Bonuses set to be a damp squib for housing market

The bankers’ bonus effect on the housing market may be a damp squib rather than a £7bn firecracker.

One factor is a report from the IFA revealing that billions of pounds worth of bonuses may have been miscalculated and paid out by mistake. Another is that bonuses may be mainly paid out in shares over a five-year period and be subject to clawbacks – making lenders nervous to lend against them.

It has emerged that complicated International Financial Accounting Standards mean that banks have been able to hide risks, thereby inflating profits and bonuses.

Ian Richards, of Aviva Investors, told the House of Lords that because of the IFAS system of auditing, some dividend distributions had been made and bonuses paid out “that were imprudent”.

The second factor – that the bonuses will not be paid all in cash – means that typically, after tax, two-thirds would be in shares, leaving approximately £166,000 cash from a typical top-end Goldman Sachs £1m bonus.

Some lenders are undecided as to how they will treat bonuses. Bonus recipients are also expected to be nervous about borrowing against their windfalls, although there is also a race against time to beat the rise in Stamp Duty on £1m-plus houses that comes into force on April 6.

Someone looking to buy a property priced up to £2.5m would pay an extra £25,000 in Stamp Duty after this date.

According to estate agents Cluttons, there has been a flurry of activity in property buying by cash-rich City workers over the last two weeks, going ahead quickly with their investments.

Against a backdrop of public fury over the size of many bonus payments, estate agents Savills anticipate a £1bn injection of bonus cash into the market. They say that most of it will be invested in central London.

Altogether the bonus pot is expected to be £7bn this year, and additional deferred bonus payments may also find their way into the property markets, said Savills.

Property finder Jo Eccles, director of Sourcing Property, agreed, but said this could take three or more years. She said: “Shares can usually be cashed in over a three-year period, but there is talk of increasing this to five, meaning that bonus money will come into the market over a longer period than we’ve previously seen.”

Much will also depend on how lenders treat this year’s bonus payments.

Mark Harris, director of Savills Private Finance, said: “The relationship lenders – 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, and others use a percentage.

“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 scarred.”