on their house, but hit buyers of properties worth over £1.5 million to a 12 percent levy.
As a result of the changes, transactions below £1 million rose by 14 percent in London in 2014, while those over £2 million fell, according to LCP.
"The sector underneath the £1 million price point becomes increasingly attractive, untouched as it is by new taxation," said Heaton.
Despite the hit to the luxury market, 2014 saw two of the three most expensive sales ever made, both of which were apartments in Knightsbridge. Apartment 6, 5 Princes Gate, SW7 1QJ sold for £50 million, while Flat 4, 21 Chesham Place, SW1X 8HG went for £46 million.
LCP forecast the housing market would slow in the run-up to the May national election—which some analysts see resulting in a hung parliament—but would rally again afterwards.
Michelle van Vuuren, a managing director at U.K. Sotheby's International Realty, agreed that the market would likely gain after the election.
"We are seeing signs of a temporary softening of the market for the first half of the year, particularly in the light of the recent amendments to Stamp Duty and the impending May 2015 election. After that, the market is expected to return to positive performance," she said in a joint report with Wealth-X on global real estate out last week.