£2bn City bonus gap set to hit property

The drop in bonuses is almost certain to hit the property market and the capital's broader economy, according to analysts.

Forecasters said a sudden slowdown in mergers and acquisitions - one of the City's most lucrative activities - and rollercoaster stock markets meant bonuses would be slashed this year. Doug McWilliams, chief executive of forecaster CEBR, said early forecasts suggested that bonuses would be down at least 15 per cent on last year's £8.8 billion record. However, as the crisis on the world's financial-markets deepened, even this could prove over-optimistic, he said. The total could fall below £7billion.

As a rule of thumb, about half the City's annual bonus windfall goes into the property market, providing a traditional spring boost as bankers and traders look to invest their money.

The worst-affected areas are likely to be those prime "bonus belt" areas of central and west London that have seen huge increases in value over the past two years.

Figures from property website Rightmove.com showed a 2.6 per cent downturn in asking prices in August. "It's going to hit the top end much more than the bottom end," said Mr McWilliams

In addition, with many markets in turmoil and banks sitting on billions of pounds of bad debts, thousands of high-paying City jobs are expected to be axed in the coming months.

Mr McWilliams said: "People will be deciding who they want to keep - and the others can go hang."

Between 5,000 and 10,000 highly paid jobs are expected to be at risk, further reducing the property spending power of the City.

The scale of the impact on the major investment banks, which employ tens of thousands of people in the City, will become clearer in the coming days as most report their third quarter profits.

The bigger the downturn in profits, the greater the impact on bonuses and jobs. Another factor driving the market downwards is a drying-up of the "aggressive" home loan deals pioneered by Northern Rock.

This will make it harder for firsttime buyers to raise the money to get on the housing ladder at current levels and force sellers to cut asking prices. Ray Boulger of mortgage brokers John Charcol said: "We will see some lenders pull back their maximum 'loan to value' limits so there will be fewer players in the 100 per cent market."

The jitters over the UK property market will be increased by gloomy comments from former US Federal Reserve chairman Alan Greenspan.

In a newspaper interview today, he said: "There are going to be some difficulties. Can [the boom] last? No. You're already beginning to see the