Demand for prime London property is tumbling – it’s just too expensive

There is a theory that demand for London proeprty is completely inelastic it doesn't matter what happens to prices or to taxes, people will just keep buying.

It's a tempting theory. But look at the numbers out in the last few weeks and you will see that it just isn't so.

According to the Telegraph, there has been a "colossal" fall in demand for houses in the likes of Mayfair, Belgravia and Notting Hill. In St John's Wood, the fall has been not far off 40%.

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And prices aren't looking too hot either: this time last year they were rising at over 8%, now that number is just 2%. Go to Notting Hill and they are actually down by 2.2%. Now, there's a day most of my rich friends swore would never come.

Prime Central London (PCL) is, says Russell Quirk of eMoov, a "graveyard, albeit a nice one". He predicts "several years" of the same. And that's despite the Tory victory in the election something that almost everyone forecast would lead to yet another leap in London house prices.

So what's up?

It comes down to price. The agents talk about an "expectations gap" and a "rise in price sensitivity." But what they really mean is that with prices up 40% in five years (more for the kind of lateral flats foreigners really like) and transaction costs massively bumped up by the recent rise in stamp duty for houses costing over £1.1m, the pool of people able and willing to pay PCL prices has dried up.

Spears magazine has an interesting example of this the Russians. According to Deutcshe Bank, some £1bn in undeclared Russian money arrives in London every month. For some years now, much of this has found its way into the property market. But now "an odd distinction has emerged in London."

There has been a surge in the cash arriving from the Russians and a surge in the numbers applying for Tier 1 Investor visas (up 69% in 2014). But there has also been a fall of 70% in the number of Russians registered with Christies International Real Estate to buy their "pricey properties."

The reason is simple: price.

The top tier of oligarchs are all sorted with their plan Bs. Their houses are long bought. The current arrivals are the tiers below the top. And they are just "not in the mansion bracket."

That's particularly the case now that the price of a Tier 1 visa has risen. It used to be that to get one you had to invest £1m in the UK and (ludicrously) a property counted as investment. No more. The price is now £2m and all that has to go into bonds and businesses. The house comes on top.

The same obviously goes for the Chinese investors who were busily buying up London alongside the Russians: the second tier entrants just can't afford £2m worth of bonds and a London house.

So there you go. The answer to why demand in London is falling isn't remotely complicated. It is because London is too expensive.