An ‘over performing’ London property market is set to slump this year while the rest of the UK will grow, according to analysis from the Centre for Economics and Business Research (Cebr).

It means price increases across the UK could outperform London for the first time in six years.

Cebr expect UK prices to rise by 1.5% this year, while London prices will drop by 3.6%.

Temporary changes

While the drop might come as a shock to many who have seen London prices consistently rise in recent years, the fall is predicted to be a temporary one.

By 2016, price growth in the capital will once again be greater than the rest of the UK with values to increase by 2.7% in London and 2.3% across the UK generally.

The drop in London is due in part to the uncertainty over who will form the next Government, says Cebr. However, once this is resolved, the under-supply of housing in the city will once again push prices up.

Other factors affecting prices in London include a drop in demand from overseas buyers caused by:

• The strength of sterling against the euro
• Concerns about the impact of the proposed mansion tax
• Bigger stamp duty rates on high-end properties

Growth in the UK

Cebr’s recent predictions of a 0.6% fall in UK prices has been revised following the changes to stamp duty filtering through to the market sooner than expected.

Buyers have been able to use the money they have saved thanks to the changes towards their deposit.

The strengthening of the UK’s labour market has also boosted people’s spending power.

Last year, during the housing market recovery London prices rose by 17.4%, while the typical UK price increased by 10%.

But market analysts predict a levelling off of prices in the capital towards the end of the year.

In its latest quarterly market report, Strutt & Parker and its retained economic advisors Volterra forecast UK house price growth to be 5.0% in 2015. The figure in the Greater London area is predicted to be significantly higher at 9.0%, in contrast to prime central London where 0.0% growth is expected.

Stephanie McMahon, Head of Research at Strutt & Parker, said: “There still lies an imbalance between London and the rest of the UK but there are signs of strong recovery in the regions as buyers outside the capital look for affordability.

"The holding off of interest rate rises, now not expected before autumn 2015 at the earliest, is a big positive. This combined with continued wage growth – UK real wages and living standards began to recover for the first time in five years in December - and low inflation, should give the national market the momentum it needs.

"We should see a flurry of activity up until the autumn as buyers take advantage of the low interest rate environment.”