How capping bankers’ bonuses could push up London’s house prices

London house prices up again. The latest Land Registry numbers show London prices rose 7% year-on-year, and 2.5% on a month by month basis. I’m never going to get the little Bayswater bolthole I’ve been dreaming of at this rate.

You can read endless past articles by us on our conviction that the London property market is grossly overpriced, but just because it is overpriced in sterling doesn’t mean it can’t get more overpriced. Let’s not forget that every word Mervyn King utters in his efforts to force down the pound makes the houses we can’t afford to buy just that little bit cheaper for anyone buying in a foreign currency. Cut-price safe havens for them; a move further into the suburbs for the rest of us.

However, there’s another factor about to come into play here – this business of capping banker bonuses at 100% of salary. Regular readers can probably guess how we feel about this in general. See our past blogs explaining that it isn’t the bonuses that are the problem, it is the ongoing supernormal profits that allow the bonuses to be paid that are the problem.

So we’d be better off addressing lack of competition (the cause ) directly than remuneration (the symptom). But the question for this post is how the cap – if implemented – might hit London prices.

The answer is probably not at all. Some bank employees might move abroad – those for whom performance really has to be the basis of remuneration – and perhaps young people who haven’t already spend a decade trying to get their kids into the Lycée. But the rest will stay for a while. So demand is unlikely to fall dramatically – in the short term at least (longer term the drip drip of attacks on wealth andhigh income might have a larger effect).

But the price bankers can pay for houses might actually rise rather than fall. Why? Our old friend @Shinsei1967 puts it well. Base salaries will, he suggests, at least double to take account of the lower bonus environment. And given that it is easier to get a big mortgage if you have a salary of £500,000 rather than a salary of £200,000 and ‘expectations’ of a £500,000 bonus, we can expect prime property prices to just keep rising.

More on what the property industry thinks will happen here

27 Responses

  1. 28/02/2013, Richard wrote

    The first in a series from Moneyweek…next week: How dry weather is to blame for flooding…

  2. 28/02/2013, GFL wrote

    You hit the nail on the head mid-way though your article, the problem is not big bonuses, it’s banks making extraordinary profits (without creating anything productive).

    You hit the nail on the head mid-way though your article, the problem is not big bonuses, it’s banks making extraordinary profits (without creating anything productive).

    I’m very free market and generally dislike government intervention into any element of the economy. But the current system is completely rigged; when you have a system based entirely on credit, those that issue/create it or have access to it buy up all the key assets and resources – that includes a little bolthole in Bayswater.

  3. 28/02/2013, GFL wrote

    Very few people have enough left at the end of the month (even the reasonably well paid) to make any real meaningful investments, especially with the price of things going up so quickly. That’s why people are so desperate for house prices to keep raising; it’s their only access to the credit market and tax free cash! And the government know it!

    I’m not sure what the solution is but allowing people to keep more of their money is a good start – and any money in someones pension should be paid into a company which they control tax free! Not to some idiotic fund manager that takes half your profits.

    Money should be decentralized away from governments and banks!

  4. 28/02/2013, Boris Macdonut wrote

    Merryn.If you’d kept your own London property ,instead of panic selling in 2008 at least a few folk might listen to you.

  5. 01/03/2013, JREwing wrote

    How have London prices performed in US Dollars, Japanese Yen, Swiss Francs, Chinese Yuan, Hong Kong Dollars, Singaporean Dollars, Canadian Dollars and Australian Dollars in the last five years? Much much worse than in Sterling. In some of these currencies the prices have actually declined.

    I rarely meet anyone these days who thinks buying property in London is a bad idea. The market is massively overbought. From here, the rise in the price of petrol and bread outguns the rise in the price of London property.

    And elsewhere in the UK: http://uk.finance.yahoo.com/news/two-in-five-homes-sold-at-a-loss-since-2007-112408456.html

  6. 01/03/2013, Banker wrote

    Salary of £200k, salary £500k…. How many bankers do you think actually earn that much? Most are a lot less paid that that. And many of those on £200k are quite shrewed and realise that London properties could be a bad long term investment. It is just wrong to assume that bankers (thorough personal purchases) drive the housing market in London. There are plenty of people on £100k+ including self employed plumbers etc, doctors, self employed car mechanics, lawyers, numerous charities bosses working 10 to 3, council officials in numerous quantities, civil cervants, judiciary who are so safe in their seats they can afford not to bother to actually consider the cases they “hear” etc etc.

