Property firm Savills today warned that the housing slump has spread to the heart of London in what many in the City took as a shock profits warning.

Shares in Savills plunged 13% after it reported a 45% drop in sales in the capital, with prices of its £1 million-plus homes down 7.5% already this year.

Chief executive Jeremy Helsby said he expected prices to fall a total of 25% by the end of next year as mortgage lending dries up and confidence evaporates from the market. That would knock £500,000 off a £2 million home.

"We are hurting along with our competitors," said Helsby. "We have been making redundancies across the country, and continue to look at that."

Savills employs 1600 staff in its estate agency business but hundreds are likely to face the chop. Helsby said the collapse of demand in the housing market, as well as deteriorating conditions in other parts of its business made predictions for profits this year "very difficult".

Alex Garton, an analyst at Royal Bank of Scotland, was more confident and slashed his forecasts by 16%, from £62 million to £52 million. The shares fell 30p, or 14%, to 1851/4p.

Garton said "horrible sector sentiment" will drive the shares down in the short term but added that Savills remained a buy in the long term.

Helsby said the housing slump is far from over, with weak sentiment driving the market down as well as the freeze in mortgage lending.

"We think there is further to go," he said. "At the beginning of the year, we were much more optimistic but the trends are going against us much more than they were six months ago.

"We were hoping that London, although not totally immune, would be more immune to the slowdown than the rest of the country. But buyers think there is no point in buying if the can buy cheaper tomorrow."

He said the very top end of the market where homes cost more than £5 million - and the "supersonic end" where they cost more than £10 million - were still "defying gravity" as the uber-rich continued to buy up London's most expensive homes.

The company is best-known for its upmarket estate agency business but also has a large commercial division. It said that after a 25% fall in the value of offices in London, buyerswere returning to the market.