What a difference a year makes. Last December, the City dealers and traders were pondering whether to splash January’s six- or seven-figure bonus on a ski chalet in Verbier or a country estate in the Cotswolds – or both. In recent weeks, many have been wondering how much smaller the payout will be this time around, and how much longer they will be in work at all.

Such is the dominance of the City in the British economy that, in the past few years, bonus money has been one of the driving forces behind sharp rises in the upper echelons of the property market, not just in prime central London, but in areas popular with holiday-home buyers.

So it is hardly surprising that the growing pessimism in the financial markets, which began with this summer’s sub-prime crisis in America, is beginning to affect the property markets. Even the most ebullient of estate agents in central London, who until two months ago were having a fantastic year, are reporting a sharp drop in inquiries from bonus-dependent buyers – a mainstay of the £1m-£5m sector of the market.

The Centre for Economics and Business Research has predicted that payouts are set to drop by 20% – from £8.8 billion to about £7 billion – and expects City firms to cut 6,500 jobs. Savills estate agency estimates that the amount of bonus cash flowing into prime London property and into second and third homes will fall by 60% to £2 billion in the coming year.

The agency expects house prices in central London to drop 3% by the end of the year and 4% by next March. The Land Registry said last week that prices in the capital fell by 0.6% in October – the sharpest drop since August 2005. Also at risk are the Cotswolds, the southwest and parts of Norfolk, Suffolk and Kent. “We expect only a third of bonus money to be put into real estate over the next 12 months, compared with 50% this year,” says Lucian Cook, director of residential research at Savills. “Most of these purchases will be main residences rather than investment properties.”

It is a dramatic turnaround from only a few months ago, when many multimillion-pound properties were going to sealed bids. “Of course they aren’t as confident and brash as they were the same time last year,” says Robert Bailey, director of an eponymous buying agency that hunts for homes for wealthy clients. “But there is still a lot of money sloshing about, from buyers who have been lucky this year, and buyers who failed to find the house they wanted at a price they were prepared to pay earlier in the year.

“Those are the guys who may pretend they are not in the game, but are keeping a watchful eye on it. If the right house comes up, even between now and Christmas, they’ll go for it. However, they believe prices will dip next year and so will wait to drive a hard bargain.”

Research conducted for The Sunday Times by Savills (right) shows the impact of bonuses in recent years, with significant peaks in prices and the volume of transactions in February and March – the time when the bulk of them are paid. Back in 2000, such payouts had virtually disappeared from the market: prices in London and the southeast were static, turnover was sluggish and the only soaring values were in former mining villages and industrial areas in northern England and Wales.

Then, in April 2004, the first flush of City money began to hit the stucco-fronted streets of west London, and up went property prices. After record bonuses last time around, house prices in areas of central London popular with investment bankers and the like, such as Holland Park, Kensington, Chelsea, Fulham and Wandsworth, soared in the first half of this year, up by 47% according to the estate agency Knight Frank, as buyers invested their million-pound payouts.

The impact was felt not just in London, but in the country, especially in the “stockbroker belt” within the M25 and M4 commuter corridors and in the micro-markets that have emerged in holiday-home hot spots such as Rock, in Cornwall, and Southwold, in Suffolk. These are now known as the “red trouser belt”, after the attire of the dressed-down financier.

These popular locations – again in the £1m-£5m bracket – might see even steeper falls in prices during the next year, as discretionary spending is reined in. In the majority of cases, it won’t be that bonus buyers can’t afford a holiday home by the sea – merely they believe their money would be better invested elsewhere.

“It’s all about confidence,” says Ed Mead, director of Douglas & Gordon’s Chelsea office. “Prices have already come off 5% since September, when the first wobbles were felt following a global credit crunch. If people start to feel more jittery about the long term, then sentiment changes and they don’t just waver, they withdraw. But there are always a few buyers out there, the ones who really thrive off risk, who see this slowing down in the market as an opportunity.”

At the start of last month, for example, Savills’s country-house department did 14 deals with a total value of £70m in just weeks; most were in the southeast, at prices ranging from £2m to £10m. “Interestingly, City money represented only 15% of that amount,” says Crispin Holborow, head of Savills’s country department. The majority of the remainder were wealthy self-made entrepreneurs.

Then there are foreign buyers, estimated by Savills to account for more than half the £1m-plus properties sold in central London, and more than 70% of homes priced higher than £4m. They have also been making inroads into the country-house market, where they now account for more than 30% of £4m+ purchases.

Cook believes the upper end of the market will not see significant falls “provided foreign investors feel safe”. But there are potential clouds on the horizon there, too, with signs of a clampdown on the tax benefits enjoyed by “nondoms”: foreign citizens resident in Britain but not considered domiciled here, and thus allowed to keep their offshore income and gains out of the UK tax net. Under proposals announced by the government in October, anyone wanting to maintain this special status will have to pay a £30,000 annual fee. In recent days, however, it has been suggested that the Treasury may clamp down on offshore trusts allowing “nondoms” to escape capital-gains tax when they sell property and other assets held in Britain.

“If it is just a levy of £30,000 imposed after seven years, and not something of a different order of scale, then it is fine,” Cook says. “But the big risk is if they use it to find another way to tax the overseas wealth of nondoms. People see it potentially as the thin end of the wedge.”

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