Wealthy foreigners push up price of homes in the capital

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The surge in demand from the Middle East and wealthy buyers fleeing the eurozone - coupled with a lack of sellers - pushed up prices in Knightsbridge, Chelsea and Belgravia by 17% last year.

Winkworth said that 41% of all the homes sold in the area last year topped £2 million, up from 33% in 2010.

Chief executive Dominic Agace said there had been "encouraging signs" of more properties coming onto the market across London so far in 2012, but the are still huge shortages of stock in some of the capital's sweet spots, including Notting Hill, Kensington and South Kensington.

Agace said: "Instructions remain very low and demand means those wishing to secure their property of choice have to pay a premium on the asking price.

"We expect to see prices in central London continuing to move upwards as buyers from the Far East and the eurozone, looking to London as a safe haven for investment, fuel demand."

Winkworth - the capital's largest estate agent by branches - said its average London property sale fetched £1.1 million last year.

Family homes were in strong demand, although prices for flats and houses in less-affluent areas were broadly flat.

Outside the rarified heights of the London property market, lender Nationwide reported a much drabber start to the year as UK prices fell by 0.2% in January, leaving the average price at £162,228.

House prices are now just 0.6% ahead of a year ago, although Nationwide's chief economist, Robert Gardner, said an outright collapse was unlikely as record low interest rates allow more people to hang on to their homes.

"With the flow of properties coming onto the market still more of a trickle than a flood, house prices are likely to continue to move sideways or only modestly lower," he said.

Capital Economics economist Robyn Daniell expects the house market to fall 5% this year and a similar dip in 2013.

"Given that the economy is already contracting, unemployment is rising and consumer confidence remains low, it would be no surprise to see more widespread and consistent house price falls this year," she said.