City bonuses send London house prices surging ahead

House prices in London are growing at more than twice the pace of any other region of the UK and are set to surge yet higher on the back of a bonanza of City bonuses, two surveys claim today.

The price of the average home in the capital has risen by almost 10 per cent in the first 10 months of the year, according to property website Hometrack.

This was more than double the 4.4 per cent recorded in the South-east and 10 times the 1 per cent growth seen in Yorkshire and Humberside. The powerful performance of the capital's housing market offset weakness in the regions to deliver annual house price inflation of 4.9 per cent, the highest for two years.

"The strong growth in house prices across London and the South-east continues to put a major gloss on the apparent strength of the national housing market," said Richard Donnell, Hometrack's director of research.

"The reality for many home owners is that house-price growth across large swaths of the country has been extremely modest over the last 12 months."

Analysts believe that prices have been driven up by a combination of factors including City bonuses, demand from overseas investors from oil-rich countries and a shortage of supply in the capital.

Today the Centre for Economics and Business Research raised its forecast for the money that will be paid out in City bonuses in the 2006/07 pay round.

It said it expected that a record £8.8bn would be paid out, an 18.3 per cent increase on the previous year's £7.4bn and 9 per cent more than the £8.1bn it had pencilled in in July.

The CEBR said that the stock market had shaken off the jitters in May to power ahead to a five-and-a-half-year high, while merger, private equity and hedge fund activity has also risen sharply. On top of this oil and metals prices have hit record highs.

Jonathan Said, a senior economist at the CEBR, said: "Continuing strong merger and acquisition activity, which is highly bonus-orientated, is driving corporate earnings up and stock markets higher."

He also pointed out that the number of jobs in the City is estimated to have hit a record high of 335,000 in 2006, up from the 324,000 recorded in 2004.

According to Knight Frank, the upmarket estate agency, prices in central London are rising at an annual rate of 23 per cent, the fastest for nine years.

"There's no doubt about the amounts of money being thrown around," said Liam Bailey, its head of residential research. "There is this constant desire of people to be right in the centre of London but we are simply building enough new units while demand grows exponentially."

Hometrack sees some signs that demand is slackening off. It said there were now growing signs of resistance to higher prices.

The average time taken to sell property was unchanged over the past three months at 3.6 weeks and price rises are slowing for the fourth month in a row. "A flood of potentially over-priced properties coming to the market would certainly put an end to the recent level of price rises," Mr Donnell said.