Review of 2012 and what lies ahead…

"As always the average position across the UK has disguised the performance of different submarkets, and none has been more different than the central London market, which saw 9% growth in prices in 2012, which added to recent growth means prices in central London are now 34% higher than three years ago, UK prices are 1% higher over the same period.

"International demand has helped to propel London prices higher and has also influenced the prime outer London markets, covering Wandsworth to Richmond, and Hampstead and Canary Wharf – where prices managed to rise by 5% in 2012 and a respectable 13% over the past three years.

"Outside of London, the weakness in the UK’s professional service and financial sector has not been offset by international demand, meaning the prime country house market has seen a slow decline in pricing continue thought 2012, with prices down by 4% in 2012 and down by a similar level over the past three years. While the performance of country houses has been unimpressive, rural estate owners will be cheered by the fact that land values have risen steadily, by 3% this year but by 22% over the past three years.”

What will happen next?

Property prices in prime central London went from strength to strength this year, but 2012 was more turbulent for the wider UK market. What is in store for 2013?

* UK house prices will not reach their 2007 peak until 2019: the longest housing market recovery on record, according to Knight Frank’s new forecast;

* UK housing transactions to rise 2% in 2013, but to remain well below peak levels for the rest of the decade;

* Tax changes forecast to weigh on prime central London prices, with no price movement expected in 2013.

UK housing market:

GrĂ¡inne Gilmore, Head of UK Residential Research, said: "Some five years after the start of the financial crisis, the housing sector in the UK still does not bear the hallmarks of a fully functioning market.

"Transaction levels have roughly halved since the last market peak in 2007, and are 35% below the 20 year average, as first-time buyers and those further up the housing ladder struggle with tighter mortgage lending rules.

"House prices have been flat or modestly declining across the UK since 2010. This stasis is underpinned by unusual economic conditions, rather than a genuine equilibrium in the market.

"The fundamentals suggest that a further correction in prices is needed as the relationship between average earnings and average house prices is well above the long-term average."

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