Nov. 5 (Bloomberg) -- Luxury-home prices in London rose last month at the slowest pace since July 2005 as the prospect of job cuts and smaller bonuses deterred investment bankers and other buyers, Knight Frank LLC said.

The average price of houses and apartments costing at least 2.5 million pounds ($5.2 million) increased 0.3 percent in October from the previous month, according to an index compiled by the London-based real estate broker. Prices gained about 34 percent from a year earlier.

Companies in the City of London financial district may cut 6,500 jobs and reduce bonuses by 16 percent this year, the Centre for Economic and Business Research said Oct. 8. For the past two years, most of the bonuses have been spent on real estate, fueling demand for homes in London neighborhoods like Chelsea, Kensington and Notting Hill.

``The impact of the credit crunch and a weaker City economy have contributed to a more sober market,'' said Liam Bailey, head of residential research at the London-based firm.

Bonus-earners in the city will invest only 2 billion pounds in homes next year, compared with 5.5 billion pounds this year, as they seek assets that offer higher returns, Savills Plc estimates. Savills and Knight Frank are the biggest brokers for prime London properties, the most expensive in the world.

Reduced Forecast

The lack of investment will restrict the gain in luxury- home prices to 3 percent in 2008, less than a tenth of this year's rate, Knight Frank estimates. The company last week cut its forecast from 10 percent. Savills expects prices for these properties in central London to gain 5 percent next year.

For homes costing more than 5 million pounds, the average price increase will probably be about 8 percent next year compared with the estimated 2007 gain of 34 percent, Knight Frank said.

Wealthy individuals from Russia and the Middle East, as well as other non-British nationals, account for two-thirds of the purchases of homes in central London costing at least 4 million pounds, according to Savills.

The contrast with the rest of the London market ``illustrates the strength of the super-prime market with demand from international buyers remaining very strong,'' Bailey said.

London has attracted foreign billionaires such as Lakshmi Mittal and Hans Rausing because of its favorable tax regime, security, shopping and entertainment.

The super-prime properties can fetch as much as 4,000 pounds a square foot, CB Richard Ellis Hamptons International estimates. That compares with 2,075 pounds a foot in New York, the broker said.

House prices in the whole of the U.K. will probably increase 3 percent next year, Savills estimated today. That would be less than half the expected gain of 7 percent in 2007.

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

Last Updated: November 5, 2007 11:37 EST