London's property market is heading for a fall

One of the biggest downsides of living in London is the property prices.

Unlike much of the rest of the UK, house prices in London have shot up to surpass their pre-2008 peaks.

This started in the "super-prime" areas of central and west London. But it quickly spread out to the rest of the capital as those priced out of those areas moved to less fashionable places.

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One recent example of how ludicrous things are getting is the block of flats in Brixton that are on the market for £465,000 each, despite the fact that some of them haven't got any windows.

According to the Land Registry, average prices for Greater London have shot up by more than 40% in the last three years alone. The Nationwide puts it even higher, with adjusted prices increasing by over half from 2012 to 2015.

However, the good news is that this process may be about to go into reverse

The foreign money is drying up

This process was accelerated by Britain's generous tax system the ability to buy property through overseas companies allowed foreign investors to avoid most taxes. In the six years to 2015, £100bn worth of property was bought by foreign investors in this manner.

However, all of these positives' for the London market are unwinding. Falling commodity prices have slashed the amount of money flowing into the Gulf states. The eurozone seems to be slowly recovering, although another crisis can't be ruled out.

And most significantly, George Osborne is moving to tax high-end property much harder, imposing additional taxes on purchases through companies, for example.

But it's not just on the demand side. High prices are doing what you'd expect them to do helping to boost supply. As the FT recently noted, more than 50,000 apartments in the £1m-plus target market are either being built or are in the pipeline. This is despite the fact that less than 4,000 such flats were sold in 2014, generally considered to have been a very good year for the London property market.

Such a mismatch between supply and demand is starting to have an effect on prices. One high-end estate agent has seen transactions plunge by nearly two-thirds.

Not only are sales down, but those prime houses and flats that are selling, are selling for less. Estate agent Knight Frank believes that asking prices have fallen by as much as 7% in areas such as Knightsbridge over the past year. What's more, prime buyers are starting to ask for substantial discounts.

There's more pain ahead for property

These changes will make it harder for landlords with mortgages to cover their expenses, particularly if interest rates ever think of rising again. The Bank of England is also discouraging banks from lending to landlords, by increasing the amount of capital they have to hold against such loans.

Overall, it is clear the government thinks that the sector creates more problems than it solves and wants to cut it down substantially from its current size.

Obviously, calling the top of any bubble is difficult, and London property is no exception. But all bubbles eventually have to pop and when this one does, prices could end up falling substantially.

According to the Nationwide's data, average London prices are 10.1 times the salary of the typical first-time buyer, compared with an average of 5.1 times since 1983. Even taking into account the much lower interest rates, this means that first-time buyers pay an average of 66.3% of their monthly income on mortgage payments, compared with 50.3% over the same period.

That can't be sustained and so it won't be.