Bonus cash could help prime UK property market

Additional deferred bonus payments may also find their way into the property markets, they say, but that will depend on how the private banks choose to treat them as collateral.
 
‘We expect to see bonus money coming into the prime London market early next year, though not to the extent that it triggers a measurable price rise as seen in the past,’ said Yolande Barnes, head of Savills residential research.
 
‘Rather, we anticipate that bonus money will be fed into the market over a longer time period than has been the case in the past, with a less pronounced effect on the spring market than the big bonus headline figures may suggest,’ she added.
 
Forecasts from the Centre for Economic and Business Research (CEBR) suggest that bonuses in the London financial services sector this season will total £7 billion. This is just 5% down on last year, but down 13% net of tax and some 45% less than the 2007 bonus pot which helped propel the market to its peak in September of that year.
 
In 2006 and 2007 City bonuses totalled some £11.5 billion according to the CEBR and much of this money went straight into the housing market, fuelling prime property growth in London and its hinterland, including prime second home hotspots.
 
In 2008, this total bonus pot was more than halved, down 54%. At the same time the housing markets of prime London and elsewhere recorded sharp falls, although the link is doubtless coincidental rather than causal, as both were without doubt triggered by wider economic malaise.
 
‘We have factored a bonus effect into our forecasts for next year and anticipate the prime London market performing well ahead of the rest of the UK as a result. However, general caution and the method and timing of the payouts mean that only a portion will be invested in property. The £1 billion boost will mean that any falls in prime London will be contained at a marginal -1.0% level, compared to a -3.0% fall anticipated for the UK as a whole,’ explained Barnes.
 
Much will depend on how lenders treat bonus payments. Mark Harris, director of Savills Private Finance, believes there are two mortgage markets which he describes as ‘relationship lenders’ and ‘automated lenders’.
 
‘The relationship lenders, such as private banks and those that meet with clients and adopt manual underwriting, take a view on bonuses on a case by case basis and are largely happy to assist. By contrast, the automated lenders rely on a computer system score and have far less discretion. Some ignore bonus cash, others use all of a bonus but cap it at 100% of salary, others use a percentage,’ he said.
 
‘To be fair I think the whole thing is being largely overplayed. We can source many lenders who will support bonus driven debt. Most of the bankers I know are expecting big numbers this year, but we could see borrowers reluctant to rely on bonuses as they have been so badly scared,’ he added.