KEY POINTS:
One late-June morning in London, a real estate broker named Becky Fatemi eases into her black Porsche Cayenne and heads for Connaught Square, just north of Hyde Park.
As her sport utility vehicle turns into the square, Fatemi - who, by her own account, handled about £55 million ($145 million) of home sales last year - nods towards one of the Georgian town houses.
"This is where Tony Blair bought," says Fatemi, the top producer at Foxtons, the biggest residential property brokerage in London.
Through Foxtons and another broker, Blair purchased the five-storey house for £3.65 million in 2004, when, as prime minister, he was still living on Downing Street. Fatemi, 31, says Blair's place is worth £4.7 million now - a 29 per cent increase.
A confluence of powerful forces from low mortgage rates to Russian petro-riches to the teeming wealth of the City of London, Europe's largest and most dynamic center of finance, has supercharged home prices across the British capital.
The average price of prime London homes, the ones brokers consider the most desirable, has soared 254 per cent since 1997, when Blair's Labour Party came to power, says London-based real estate firm Knight Frank.
Defying predictions that the market would sputter, that average rose 28.7 per cent last year, the steepest rise since 1979, and then by 18 per cent during the first half of this year.
These days, buyers who dillydally risk getting gazumped. The decade-long leap in prices has made London the most expensive city in the world for high-end homes - costlier per square foot than Monaco, New York, Hong Kong or Tokyo, according to Knight Frank, which says prime London houses cost about £5 million and prime flats run about £2.5 million.
The unprecedented surge has brought with it unprecedented risks. Prime Minister Gordon Brown must now contend with a host of dangers - from accelerating inflation to rising interest rates, to mounting mortgage debt - that could puncture the housing market and threaten Britain's longest period of economic growth in 200 years.
The housing market hasn't been this heady since the 1980s, when prices almost tripled. That boom, touched off by falling interest rates and rising stock prices, ended when a subsequent increase in inflation drove interest rates as high as 15 per cent. London home prices sank 27 per cent from December 1988 to December 1992.
Now, the thunderheads are gathering once again. As the US Federal Reserve battles a sub-prime mortgage crisis, the Bank of England is tightening credit to combat inflation.
The UK central bank has raised its benchmark lending rate five times since August 2006, pushing that rate to a six-year high of 5.75 per cent.
No broker has fed the frenzy like Foxtons, which has helped drive up prices and, in the process, its own commissions, by inflating home valuations, wooing buyers and sellers - and pushing agents to close, close, close.
This year, Foxtons itself, with another British property broker, Countrywide was gobbled up. The buyer in both cases was the new power in global finance: private equity. London-based buyout firm BC Partners bought Foxtons from its founder, Jonathan Hunt, in May for about £390 million. New York-based Apollo Management LP bought Countrywide in the same month for £1.07 billion.
Hunt's exit is a bad sign, says Peter Nicholls, who sold his own London real estate firm, Royston Estate Agents, to rival Douglas & Gordon in May for an undisclosed price. "When Jon Hunt sells, you know the market's going to be in trouble," Nicholls says.
Hunt, 54, electrified the real estate scene by creating a snazzy company with a gladiatorial sales culture. From the moment Hunt founded Foxtons, in 1981, he never tolerated excuses from his brokers, former managing director Peter Rollings says.
In the early days, Foxtons' attitude towards its brokers was simple: "There's your desk, there's a phone, there's your car - now bugger off and sell some property," says Rollings.
Today, the firm Hunt founded employs 1300 people, most of them fresh out of university and willing to work weekends. Foxtons' 780 brokers race through London in a fleet of 635 Mini Coopers. The cars are painted British racing green and emblazoned with names like "Park Lane Prince" and "Fulham Flyer". Top producers are rewarded with BMWs.
Inside Foxtons' glass-and-steel headquarters in Chiswick Park, in west London, hundreds of telebrokers with headsets work the phones as dance music thumps. The young crowd cheers, claps and exchanges high-fives as brokers reel in new clients. Foxtons offers more places to buy or rent than any other London broker. Employees staff the phones 8 am-8pm, seven days a week, and typically process 1000 applications a day from people looking to buy or rent.
Suddenly, one broker leaps to his feet. "I got a val!" he shouts, to huzzahs from his colleagues. Val is Foxtons-speak for a request to value a property.
Foxtons lets its brokers choose how they get to be paid. Some collect £22,000 annual salaries and no commissions. Others opt for £10,000 salaries and 10 per cent of the fees they generate. Still others choose to take 20 per cent of their commissions and no salary at all. Fatemi brought in £1.5 million in fees for Foxtons last year and says she pulled down six figures.
Along the way, Foxtons agents have bent - and sometimes broken - the rules. In 2000, the London borough of Camden fined Foxtons for staking signs outside homes of people who hadn't hired the firm, a practice known as fly-boarding. The same year, Foxtons issued an apology after one of its signs ended up in the front yard of Alastair Campbell, Blair's press secretary. Foxtons manager Jean Jameson says the firm stopped fly-boarding years ago.
Foxtons has always played tough, Rollings says. It has gone to court to collect a commission from a seller when a buyer backed out of a purchase after making a down payment. "They're just incredibly hard, unforgiving," he says.
Fatemi says unscrupulous rivals goad buyers into raising their offers by lying about how many people are bidding on a home, she says. "That's sales, isn't it? It's putting the pressure on," says Fatemi, who left her native Iran in 1979, at the age of 3, after the Islamic revolution there.
These days, London is a gazumper's market. Old landmarks vie with new ones for favour. Not far from Kensington Palace, brothers Christian and Nicholas Candy have dreamed up the most expensive address in town: One Hyde Park.
Apartments in the glass-and-steel complex, scheduled for completion in 2010, have sold for a city-record £5000 per square foot, says Edward Lewis of London-based Savills, one of the brokers contracted to sell the 80 homes in the development.
Nearby, Knight Frank partner Rupert des Forges steps through an apartment in what was once a warehouse for Harrods department store.
The two-bedroom flat, adorned with silk-and-wool carpets, a white Yamaha grand piano and a bespoke bar, was for sale for £6 million in late June. A parking spot in the garage, next to three Aston Martins, two Ferraris and a pair of Rolls-Royces, costs an extra £250,000.
"You can name your price right now," des Forges says.
People have been warning of doom for years. So far, the market has confounded home buyers and research analysts alike.
Estate agents and property developers say zooming prices reflect basic economics: Demand outstrips supply.
- BLOOMBERG
