The run up to the holidays are supposed to be filled with good cheer, but the news from the property market is distinctly gloomy. Or is it?

While the Royal Institution of Chartered Surveyors warns that the UK property market is set for a more severe slowdown than in 2005, the prime market is proving remarkably resilient.

Recent research by Savills, the estate agency, reported that while every part of London covered by its prime indices reported a slowdown during the third quarter, properties in Notting Hill, Holland Park and Kensington have still registered a 30% rise in value in the year to September.

"The top end of the prime market, over £5m, has been particularly strong in recent times, with annual growth reaching 50% by the middle of this year," says Harriet Black, associate director, residential research at Savills. "This growth has now fallen to 44% as at the end of the third quarter, but is still outperforming the rest of the market. "

"This outperformance is largely due to high demand from international buyers, who accounted for nearly two-thirds of deals over £4m in the first half of this year," she adds.

Byron Coombs Director of Investment Management at Coutts, agrees: "The property market is not an homogenous market. To some extent, where one is in the country will make a difference to the outcome. The property market in central London is being driven by foreign buyers. Its performance is more to do with wealth being created in Russia, Asia and the Middle East, for example, than what is going on in the UK."

Most of these foreign buyers are unaffected by three 0.25% hikes which lifted UK base rates by 0.75% percentage points to 5.75% - the highest level since February 2001.

"The top end of the prime market, over £5m, has been particularly strong in recent times, with annual growth reaching 50% by the middle of this year" Harriet Black, Savills

This suggests that demand from foreign buyers is unlikely to slow down next year. Another factor that should keep the prime London market buoyant next year is the lack of available suitable properties. While the house-building sector has enjoyed an unprecedented period of prosperity in recent years, new supply of luxury properties in prime London locations - such as Mayfair and Knightsbridge - has been remarkably light.

Such limited supply is one reason why luxury apartments in Knightsbridge were sold off plan in February at a record £4,200 per square foot. The four penthouse suites of One Hyde Park, close to the Albert Hall and with views over the Serpentine and Hyde Park, have price tags of up to £84m.

But there can never be additional supply of period properties in prime locations, such as Chelsea and South Kensington, which will underpin their prices. Coombs adds: "The prime market in central London is underpinned by foreign demand. It is a strategically attractive place to live and I don’t think there is any great reason to feel that this will change."

However, the ripple effect of reduced City bonuses may impact suburban areas and the commuter belt. The Centre for Economics and Business Research predicts City bonuses will fall by about 16% this year, and that thousands of jobs will be lost in 2008.

"Clearly that would impact the commuter belt and the suburbs,' says Coombs. 'There will be a softening in demand which will affect prices."

This has already been seen in the south west of London, comprising Fulham, Barnes, Richmond, Wandsworth and Putney, where Savills reports that the quarterly growth rate slowed from 8.1% in the second quarter to 2.4% in the three months ending September.

"The property market in central London is being driven by foreign buyers. Its performance is more to do with wealth being created in the Middle East, for example, than what is going on in the UK." Byron Coombs, Coutts

"A degree of caution has crept into the market but there is still a shortage in supply of houses, in particular, which will support values," predicts Black. "In prime London as a whole, houses are still outperforming flats with annual growth in the third quarter standing at 38.9% and 20.4% respectively."

Moving further across the country, Coombs sees some slowdown in prime property markets in cities such as Manchester. "I can see some softening," he says. "But the markets will be affected in different ways. There will be different dynamics in operation. In some areas, the softening will be the result of overbuilding of inner city apartment blocks, for example."

John Denney, head of country house sales for Hamptons says: "Worries about interest rates and press commentary have caused expectations to soften. We're seeing the return of a trading market with fewer viewers but genuine buyers."

Higher interest rates and a likely tightening of credit conditions, with banks insisting on mortgages with lower loans to value, for example, will have a bigger impact in the prime property markets outside London and its environs.

But Coombs is relatively optimistic about the prime property market's outlook next year. "Buyers at the top end are not automatically driven by economic conditions," he explains. "Price rises for prime properties might slow down a bit over the next 12 months but I don’t see them falling dramatically."

By Helen Dunne