London Luxury Home Prices Have Second-Biggest Drop on Record

By Peter Woodifield

Feb. 2 (Bloomberg) -- London luxury home prices had the second-biggest decline on record in January as would-be buyers struggled to secure mortgages from banks hurt by the global financial crisis.

The average value of homes costing more than 1 million pounds ($1.4 million) in London’s most expensive neighborhoods fell 3.7 percent from a month earlier, Knight Frank LLP said in an e-mailed statement Jan. 31. In the past 12 months, prices have slumped 21 percent, the biggest annualized drop recorded by Knight Frank.

“The sudden restriction of mortgage finance” was the main cause of the market’s decline last year, Liam Bailey, head of residential research at London-based Knight Frank, said in the statement. “This factor is continuing to cause problems for the housing market and the wider economy.”

The cost of buying a luxury home in the U.K. capital has fallen for 10 straight months, declining 21 percent since the market’s peak in March. The biggest drop since the broker started the survey in 1976 was 3.9 percent, recorded in October.

Financial-services companies in London may cut as many as 60,000 jobs by the end of 2010, according to research firm Oxford Economics. As a result, the market won’t rebound soon, Knight Frank said.

“Price falls should begin to level out towards the end of 2009, although 2010 is likely to see prices move sideways at best,” said Bailey. Knight Frank now expects prices to fall as much as 35 percent from their peak, compared with its previous estimate of 30 percent.

Buyers Looking

The drop in prices has attracted more potential buyers. The fall in the pound against the dollar and the euro is prompting international buyers to look at London properties. Viewing levels last month were 65 percent higher than a year earlier, while the number of international buyers registering with a broker in January was 35 percent more than the year before.

The neighborhoods attracting the biggest increase in interest last month were Mayfair, Knightsbridge, Belgravia and Chelsea, said Knight Frank.

“If the weakness of Sterling continues, it will help to bolster demand from the foreign super-rich, partially compensating for the reduced earning ability of many City-based buyers,” said Bailey.

Prices Fall

The pound has fallen 28 percent against the dollar in the past year and 14 percent against the euro in the past year.

House prices across the U.K. fell 1.3 percent in January from the previous month and about 17 percent on an annual basis, Nationwide Building Society, the U.K.’s largest customer-owned mortgage lender, said Jan. 29. The report covered all types of homes.

While the biggest drop in values has been in properties costing as much as 2.5 million pounds, homes costing more than 10 million pounds have lost 20 percent in value since September.

In November, Richard Cutt, head of Knight Frank’s Mayfair agency, sold a modernized, 7,321 square foot house near Grosvenor Square to a Middle East buyer for 15 million pounds, 25 percent less than the original asking price.

Hamptons Slides

A property costing 100,000 pounds in 1976 when Knight Frank started its index, peaked in value at 3.99 million pounds in March. By the end of last month it was worth 3.13 million pounds, the equivalent of losing about 2,810 pounds in value every day over the intervening 10 months.

London isn’t the only prime residential property market to lose value because of the financial crisis. In the Hamptons, the New York seaside resort favored by financiers and celebrities, median prices were 14 percent lower at $690,000 in January than a year earlier, according to New York property appraiser Miller Samuel Inc. and broker Prudential Douglas Elliman Real Estate.

In Manhattan the average price of luxury apartments fell 3.2 percent in the fourth quarter, Jonathan Miller said in an interview. That compared with average quarterly gain of 13 percent since he started compiling data in 2001, said Miller.

London-based Knight Frank compiles its monthly index from estimated values of properties in the Mayfair, St John’s Wood, Regent’s Park, Kensington, Notting Hill, Chelsea, Knightsbridge, Belgravia and the South Bank neighborhoods of London.

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.