London’s tumbling house prices

In recent years, the face of London has changed. The city has become a magnet for high-end property developers eager to snap up its office blocks, government buildings, warehouses and power stations. The number of luxury new-build apartments has soared.

In the borough of Westminster alone, some 4.4 million sq ft of commercial space has been transformed into housing over the past four years. And it's not just prime central London real estate getting the new-build treatment. Luxury new apartments are popping up everywhere, from Battersea to Brent Cross. There are 75,229 new properties currently in the pipeline, according to commercial and property management company LCP. But now the heyday for London's high-end developers looks to be grinding to a halt, as supply begins to outstrip demand.

Some of the developers behind London's swankiest new digs are struggling to sell their units. Asking prices for flats in the redeveloped Battersea power station development have reportedly been slashed, with one reduced from £6m to £4m over the past year (although the developer puts the price cuts down to some off-plan buyers being rather too "ambitious" with their initial asking prices). And Capco, the developer behind a luxury development in Earls Court, said sales have slowed as a result of "challenging conditions" in the residential market.

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A more concrete sign of the cool down in the market is the fact that developers are putting plans to convert commercial property into residential houses on hold. For example, Derwent London has "shelved plans to transform the Savile Row building that houses its own headquarters into 29 flats", reports Judith Evans in the Financial Times. Others have extended commercial leases, despite having planning permission for residential conversions.

As Mark Farmer of property consultancy Cast tells Evans, "the commercial market in prime locations is still relatively healthy there is an undersupply and rents are high. But in residential you are seeing stress and strain around the prime London market". Buying agent and commentator Henry Pryor is less circumspect: "There was less panic on the third-class deck of the Titanic than there is in this casino-like sector of the housing market and at least on the Titanic the band was still playing!"

The slump in demand is partly down to rising supply, but it's also a side-effect of the collapse in emerging-market currencies and the commodities crash, both of which have dented the buying power of overseas speculators. As a result, estate agency JLL has predicted that prices for new central London houses will drop by 3% this year. Analysts at Morgan Stanley are even more bearish forecasting that prices will tumble by 10%-20%.

Then, of course, there's Chancellor George Osborne's various efforts to crack down on tax breaks for buy-to-let landlords and overseas property owners. Given that Osborne has already proved his fondness for tinkering, and his taste for throwing in the odd crowd-pleaser in his Budgets, further efforts to pop the more rarified reaches of the housing bubble can't be ruled out. Anything that makes buy-to-let even less attractive would certainly have an impact. "You can't accept a 3% gross yield in property. It needs to be over 6% even in this age of artificially low interest rates because the carry cost is too high" adds Pryor.

"Take out voids, dilapidations, letting and management costs and you are soon looking at negative net yields. This may be [fine] in theory in the fantasy world of central banks, but in property this results in capital values falling." Falling prices might be a good thing for London's property market in general, particularly new buyers. But if you own a property and you've been considering a move out of town to somewhere less expensive, now may just be the right time to do it.