Shortage of top quality homes send prices soaring: City money is fuelling the boom in the cost of property in London. Anne Spackman reports

PRICES for quality property in the best areas of London are back at their 1990 peak and, in some cases, exceeding it, as a result of the acute shortage of homes on the market. Estate agents have seen houses sell for as much as 35 per cent above the asking price, fuelled by competition among buyers.

Kensington is the hottest spot in the capital. The best offer Savills got on an unmodernised four-bedroom terrace house in Bedford Gardens last October was pounds 530,000. The owner put it back on the market in February this year for pounds 565,000 and, with three people bidding, sold for well in excess of the asking price.

John D Wood's Kensington office took on a house in the same road three weeks ago and immediately received three offers above the asking price. It has also just sold a large unmodernised flat in Kensington, with an asking price of pounds 550,000, for well over pounds 700,000 after sealed bids.

Foxtons advised a client last September that his three-bedroom maisonette in Queen's Gate could fetch just under pounds 400,000 if modernised. He did it up, put it on the market earlier this month for pounds 485,000 and by the next day had agreed a sale for more than pounds 500,000. Two kinds of property are in particularly high demand: family houses and two-bedroom, two-bathroom flats which appeal particularly to investors.

Knight Frank & Rutley has charted price movements in flats of that type. A flat which cost pounds 250,000 in early 1990, when the market peaked, fell to pounds 215,000 in late 1992. Now it would cost at least pounds 275,000, such is the imbalance of supply and demand.

About half of all buyers in that market are from overseas, particularly Hong Kong and South- east Asia. They like their properties 'ready-to-go', rather than in need of work and developers have been trying to meet the demand. Last year 23 per cent of the London property sold by Knight Frank & Rutley was on behalf of developers.

But single people with City bonuses are also chasing the same flats. When the merchant bank Morgan Grenfell paid staff their bonuses this month agents were inundated with calls the same afternoon. The queue to buy is set to lengthen next week when more City firms pay out bonuses for the past 12 months. City money is also fuelling the rise in the price of houses. In 1993, Savills sold three houses in Argyll Road, Kensington. The first went for pounds 900,000 in January, the second for pounds 1m last summer and the third for pounds 1.05m in December. 'That was all City money,' said Timothy Wright, head of Savills, Kensington. 'Most buyers now understand that unless they bid very close to or at the asking price, very quickly, they won't get the property they want.'

One new factor which has kept prices on the upward trend which began 15 months ago is the return of the domestic buyer, moving out of choice rather than compulsion. Lorna Vestey, of Knight Frank & Rutley, said: 'It was all debt, death and divorce. It's nice to have people moving for cheerful reasons again.'

But all agents emphasise the huge price rises apply to only a tiny proportion of the property market and look likely to last for only a short time. Properties falling outside this top bracket will not sell unless they are keenly priced. David Forbes, of Chesterfield, said: 'Prices are now back to the peak levels, but it is vitally important people understand that these conditions are the result of limited market supply. I have not seen such a dearth of houses on the market for nearly 15 years. When more property comes on to the market, prices will soften and things will calm down.'

From the buyers' point of view it may pay to hang on. Property Vision, a company which acts only for buyers, is recommending its clients to steer away from the most prime London properties. Charles Ellingworth said: 'The best value now is second-rung-of- the-ladder property. These properties have not increased in price in a similar way to the top quality houses and flats and can still be bought quite reasonably.'

(Photograph omitted)