Sharp fall in London house prices alarms analysts

The first signs of a rapid slowdown in the housing market have emerged with the most comprehensive index of property prices showing that the market in London is contracting sharply.

Figures released today by the Land Registry, which is responsible for recording every property sale in England and Wales, show that prices in Greater London fell by 3 per cent in the past three months.

The drop in the capital has come despite a continued annual price rise across the country of 22 per cent to the end of last year, with sales in the East Midlands and the South West driving the boom.

But the shift in the price trend in London, where the property bonanza has been at its most extravagant, is important because the capital has historically set the pattern for the nation. Specialists admit that the drop, which saw the cost of the average property fall nearly £4,000 to £241,838, is a surprise. Most had been expecting continued price rises in 2003, rather than a net drop.

Although the Land Registry figures are not adjusted for seasonal trends, they are regarded as an important measure because they detail the final selling price for every residential property type rather than asking price, and include non-mortgaged sales.

Richard Donnell, the head of residential research for the estate agents FPD Savills, said: "Most would not be expecting a price drop of this level [in London]. There will be a lot of debate about why these figures have come through so quickly. Certainly, the very top end of the London market has been dropping and turnover has declined dramatically. But we would have expected it to be another 12 to 18 months before we see any general falls."

Demand for London's ritziest residences did suffer a sharp decline, with 390 properties costing £1m being sold between October and December last year, compared with 628 in the previous quarter, the Land Registry said.

Greater London also had the lowest annual increase of anywhere in the country with values rising by 18 per cent – below the national average and some 10 points below areas with the steepest increases. The fall in the capital was also thought to have contributed to a drop in the national average cost of a home over the past three months of almost £900 – to £145,251.

The figures are likely to provide backing for the decision by the Bank of England's monetary policy committee last week to lower interest rates by a quarter point to 3.75 per cent, their lowest level since 1955. The move, widely interpreted as an attempt to bolster Britain's flagging manufacturing sector, brought warnings that it could fuel the housing boom.

Another change is the low growth in prices for new flats, a recent cash cow for property developers trying to maximise income in crowded cities. The asking price for new apartments rose by just 1.5 per cent compared with the national average of 22.24 per cent amid evidence that buyers are no longer willing to pay a large premium for a new home.

Beyond London, the Land Registry figures show demand for property continues to push values higher. The highest annual rises were in the East Midlands, where the average price rose 28.2 per cent to £110,853, followed by the South-west at 28 per cent to an average of £157,043.