June 1 (Bloomberg) -- London luxury-home prices fell about 20 percent in May from a year ago and probably won’t return to their 2008 highs for another five years, Knight Frank LLP said.

The average value of houses and apartments costing more than 1 million pounds ($1.6 million) in the most expensive neighborhoods has fallen on an annual basis for 11 straight quarters. The pace of the decline slowed in May and prices gained 1.6 percent from April, the London-based property broker said in a statement.

“The uplift we are currently experiencing in the London market could be short-lived,” said James Hyman, a partner for residential sales at London-based broker Cluttons LLP. There are “few convincing signs of an upturn in the wider economy,” he said.

Thousands of bankers, the main buyers of luxury homes in London, are at risk of losing their jobs as a result of the global financial crisis. Financial companies may cut as many as 60,000 jobs by the end of 2010, according to Oxford Economics, a research company.

London luxury home prices will probably fall by a total of 30 percent from the market’s peak in March 2008, Knight Frank said. The decline in May was the smallest since a 16.9 percent drop in December.

Home prices across the U.K. fell about 11 percent in May from a year earlier, compared with a 15 percent drop in April, Nationwide Building Society said May 29. On a monthly basis, prices unexpectedly rose 1.2 percent, the mortgage lender said.

Some Positive Signs

Still, Liam Bailey, Knight Frank’s head of residential research, said he sees increased competition for the few available prime properties for sale from domestic buyers, as well as rising interest from foreign buyers lured by the pound’s decline against the dollar.

“The falls in capital values, cheap debt and overseas investors with dollars and euros have encouraged buyers back into the market,” Bailey said.

The pound has lost 25 percent against the dollar in the past year and 11 percent against the euro, making homes in London more affordable for foreign investors.

That helped boost Knight Frank’s Kensington branch to its best April in three years for the number of signed contracts, said Tim Wright, who heads the office.

In the Notting Hill, Holland Park and Kensington neighborhoods, Wright said two family houses went to a “best bid” contest in which multiple buyers submitted their best offers at once. He’s had three cases in which a last-minute bidder stepped in with a higher offer for a property and scuttled a previous deal at a lower price, a tactic known as “gazumping” in the U.K.

Mayfair Rises

“Supply is still thin across the price ranges,” particularly for properties worth 1 million to 2 million pounds, Bailey said.

Luxury-property values in Mayfair rose 2.9 percent in the two months through May, more than any other neighborhood, Knight Frank said. Marylebone was second with an increase of 2.7 percent. Homes valued at 10 million pounds or more gained 0.8 percent during that period.

Prices may drop as little as 5 percent in the whole of this year, less than Knight Frank’s last forecast for a 10 percent decline, Bailey said.

Knight Frank compiles its luxury index from estimated values on properties in the Mayfair, St. John’s Wood, Regent’s Park, Kensington, Notting Hill, Chelsea, Knightsbridge, Belgravia and South Bank neighborhoods of London.

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net

Last Updated: May 31, 2009 20:49 EDT