Bear turns too soon
By
MoneyWeek Editor
John Stepek Feb 16, 2012
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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's biggest 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.
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.
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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.
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