Lower City bonuses mean slower growth in prime London property prices. But what’s a few million between friends, asks Ross Clark.
The first sign that the prime London property market was about to enter another boom was in September 2005, when rumours began to circulate that City bonuses were to surge after several years in the doldrums. As Lulu Egerton of Lane Fox recalls: ‘One of my clients called and said, “Last week I was looking for a £5 million house. Now I’m looking for an £8 million one.”’ Sure enough, a year later the price of a so-so house in Chelsea had advanced from £5 million to £8 million to take account of the extra spending power exerted by the City bonus boys.
Over the past month, upmarket estate agents have been gently digesting the news that this year’s bonuses are unlikely to be so generous. According to the Centre for Economics and Business Research, the City bonus pool will fall by 15 per cent in reaction to the global credit crunch and wobbles on the stock market. Not only that, the City is bracing itself for 6,000 job cuts.
The relationship between the City bonus pool and Central London house prices is well-established. The last time that bonuses fell was in 2001, when they slipped by 30 per cent, and 2002, when they collapsed by 40 per cent – a grim year in which 20 per cent of bankers found themselves without a bonus at all, and had to grub by on their salary alone.
The effect on the London property market was instant. Prices of property in Kensington and Chelsea slipped by ten per cent almost immediately and for the next four years they struggled to keep up with inflation. Volumes fell too. In the first quarter of 2002 – the time of year when bonus-fed property purchases tend to peak – 131 properties in England and Wales were sold for £2 million or more. Just one year later, it was right down to a measly 105.
So, anyone fancy having to sell a posh pad in Central London next year, when City types are forced to draw in their horns, if not quite resort to shaking a tin outside Woolworths? One who is putting a brave face on it all is Ed Mead of estate agents Douglas & Gordon. ‘Eighty-five per cent of what bankers were paid last year is still a lot of money,’ he says. ‘But the environment is certainly not conducive to a reckless spending spree.’
Not half. According to Marc Goldberg of Hamptons, 60 per cent of deals in a two-week period in September fell through, either because the buyer got nervous or because a lender valued the property at less than the buyer had offered. Prices, he says, have stabilised for the moment at ten per cent below their peak.
The slide in City bonuses is one reason Knight Frank is predicting inflation in the prime London property market to fall to five per cent in 2008 – down from what it expects to have been a 30 per cent rise over 2007. ‘The market has come to a bit of a standstill,’ says Liam Bailey of Knight Frank’s research department. ‘At prices above £5 million, there are still a lot of deals being done.
That is more of an international market, driven especially by Russian and Middle Eastern buyers. But between £1 million and £3 million the market is a bit more sticky. Purchasers are finding that the ball is in their court, and beginning to look for problems with properties, which allows them to negotiate the price downwards. A few months ago, if you wanted to buy a house, you just had to crack on and buy it.’
Last year, according to Savills, out of an £8.8 billion bonus pool, £5.5 billion found its way into the London property market. This year, it reckons, that will be down to just £2 billion. The problem is, says Yolande Barnes, the company’s research director, is that an entire generation of City bonus boys ‘are now what you might call fully-housed’.In other words, they have got a big house in Chelsea, a place in the country and probably a bolt-hole or two abroad. Why on earth would they want to buy any more property? ‘Theoretically there should still be a lot of equity coming into the market, but with real estate out-of-favour, City buyers are unlikely to see it as a big play. However, real estate in a financially stable country can seem quite attractive after other assets have declined.’
The City is not so sure – as Ms Barnes will discover when she contemplates her own bonus pool. Since January, Savills shares have plunged 40 per cent as a chill has hit all quoted companies dealing with property. If you are not sufficiently impressed to buy the company, to twist an old saying, why should you want to buy the product?