After a weak final quarter last year, price declines in prime London markets appear to be “bottoming out”, the latest Knight Frank sales report reveals.

The report finds that average prices were flat on a quarterly basis in prime central London (PCL) in February.

This compares to the decline of 0.6% recorded in the three months to December.

Prices in prime outer London (POL) recorded their first monthly rise of 0.2% in February since September.

The average rate for a five-year fixed mortgage is headed below 4% after spiking above 6% in the aftermath of the mini-Budget.

Knight Frank’s head of UK residential research Tom Bill explains that financial markets “took fright at the inflationary potential of the previous government’s low-tax economic plans, but nerves are settling under new prime minister Rishi Sunak”.

“That said, double-digit inflation has led to successive bank rate hikes and pushed mortgage costs higher. This time last year a five-year fix was priced below 2%,” Bill adds.

Demand remains strong against the relatively stable economic backdrop and the number of new prospective buyers registering in the first seven weeks of the year in London was 28% higher than the five-year average.

Meanwhile, the number of new sales instructions was 36% higher.

Bill says this mirrors what is happening across the UK, where the property market has made a better start to the year than expected.

However, activity is stronger in higher price brackets where there is less reliance on mortgage debt with around half of sales in PCL being made in cash.

The number of exchanges above £2m was 66% above the five-year average in January while the number below £2m saw a 12% increase.

The number of new prospective buyers above £2m was 52% higher, while the rise was 20% in the sub-£2m bracket.

On an annual basis, average prices were essentially flat in February in PCL, rising by just 0.9%.

While there was a decrease of 0.5% below £1m, there was a rise of 2.1% between £5m and £10m, reflecting the relatively stronger performance of the market in higher price brackets.

Meanwhile, there was an increase of 3% in POL with an increase of 1.8% below £1m compared to a rise of 4.4% above £5m.

Bill says Knight Frank expects prices in PCL to outperform most UK markets over the next few years, based on data from the latest forecast.

Knight Frank’s prediction is underpinned by the higher percentage of cash buyers, currency discount for overseas buyers and the fact prices remain 15% below their last peak in August 2015.

Commenting on the latest report, Knight Frank head of London sales Rory Penn states: “Nerves have settled and the aftershock of the mini-Budget is dissipating.”

“However, the true test of strength across all price points will be the spring market.”

Knight Frank also release its latest lettings report which reveals that the number of lettings instructions in London was 21% lower in the second fortnight of the year and 12% down in the following two-week period, compared to the first two weeks of 2023.

“The strength of the sales market since Christmas has taken most people by surprise,” says Knight Frank head of lettings Gary Hall.

“It means the flow of stock we had started to see come across to the lettings market in some areas has slowed down. This will keep supply tight and maintain upward pressure on rents in the short-term.”

Rental values are still 26% higher in PCL than before the pandemic while the equivalent figure in prime outer London is 23%.

Rents have been pushed higher by stock shortages over the last 18 months, while the re-opening of offices and universities has boosted demand.

Supply has struggled to keep pace as owners took advantage of a resurgent sales market, which was turbo-charged by a stamp duty holiday.

Prospective landlords have also been put off by tax hikes in recent years and the prospect of further legislative changes, intensifying upwards pressure on rents.

It means prospective tenants could face the frustration of supply that stays lower for longer.

Average rental values grew by 18% in the year to February in PCL while the equivalent rise in POL was 15.6%.

Knight Frank head of PCL lettings David Mumby adds: “Based on the evidence of the last few weeks, it looks increasingly unlikely that the lettings market will return to any sense of normality this year.”

“Despite an initial flurry at the start of January, stock levels again feel low across all price points and prospective tenants will need to remain decisive when looking for a rental property.”