London's Prime and Super-Prime Markets will always be Unpredictable

This week Knight Frank has reported the first price rise in 13 months on prime property in London. But if the other indexes are open to statistical anomalies because of the small transaction levels on which they are based, then prime indexes, which are based on fewer transactions in every way (fewer during normal conditions and affected worse by crunch) are surely even more open to statistical anomalies.

That aside: during the last boom in UK house prices London's prime and super prime sectors were at the forefront of that growth; with property values increasing to the equivalent of 50% per year at the height of the boom.

Prime and super prime transactions are always comparatively few compared to ordinary property sales and as such price rises and falls can often be based on only a few sales in the month. Therefore, if those sales are exceptional, i.e. two very interested parties caught in bidding wars, which frequently happens on prime properties, and you have an exceptionally high growth figure for the month.

At any rate, what factor could growths like that possibly be based upon, when the properties are already priced between the high hundred thousand and tens of millions of pounds? The answer: Location location location.

Such prime properties in London are no longer being sold on what their value is, they are being sold for what estate agents can get people to pay, for a mansion or mansion like home in some of the world's best known and most fashionable postcodes.

These locations, and similarly sought after locations around the world are unique and as such, can behave very differently to the larger housing markets to which they belong. This is because it is primarily rich people that buy the houses, and no international downturn will ever bankrupt everyone. This makes prime and super-prime sectors more resilient in a downturn for two reasons:

1. The owners are rich and sell at the price that they want, which will either be the peak price, a good profit on what they paid, or if they are feeling the burn a little: what they paid for the property. The few exceptions to this rule; those that have been badly affected by the downturn, namely those who made a fortune from the stock-market only to see it turn into ashes, are responsible for the prime and super-prime house price falls we have seen.
2. Even now in the worst international recession in 80 years there are still thousands of rich and super-rich people out there, many of whom continue to get richer. Therefore, prime properties still have a market, though at the moment buyer's are sniffing out bargains from the second group above, when they dry up the first group will benefit.

In my opinion indices for prices on prime and super-prime properties are useless. I say this because the value is fictitious, based on what people are willing to pay which gets inflated as many people profit exceptionally during a boom -- thus leaving the market vulnerable to economic downturn. I'm sure some people will view Knight Frank's finding that prime London properties are growing in value, but I shall not be one of them.