  7. 01/03/2013, Banker wrote

    Salary of £200k, salary £500k…. How many bankers do you think actually earn that much? Most are a lot less paid that that. And many of those on £200k are quite shrewed and realise that London properties could be a bad long term investment. It is just wrong to assume that bankers (thorough personal purchases) drive the housing market in London. There are plenty of people on £100k+ including self employed plumbers etc, doctors, self employed car mechanics, lawyers, numerous charities bosses working 10 to 3, council officials in numerous quantities, civil cervants, judiciary who are so safe in their seats they can afford not to bother to actually consider the cases they “hear” etc etc.

  8. 01/03/2013, Banker wrote

    Most people in the investment banks are on a total package (including) quite below £100k and there are just not too many of them and the numbers are shrinking. Also they do realise unlike say doctors who are almost guranteed their £100k+ till returement they can not rely on their income beyong next month or two and hence would be quite reluctant to borrow to the full capacity based on their income figure only.

  9. 01/03/2013, Nev wrote

    Hospital doctors do not earn that much. It’s doctors in the provinces who do so very well for themselves, and have a lifestyle and house not unlike that of their fathers and grandfathers. A fortunate but hard working group. The bank manager in the same location is not in the same financial situation as his forebears.
    It’s clear that the money in banking has been drawn upwards and collects at the top.

  10. 01/03/2013, Shinsei1967 wrote

    @JREwing

    London property prices falling in Aussie $ or Sing/HK $ just makes London property even more attractive for all those Aussies or Asians who haven’t yet bought a place here.

    @ Banker

    Not sure where you get the idea that most people in inv banks get less than £100k. There are clearly many thousands of bankers in London earning the packages Merryn mentions, and it is these who drive London property prices.

  11. 01/03/2013, Banker wrote

    to Shinsei1967

    Many thousands – may be. But total number of people working in investment banks is hundreds of thousands of which a small minority might get those kind of packages. I think it is not very clever to suggest that say 10000 people are through personal purchasers drivers of house prices of London and commmuter belts where tens of miooions of people live. Bankers that earn a lot are just a drop in the ocean. There are many people on high income (especially blue colour self employed who can “avoid” tax) and even more on tiny income who are nevertherless prepared to borrow as much as they can (sometimes under false representations) just to buy and overpriced house / flat in the expectation that it will make them wealthy / provide retirement. These are the driving force of house prices.

  12. 01/03/2013, MichaelL wrote

    “Most people in the investment banks are on a total package (including) quite below £100k and there are just not too many of them and the numbers are shrinking. “

    I’m not entirely convinced by that. For a start, base salaries took a big jump up about 2008 time – thats when the banks were deferring bonuses etc… For banks its not too bad, there is more ‘fixed’ in the pay but:

    i) they aren’t scared of sacking people if need to.
    ii) base pay can be frozen so they can let inflation take away the cost over time if they need to.

    FWIW, I think you’ll see (at the higher end – the people discussed in the article) pay within banks getting ever more stretched with the “top” taking a big piece of the pie and the rest seeing their salaries gradually managed down to “normal” levels.
    Of course “normal” has to be above what someone could get in another industry – if it wasn’t you’d never get people working for banks.

  13. 01/03/2013, Jay wrote

    How to get a little Bayswater bolthole at a reasonable price?
    Buy at auction?

    Property auction prices are usually about 30% lower than estate agency prices, maybe 40% lower if you are astute. Sometimes they need renovation. You have to be a cash buyer and pay within 28 days, that is why the competition is reduced. Arranging a mortgage in time afterwards is tricky, but can be done before the auction takes place. Either attend in person or bid by telephone or soon even on-line.

    Best London Property Auctions…

    http://www.allsop.co.uk/3/auctions-home
    http://auctions.savills.co.uk
    http://www.barnardmarcusauctions.co.uk

    For the rest of the UK…

    http://www.propertyauctionaction.co.uk – lists about a 100 auctions
    http://www.futureauctions.co.uk – a smaller site with regional lists.

    Alternatively you can register free with one of the big property portals, eg Prime Location or Zoopla, etc., and they will email you properties coming up for auction in the area of your choice.

  14. 01/03/2013, kkggx2x wrote

    @Jay

    “Property auction prices are usually about 30% lower than estate agency prices, maybe 40% lower if you are astute”

    Actually that is rarely true these days. I’ve been attending the Savills London auctions for a while and the prices are ridiculous. I have seen barely any bargains for ages.

  15. 01/03/2013, Boris MacDonut wrote

    #6,7,8, and 11 Banker. As of last year there were 800 council officials and 600 civil servnats earning over £100,000 but 1,700 bankers just at RBS and Lloyds. Across the whole finance sector in the UK it is estimated that there at least 20,000 on such salaries though many take advantage of their foreign status to avoid paying our taxes. Of course many doctors do earn this,but get no bonuses and represent a small percantage of all NHS workers.

