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London is a property hotspot – but it's not immune to UK's woes

What will happen if international buyers take fright, if euro-countries default on debt, or if there are mass redundancies in the financial-services sector? The bubble could burst, says Chiara Cavaglieri

Our capital city stands out for many reasons and its property market is no different.

While the rest of the country faces dwindling house prices, and nervous buyers stay away, low supply and high demand are driving prices up in London.

"London feels like a separate country at the moment. We used to think that London was always six months ahead of the rest of the UK but that has changed," says Andrew Montlake from mortgage broker Coreco. "If anything, I don't think London is ahead any more. I just think it's different."

Asking prices in London are up 7.2 per cent compared with last September, according to the new house price index from Rightmove – the equivalent of an extra £28,870. A lack of new sellers has been blamed for rising asking prices, with the number of properties put up for sale falling from 20,496 in September 2010 to 17,966 a year later. Turning to Rightmove's nationwide figures, there is a much smaller price increase of 1.5 per cent since last year; over the summer period, asking prices fell by 0.3 per cent.

London still attracts some of the wealthiest investors: another new report, the global billionaire property index from international estate agents Savills, reveals that homes for the super-rich are more than £3,000 per sq ft in London – the fourth most expensive in the world. Ongoing turmoil in financial markets has created an influx of foreign buyers looking for a safe haven for their assets, with many choosing London property.

"The top-end market is driven by international demand assisted by the cheap pound," says Miles Shipside, a director of Rightmove. "There is a lot of money coming into London and a shortage of properties, so rich people are competing. That gives you some trophy prices being achieved which generally helps confidence elsewhere."

The appeal for buyers looking at London property is clear, with strong demand coupled with relatively weak supply and resilient prices. Prices did take a tumble in 2008 but were quick to recover in the following two years as foreign buyers and bankers with bonuses returned to the market.

London's landlords are raking it in too. Average rents in England and Wales rose by 1.2 per cent to £713 per month, according to the latest buy-to-let index from LSL Property Services. It's the largest monthly increase since August 2010 – but London saw the strongest annual growth with rent up 6.6 per cent.

"London has always had a micro-climate of its own. One factor that is driving up values in the capital is the return of amateur landlords. They are increasingly buying property in order to benefit from soaring rents," says Giles Atkinson, a director of estate agency Atkinson McLeod.

Many in the industry have high hopes for London prices. High-end estate agency Knight Frank is predicting that new-builds in hot spots will see prices rocket. Most of the prime areas were picked out because of regeneration plans and proximity to transport links such as Crossrail, which will run across London from 2018.

The golden opportunity, according to Knight Frank's forecasts, is Nine Elms, in south west London, which it thinks will see a mammoth rise of 140 per cent from £750 per sq ft to £1,800 in 2016. Other key areas include the eastern fringes of the City, Hammersmith and Marylebone.

Despite this, London is not immune to the problems affecting the rest of the UK. "The biggest problem for London is the affordability issue," says Mr Montlake. "People are struggling to raise deposits and so more people are renting. Rents are strengthening because there is shortage of properties – but there has to be a cut-off point eventually," says Mr Montlake.

Some experts are even warning that it is only a matter of time before the property bubble in London bursts. Nick Hopkinson, a director of PPR Estates, has reported a jump in the number of "distressed sellers" willing to sell up quickly, particularly in areas hit by recent riots, such as Lewisham and Croydon, where buyer interest has dropped off and sales have fallen through. He adds that he was aware of international buyers getting cold feet after the riots, which could be an indication of what might happen to the rest of London if they lose this part of the market.

"Maybe that will be the start of the tipping point which bursts the London property bubble," he says. Mr Hopkinson explains that foriegn buyers see London as a safe haven for their cash. And if these buyers pull out, perhaps because currency markets change or we see the likes of Portugal and Greece defaulting, interest in London could dissipate.

Even if London can rely on international buyers, anyone interested in buying in the capital must keep in mind that any market is cyclical. There is also a risk that some of the outer boroughs of London may not have as strong a market as people might think.

"As you move towards the M25 the market can get a little more volatile or at the very least uncertain. Examples of this would be Barking and Dagenham, Bromley, Lambeth," says Jennifer Warner from Globrix.com.

What could knock London is an influx of properties on to the market and more forced sales, dragging prices down and causing buyers to hang back till the market hits bottom. If there were, say, lots of redundancies in the financial-services sector, people may be forced to sell, creating a downturn in prices, particularly when interest rates rise and owners can no longer rely on rents to cover their mortgage.

"In other parts of the country there is an oversupply of residential properties, due to unemployment black spots and local authority job cuts starting to bite.

London hasn't really had a combination of job losses and high interest rates, but that's not to say it won't happen," says Mr Shipside. "There are boom times and there are negative times ... Don't make the mistake of thinking there won't be other downturns that will affect the London market – they will come again."