City windfalls look set to spark a new property boom — but only in the southeast, says Clare Francis

HOUSE-PRICE growth in London is expected to outstrip that of the rest of the country in 2007 as many of the capitalnulls bankers invest their bonuses in bricks and mortar.

An estimated null8.8 billion of bonus money will be paid out over the next month with much of it expected to be ploughed into the London property market, boosting prices in the capital.

Haart, an estate agent, predicts prices in London will climb by about 8% in 2007, compared with increases of between 4% and 5% nationally.

Russell Jervis, managing director at Haart, said: nullThere has already been a higher than usual number of buyers registered in London for this time of year as a result of the expected bonus bonanza.null

Savills, another estate agent, is even more bullish about prime properties in London and the stockbroker belt of the southeast. It thinks they will go up by 15%.

Yolande Barnes, director of research at Savills, said: nullHampshire, Surrey and Kent are popular with purchasers in the financial sector who benefit from bonuses. Properties in Oxfordshire, Suffolk and Norfolk are also in demand.null

It is not only the top end of the market that is affected. City high flyers are not just looking for large family homes to spend their bonus on — one and two-bedroom flats favoured by first-time buyers are also highly sought after as buy-to-let investments.

Prospects for the rest of the country are less rosy, although prices are still expected to rise. Savills predicts average house-price growth of 7% in 2007, but prices could increase just 3% in the northeast.

The biggest gains this year have been concentrated in and around London while other regions have experienced much slower demand and longer times for property to sell. UK house prices rose by 10.5% during 2006 and the average cost of a home has increased to null174,000, Nationwide building society said last week.

But while property values in parts of the capital, such as Kensington, Chelsea and Islington, have soared by more than 20%, according to Hometrack, a property website, in some areas of the country they have virtually stood still. In the north of England values have risen by just 0.5%, while those in the East Midlands are just 0.7% higher.

Experts say that the north of England and the Midlands are experiencing the downturn London saw a couple of years ago. Strong price growth between 2001 and 2005 have stretched affordability and priced many first-time buyers out of the market, slowing demand.

Richard Donnell at Hometrack said: nullThe reality for many homeowners is that house-price growth across large swathes of the country has been extremely modest over the past 12 months. I think this will continue over the next few years causing a gradual realignment of prices and affordability.null

Donnell expects values to rise by an average of 4% in 2007.

But even if prices slow to low single-digits in many parts of the country, a few forecasters expect a housing-market crash.

Price Waterhouse Coopers, a consultancy, suggests there is a one in three chance that prices could fall over the next four years.

David Miles, a Morgan Stanley economist and former adviser to Gordon Brown, has also warned that a housing slump looks likely in the next couple of years.

Such views, however, are in the minority.