  16. 02/03/2013, I'm just saying... wrote

    Merryn-the only issues we need to focus on are these: How much money do you have? How much did your parents give you? How much did your schooling/private clubs cost? What interests do you have in telling us about property prices? What is your income? Until you tell us these things, why should we pay you any attention?

  17. 03/03/2013, Thomas wrote

    Having spent the last 5 to 10 years telling everyone that house prices (including London) would drop by up to 55%, Moneyweek is now waking up to the real facts of the matter. Brilliant!

  18. 03/03/2013, Paddington Bear wrote

    I understand that 80% of purchasers in London are currently from overseas. This rather puts the bankers bonus issue into perspective I think.

  19. 03/03/2013, The Pope wrote

    Every comment on sites like this are trying to either talk the market up or down depending on whether you’ve already bought or are planning on doing so. All this talk of bonuses, foreign tax-evaders, triple-dip recession, repossessions, property bubbles bursting, empty homes in prime London vs homeless on the streets etc. is all very well but we’re all selfish gits when it comes to our savings/investments. That’s capitalism and we’ve got ir bad. Ofcourse that’s what causes bubbles and their bursting crises in the first place. And when you see a penthouse flat overlooking Hyde Park going for £140,000,000 (yup, that’s 6 zeros) you know the great London property boom has gone to the dogs i.e. money launderers et al, and currency wars followed by trade wars then military wars will swing the boom to bust. Sorry you wealthy moneyweek readers, the game’s changed. Too late to get out of prpoerty now…

  20. 04/03/2013, 4caster wrote

    #19. The Pope: By definition anyone who reads Moneyweek is a selfish git, interested in keeping what wealth we have and hopefully increasing it. On the other hand some of the richest people in the world are the biggest philanthropists, e.g. Bill Gates and Warren Buffett. Most of us lesser mortals have some scruples too, e.g. we try to stay within the law, pay our taxes, and don’t take the rice from the mouths of the poorest people in the world by speculating on its price.
    And The Pope would have more credibility if he or she could correctly count the zeros in 140,000,000. I make it seven.

  21. 04/03/2013, Boris MacDonut wrote

    #11 Banker. We hear today that HSBC alone has 80 UK staff earning over £1million each. There are no public servants earning anywhere near that ,except a couple of BBC executives on £600k.

  22. 10/03/2013, Lupulco wrote

    If the Bankers wish to move out of this county, let them, i am sure there is a lot of under 30′s with good Business and Accountancy Degrees would welcome a chance to show what they can do.
    Bonuses fine, but paid out of profits, ala dividends. No profits, No dividends = No Bonuses.
    Tax it is about time tax was simplified.
    Income Taxed for employees, at one rate.
    Tax on Company Revenue. say 2% for Companies based in the UK and 4% for those outside the UK [ref Amazon]
    Scrap Corporation Tax over 5 years, the above taxes to be paid a year in arrears, with no losses brought forward to ofset taxes due.
    Tax on Assets, Say 1% of property/land values
    Tax on Company Assets as shown on Company accounts @ 1%
    Consumption Tax set at point of sale, set @ 21% or 50% of Income Tax

  23. 10/03/2013, Boris MacDonut wrote

    #21 Further, on Friday we heard Barclays has 428 UK staff on £1million or more ans RBS another 110. That is 3 banks with 600 earning over £1million pa , and then they weant bonuses,but protest at these being limited to one years’ pay.
    At the same time they offer savings accounts, including ISA’s at 0.4%. They are taking the ****, but Gideon and his crew let them. RBS is only fit for the knackers yard but still get fatcat pay. Cheats.

  24. 10/03/2013, Boris MacDonut wrote

    #21 Further, on Friday we heard Barclays has 428 UK staff on £1million or more ans RBS another 110. That is 3 banks with 600 earning over £1million pa , and then they weant bonuses,but protest at these being limited to one years’ pay.
    At the same time they offer savings accounts, including ISA’s at 0.4%. They are taking the ****, but Gideon and his crew let them. RBS is only fit for the knackers yard but still get fatcat pay. Cheats.

  25. 10/03/2013, Boris MacDonut wrote

    #11 Hey Banker. I think it is “not very clever” of you to be so wide of the mark with who earns the big salaries. But from what I read maths is not a requirement in banking.
    Drop in the ocean I think you described banker son big money. Well there are 600 of you just at 3 of London’s big banks. That is more staff than all of the 20 Premier League football teams.

  26. 13/03/2013, Boris MacDonut wrote

    ….and RBS tried to hide the fact that even this failed entity has 92 bankers on £1million plus. Give the taxpayers flipping money back before you vote such salaries.

  27. 23/03/2013, Boris MacDonut wrote

    #26……and 430 at Barclays too.

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