Feb. 5 (Bloomberg) -- Luxury-home prices in London, the world's most expensive city for prime real estate, rose at the fastest rate in four months as the overall U.K. market stagnated, industry reports showed.

The average price of houses and apartments costing at least 2.5 million pounds climbed 1.1 percent in January from December, Knight Frank LLC said in a statement today. There was no change in the average cost of homes across the country, HBOS Plc said in a separate report.

``It is being totally led by the purchase of properties of 10 million pounds or more,'' Liam Bailey, head of residential research at Knight Frank, said in an interview. ``The number of deals done at that level in the past three months was double a year ago.''

The wealthiest property buyers don't need to borrow money to make purchases, so they're not dependent on lenders that have made it more difficult and costly to obtain mortgages, Bailey said. Britons are now buying between 40 percent and 50 percent of all London homes priced at more than 10 million pounds, up from 30 percent a year ago, according to Knight Frank, a real estate broker based in the city.

Bishops Avenue Purchase

London's most expensive new-built home was sold for 50 million pounds last month to Hourieh Peramaa, a 75-year-old real estate entrepreneur from Kazakhstan, the Sunday Times reported on Jan. 27.

The house on Bishops Avenue in Hampstead, northwest London, has nine main bedrooms, 16 bathrooms and five reception rooms and was acquired from Turkish businessman Halis Toprak. Peramaa plans to spend another 30 million pounds extending and redecorating the property, the newspaper said.

Earlier in January, Lev Leviev, an Israeli diamond billionaire, paid 35 million pounds for a house in the same district as Peramaa, according to the Daily Telegraph.

Indian steel entrepreneur Lakshmi Mittal owns the U.K.'s most expensive home. He paid 57 million pounds in 2004 for a home close to Kensington Palace in central London. Both Kensington Palace Gardens and Bishops Avenue have been dubbed ``Billionaires Row.''

January's increase in luxury-home prices was the biggest since September, when prices advanced 1.2 percent. For the year ended Jan. 31, the gain was 26 percent, the smallest since October 2006.

Across Britain, prices in January were 4.5 percent higher than a year earlier, according to HBOS, the country's largest mortgage provider. Lenders are selling fewer mortgages as they contend with losses stemming from the collapse of the U.S. subprime mortgage market.

Properties at the lower end of Knight Frank's prime index are now moving more in line with the U.K. market, said Bailey.

Bonus Money Declines

Bonus-earners in the U.K.'s financial industry will invest 2 billion pounds in homes this year, compared with 5.5 billion pounds in 2007, as they look for higher returns, Savills Plc said in November. Savills and Knight Frank are the biggest brokers for prime London properties.

This year, top-quality dwellings in the U.K. capital will appreciate about 3 percent, Knight Frank said today, reiterating an October forecast. The Bank of England's ability to cut interest rates to ward off an economic slowdown may be hindered by inflationary pressures, said Knight Frank.

``It is fair to say that the issues of confidence and affordability that have so far dogged the main market may now promote a more cautious purchasing environment in the prime sector too,'' Bailey said.

Billionaires

Britain is home to about 68 billionaires, according to the Sunday Times 2007 Rich List. Many are investors from China, India and Russia who have bought homes in London for its schools, stores, theaters and restaurants.

The most expensive houses can fetch as much as 4,000 pounds a square foot, CB Richard Ellis Hamptons International estimates. That compares with about 2,075 pounds a square foot in New York, the broker said.

Purchasing at such prices so far isn't being inhibited by the prospect that the U.K. may impose an annual tax of 30,000 pounds on wealthy individuals who live in the U.K. and keep their residence elsewhere for tax purposes, said Bailey.

``There is a lot of interest in deals being done by super- rich foreign buyers.'' said Bailey.

To contact the reporter on this story: Peter Woodifield in Edinburgh at pwoodifield@bloomberg.net.

Last Updated: February 5, 2008 07:35 EST