Merryn's Blog

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

London’s house prices just keep on getting more unaffordable. And if bankers’ bonuses get capped, they could get even further out of reach.

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.

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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.

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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 Lyce. 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.

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