Mainstream UK residential property prices are set for 'a slow correction', while prime central London prices will continue to climb, according to the latest forecast from estate agent Knight Frank.

Key headlines:

• Average house prices across the UK will drop by 5% next year and will show little convincing growth until 2014
• Prime central London prices will climb 5% next year, before pausing in 2013 and rising by a further 4% in 2014. Cumulatively, prices will rise 24% by the end of 2016
• Geo-political issues will continue to push overseas buyers into London, especially at the top end of the market, as the capital is seen as a safe haven
• The prime central London market will remain ‘decoupled’ from the rest of the UK market
• In real terms, adjusted for CPI inflation, house prices will have fallen 29% from the peak of the market by 2015, and will not regain the levels seen 2007 levels until 2028
• Prime country-house prices will slip by 2.8% next year before returning to growth in the mid-term, following the establishment of more convincing UK economic growth from 2013 and beyond

“After falling by 15% in 2008, it was widely forecast that the market would dip again the following year, but this failed to happen – largely because of the drop in interest rates,” said Grainne Gilmore, head of UK residential research at Knight Frank.

“We believe that this correction is still to come, but that it has been pushed further and further out because of low base rates. But next year, amid a ‘perfect storm’ of a struggling economy, public-sector cuts and rising unemployment, prices will fall.

“As interest rates start to rise, prices will struggle to maintain any notable growth until 2015.”

Liam Bailey, Knight Frank’s head of research, said, ”Prices in prime central London are currently at an all-time high, despite which we believe there is scope for further price gains over the next 12 months, averaging 5% across 2012.

“The reasons which have underpinned recent growth – a weak pound, renewed wealth-creation in emerging markets, the search for safe-haven assets and flight capital – all seem set to continue, at least in the short term, reinforcing our positive view for next year.”