Even London's property market can crumble

Think London house prices are immune from the price falls hitting the rest of the market? Think again. Black Brick a property search agency notes that in July, prime London prices fell for the first time in 15 months (down 0.5%).

Meanwhile, "lenders are slashing" the valuations they put on top-end properties by "up to 25%", reports The Sunday Times. This won't surprise anyone watching the crushingly awful stats coming out of the market. Property website Zoopla tells us that a third of the houses currently on sale are at reduced prices, while the Royal Institution of Chartered Surveyors says that new-buyer enquiries have fallen just as the number of properties coming on to the market has risen; and gross mortgage lending fell again in July.

One drop in prime prices clearly doesn't prove a trend. But the fact that the prime market moved in tandem with the wider market in July should concern prime London's agents. Their general view is that their area is immune from slowdowns. Why? Because there is a shortage of quality property. Because high bonuses mean City demand will remain high; and because, as Black Brick says, "international interest in London property is unlikely to be affected by UK public sector job cuts, rising domestic taxes" and the glum economic outlook.

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I'm not convinced. First, the bonus business. Yes, too many bankers are still paid too much. But the hedge funds have made almost no money this year so they won't be paying out big bonuses. And the banks are increasingly paying out in deferred shares, not cash. There is just less money than there was.

Next, international buyers. If you've made your money in environments with historically unstable property rights (China or Russia perhaps) you might view the UK as a safe haven. But foreign buyers alone cannot prop up a market indefinitely. And will they keep buying anyway? They might not think they use our public services, but they use our roads and rely on the security our police provide - won't these be hit by cuts? And what if the pound weakens again against Asian and commodity currencies? Will the losses they make on foreign exchange be worth the security they get from owning here?

That last question is particularly relevant. Asset security is only relative: the UK has a long tradition of responding to fiscal troubles by resorting to the extraordinary taxation of the rich. If I were a foreigner, even a non-dom, thinking of buying in London, I might look at the state of the public finances as we head for a double dip, cast my mind back to 1974, when the top marginal tax rate was 98%, note the renewed clamour for land and wealth taxes from the Labour leadership candidates, and think again.

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