Bear turns too soon

published 16 February 2012

Dominic Frisby, who writes for our free daily email, Money Morning, caused a bit of a stir on the MoneyWeek website last week. Fed up with the inconvenience of renting, and tempted by the sheer cheapness of money, Dominic a rampant gold bull and property bear confessed he was thinking of buying a house. His piece -Why the world'sbiggest property bear may be buying a house -has drawn a record number of comments read it, and have your say.

You can see why Dominic, and any other renters forced to remain in London, might be despairing right now. Despite record low interest rates, house prices in much of the rest of Britain remain well below their 2007 peak. Yet central London remains robust indeed, prime' areas are now even more expensive than they were before the crash.

However, perhaps Dominic shouldn't be so hasty. Amid the entirely justified outcry over bank bonuses, we've pointed out several times that the fundamental problem is that banks were able to make the massive profits that sustained those giant pay packets in the first place.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

The good news for anyone irritated by bonuses is that the good times for banks are over. New rules increasing the amount of capital they have to hold and limiting the trading they can do on their own behalf are a start. But it's the hostile economic backdrop that will really do for the banks, rather than anger over salaries.

We're living in a world of deleveraging paying down debt, rather than taking more on which means that taking big bets with borrowed money is no longer the sure route to riches that it was in the boom days.

As a result, workers in investment banks are not only seeing their bonuses decline (or the cash elements, at least), but in many cases they're also lucky to hang on to their jobs. According to the Centre for Economics and Business Research, the number of City jobs fell by 8.5% last year.

Why does this matter? Because one of the things propping up the London market is money from finance workers. Fewer workers and less money means lower demand for property. Rents in prime areas are already "coming off the boil", notes George Hay on Reuters Breakingviews, while "corporate letting budgets for relocating bankers to London have been slashed by up to 15%".

Yes, there's still demand from overseas buyers. But anyone worried enough to pull their capital out of Europe must surely have made that move by now. Ironically, if things start to look even slightly less bleak in the eurozone, it could be very bad news indeed for London property prices.

PS. If you don't receive Money Morning, sign up for it free here.

John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.