London property house prices prime central
Prime central London property in areas such as Kensington and Chelsea have seen the market stagnate after George Osborne hiked stamp duty on high value homes Reuters

Chancellor George Osborne's stamp duty hike on expensive properties is "constipating" the top-end of the London housing market as sales of £2m-plus homes crash – a situation experts warn is "increasingly unhealthy".

Figures released by the estate agency Douglas & Gordon, which specialises in London property, show a dramatic 64% drop in transactions for high-end homes in what are called the "prime central" (PCL) areas of the city. The stagnation at the top could soon spread further down the market. And Osborne's stamp duty reforms may achieve the opposite of what they are designed to do – lower revenues for Treasury coffers.

"If you choke off the top end of the top end, that has an effect all the way down," said Ed Mead, executive director of Douglas & Gordon, to IBTimes UK. "It's like a Chinese lantern or an accordion. If you cut the top of it, the whole thing starts collapsing. And people don't understand that about London."

In December 2014, Osborne radically overhauled stamp duty on property purchases by abolishing the "slab" system, which saw a sharp jump in tax rates between price brackets for homes. Alongside this he hiked the stamp duty rates for more expensive property. There is now a 10% tax rate on properties worth over £925,000 and 12% on those over £1.5m.

Mead said there is a stand-off between buyers and sellers over the new higher stamp duty rates, with the former now demanding a discount on the property price. Normally, said Mead, stand-offs over changes in the market last three months before normalising again. "But this has been going on for well over a year, ever since the pre-election Mansion Tax talk, which started in November 2014," he said.

"That has just caused a crash in volumes because very few people are moving. That is going to have an effect all the way down. People aren't moving into London from places like Battersea so they're not selling their places there. People who would normally buy there can't get in. It's having a real constipating effect that means that for those people who do want to buy, they've probably got to pay a bit more, or they've got to find someone who is desperate to sell. It's an increasingly unhealthy situation."

Chelsea is a ghost town

Andrew Monteath, head of research at the asset management arm of Douglas & Gordon, compiled the data from the firm's estate agencies in London. The 64% fall in sales of £2m+ properties is for the last nine months of 2015 when compared with the same period in 2013, not the previous year. Monteath told IBTimes UK this is because 2014 was an abnormal period for the market.

In the run-up to the election there was uncertainty over who would win, until the Conservatives were handed a majority in May 2015. Labour were pledging to introduce an annual Mansion Tax on homes worth £2m or more if elected, causing jitters in the property market.

Monteath warned Osborne may have to reverse the stamp duty hike for top end properties if the Treasury ends up taking in less tax revenue as a result. Osborne has previously justified a cut to the top rate of income tax from 50% to 45% on the basis that it brings more money in.

Land Registry figures show a sharp drop in sales of £2m-plus properties across the whole of London, not just prime central areas like Kensington and Chelsea. In 2015, there were 2,576 such transactions, down 21% on a year before, when there were 3,254.

It's been a vibrant, extremely valuable part of London which created a lot of wealth, it's just becoming a ghost town and I think it's really sad
- Ed Mead

"I don't spend an enormous amount of time socialising in Chelsea because I've never been able to afford to. But very occasionally I go into Chelsea for supper and it's like a ghost town," Mead said.

"You go in after dark, yes just along Kings Road there's a lot going on, you go go a block south or a block north and it's dead. There's no lights on, nobody around, nothing happening. I just don't think this has bred a very healthy market. I think the fact is ordinary, wealthy English people no longer want to live in Kensington and Chelsea.

"They'll go and live in Battersea Park, or in Fulham, or in the nice bits of Hammersmith. That's where those people go and live because they don't want to live in Kensington and Chelsea any more. It's been a vibrant, extremely valuable part of London which created a lot of wealth, it's just becoming a ghost town and I think it's really sad."

However, the current market turmoil may be a boon for prime London property, which is viewed as an safe haven investment. When sterling plummeted as the financial crisis tore through the world economy, high-end London property boomed as investors poured money into the market shelter during the storm. Top forecasters including the World Bank and OECD have slashed their growth estimates for the world economy in 2016 as oil prices collapse and China's stock market bubble bursts, among other concerns. Sterling has also slumped to fresh lows against the dollar.

"In global economic turmoil, people tend to look for a safe haven," said Mead. "So, ironically, I don't think it's necessarily going to have an enormous effect. PCL – I've been working in it for 35 years – is a very finite patch of real estate and it's in a very, very safe place.

"So if sterling is getting hammered, that's good if you're coming from abroad. That was the principle thing that led to the PCL boom in 2009-10, because sterling was so cheap people would come in and buy it. Obviously you had other things like the euro go to almost parity and all that sort of stuff. But the main driver of it was economic turmoil abroad and cheap sterling. Well, what's the situation at the moment? Here we are again."

He added: "Are the reasons that people bought houses more powerful than the levies they're going to be paying? If that's the case then the chancellor might have made quite a good call. But he's still selling to people who are just parking money."