It's tough at the top, too

Even prime areas of the property market are now proving hard to shift, says Anne Spackman

The only spot of optimism in the property market for the past five years has been the increase in values of houses and flats in the best locations. It was always hoped that the confidence which was forcing up prices by about 20 per cent in central London and other prime areas would eventually permeate the rest of the market. Instead, the opposite has happened.

For the first time in two years it is tough at the top of the property market as well as at the bottom. Prices which rose by 10 per cent in the first six months of 1994 have not risen since. If anything, they are starting to fall. The brief flurry of activity which marked the new year and was expected to rise to its seasonal crescendo in spring has, instead, petered out. Estate agents report that business is down by as much as 20 per cent compared with spring last year.

If anything epitomised the strength of the prime market it was the Kensington house. Since autumn 1992, when Britain pulled out of the European exchange rate mechanism, the value of a family house in one of London's smartest boroughs has increased by about 25 per cent, taking it back to pre-recessionary levels.

Richard Ford, who runs Knight Frank & Rutley's Kensington office, said buyers would still occasionally pay a premium price for a special house, but the occasions were now more rare. "For the first time in a long while I am seeing particulars saying `please note the price has been reduced'. The market has gone right off the boil," he said. "Eight weeks ago things were cock-a-hoop, but since then volumes have gone down. There is no doubt the market has got much more difficult."

The problems are not specific to Kensington. Black Horse Agencies, which is strong in the middle of the market in counties such as Surrey and Hertfordshire, says business has fallen by up to 20 per cent.

The biggest problem is the lack of good property for sale at a price buyers are willing to pay. There are plenty of keen buyers around, but they refuse to chase prices up in order to get the right house. This is a very different picture from last year.

Another problem is the high percentage of deals which fall through. David Wood, managing director of Black Horse Agencies, said every customer coming through the door was serious about buying and selling and yet the number of deals collapsing had risen to more than 30 per cent: "One crack in the wall and they are out."

Surrey, along with Hampshire, Gloucestershire, Oxfordshire, Wiltshire and Berkshire came out top of a recent Country Life magazine survey on volumes of country house sales. Diana Sketchley runs the country house department of Allen and Harris, which covers that part of the country. She said: "We had a quick flurry in January and it has just fallen away completely. Normally at this time of the year I would have negotiators out four days out of five on valuations. It simply isn't happening.

"There is plenty of interest from potential buyers living in rented accommodation, but because they have hung out so long they are very hard-nosed about what they will buy and what they will pay for it." Allen and Harris opened its Newbury office over Easter last year because of the strength of the market. "We are seriously considering not opening this year," said Mrs Sketchley.

Most of the demand in these areas comes from families moving out of London looking for large period houses. There is almost nothing to show them. Yet despite this imbalance in supply and demand, prices are not rising. Mrs Sketchley feels this is due to a lack of confidence among buyers about their financial future. "Salaries are not rising. Interest rates are creeping up," she said. "People are very aware of the problems of servicing a high mortgage with a pegged income." Prices were "possibly holding to within a spit of last year".

In central London, prices were pushed up by overseas investors, particularly those from Hong Kong and the Far East. They competed for almost every smart new development which came up for sale. Suddenly they have disappeared.

Almost the only hot spot of activity is Knightsbridge, where overseas buyers are looking for homes rather than investments. Already this year 11 flats have sold for more than £1m each, compared with 22 in the whole of last year. But even so, the business is erratic. Many agents feel the cooling off has much to do with the economic situation in their own countries. But they also feel the political climate here is playing a part.

Lack of leadership, uncertainty over Europe and turmoil in the financial markets are all blamed for contributing to the general malaise. Estate agents are privately saying the best thing for the top end of the property market would be a change of government.

This may turn out to be a temporary gloom which is dispelled by the warm air of spring, or maybe the richest home owners will have to learn some home truths. "We might all have to get used to living in a world where we don't get richer on a yearly basis," observed Victoria Mitchell of Savills.