The number of homes changing hands in London’s luxury housing market has fallen precipitously as political uncertainty and fears that the market has become overblown continue to escalate.

Sales in the prime central London market – areas such as Knightsbridge, Chelsea, Kensington and Belgravia – fell by a third on the year in the third quarter of 2014, according to exclusive research carried out for the FT by data firm Lonres and analysis company Dataloft.

Houses were worst hit, seeing a drop in transactions of more than 50 per cent. Flats and apartment sales fell by 27 per cent.

“A gradual erosion in sentiment has been steadily mounting through the year, which has impacted the top end of the market,” said Anthony Payne, Lonres managing director.

Foxtons, the London estate agency best known for gentrifying previously rundown areas, warned on Thursday that the market was slowing rapidly.

Uncertainty around new property taxes, the strength of the pound on global currency markets and the introduction last year of a tax on homes held through companies have all contributed to the slowdown, according to those involved in trading properties.

“The summer was the quietest we’ve seen in some time,” said Roarie Scarisbrick, a buying agent at Property Vision. “It had been a long bull run and markets do need a breather occasionally, but it was also the moment that sentiment changed slightly, so the brakes came on.”

While buyers have gained the ascendancy, many sellers have not yet caught up with the shift in sentiment, Mr Scarisbrick added: “There is a hell of a lot of new stock coming to the market . . . with [many sellers] trying to catch the coat-tails of the disappearing market.”

Investors have used the London housing market as a store of value in recent years, crowding out occupiers.

Richard Donnell, director of research at data analysis company Hometrack, said: “More and more housing is being taken out of circulation by investors and people seeing it as a better way of investing their wealth than traditional investments.”

But the growing political debate over new property taxes and other possible clampdowns on the internationally wealthy meant that investors were likely to draw back, he said: “All this debate around tax is putting people off and they’ll wait until after the election now.”

The drop-off in interest from potential buyers has proved a boon for landlords, estate agents say.

Property prices

“People are saying we’ll just rent, so the rental market is quite good and that is a byproduct of the nervousness on the sales side,” said Charles McDowell, who acts on behalf of wealthy home buyers. “I’m seeing an ever greater number of emails from agents announcing price reductions, agents are reducing prices to get things sold.”

Douglas & Gordon estate agents estimated that homeowners were cutting prices by up to 15 per cent to achieve a sale. Classic white stucco villas in Chelsea are taking as long as a year to sell, with some properties worth around £4.5m dropping their prices by £1m, according to D&G.

As a result, the job prospects of estate agents at London’s luxury firms are quickly darkening.

Asset-rich pensioners

During the boom years “all the big agents opened lots of new offices and have been buying up smaller chains”, said D&G director Ed Mead.

He estimated that the number of estate agents’ offices in Kensington and Chelsea had grown by about a third since the market began to boom.

“Now volumes have shrunk, estate agents are all competing for a smaller slice of a smaller market,” he added. “There are quite a lot of disgruntled agents sitting around doing not very much.”

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