"In rather crude terms it comes down to financing debt or cash. The mainstream market is dependent on debt ‘its price and availability’ and the prime markets, whether they be in London, the country, France or Switzerland, are mainly, but not exclusively of course, funded by cash. The key point being that debt is, more likely than not, optional.
"Another shorthand for all this is bonuses. Every spring, along with the Boat Race and Cheltenham, there is talk of the ‘bonus season’, a time when investment bankers look miserable (by definition they are underpaid and so have to appear aggrieved) and estate agents look happy (in anticipation of finally selling the properties that they had egregiously overvalued to get the instruction).
"Despite the popular press image of the streets of Notting Hill being awash with Goldman’s millions, the reality of the bonus season is more prosaic. While the City pays a few people a huge amount of money, most receive sums that allow a comfortable middle-class life of private education and some nice holidays ‘but certainly not yachts and helicopters’. Bodenland rather than Pradaville. And the economic reality is that all these people were priced out of Notting Hill years ago – the ticket price for any sort of large family house there now being north of £8million. Where have they gone? To all the adjoining areas – Fulham, North Kensington, over the river and to the leafy suburbs of west London or commuting from Basingstoke and Guildford. This is now where the bonus season really has an effect – not in Chelsea or Knightsbridge where it is the vagaries of international wealth that make the prices.
"The outlook for those bonuses is not looking good – at least compared to the recent past. The rhetoric coming out of the Bank of England and the FSA would suggest that within the UK everything from regulation to capital requirements for banks is likely to go up even if separation of investment from retail banks gets kicked into the long grass.
"This is happening at the same time as America is heading in the opposite direction. As finance tends to flow towards the lowest level of regulation and tax, the smart money must be on New York recovering some of the ground that it lost to London over the last 20 years. And there is the rise of Shanghai and Mumbai to suck money eastwards. Combine this with a trend toward deferred pay (again much more than America) and some of the highest top rates of tax anywhere, and it is hard to see the sort of net money needed to power house price increases in Bodenland.
"Are these trends driving people away from the prime areas of Central London as well? This is a difficult one to answer. On the face of it, yes; one hedge fund group has conspicuously relocated to Geneva and others are making noises about only one more straw of tax or regulation to break the camel’s back. The market in Central London is tight – so the lack of supply probably still trumps any diminution in demand, for the time being anyway, when it comes to the direction of prices. The thing that is most difficult to gauge is how many people – entrepreneurs, media folk and financiers of all sorts – have decided not to relocate to the UK in the current climate. Recent surveys have still put London at the top of the tree when everything – culture, time zone, climate, tax, etc – is taken into account, but this lead is now marginal rather than commanding.
"The UK does still have the status of safe haven and there has been no safer haven over the last 20 years than London real estate. This is something easy to forget when financial markets are moving up and there has been so much money to make in emerging markets. During these times it is well to remember the saying that the trouble with emerging markets is that they are difficult to emerge from in an emergency. It is now 13 years since the Asian Crisis in financial markets that is the equivalent of a generation: in other words, there is now a generation of fund managers who don’t remember it because they were still at university when it happened. We do."
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