July 25 (Bloomberg) -- 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 pounds ($113 million) of home sales in 2006 -- nods toward one of the Georgian town houses.

``This is where Tony Blair bought,'' says Fatemi, the top producer at Foxtons Ltd., the biggest residential property brokerage in London.

Through Foxtons and another broker, Blair purchased the five-story house for 3.65 million pounds in 2004, when, as prime minister, he was still living on Downing Street. Fatemi, 31, says Blair's place is worth as much as 4.7 million pounds now -- a 29 percent increase.

Blair is no real estate savant. 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 percent since 1997, when Blair's Labour Party came to power, according to London- based real estate broker Knight Frank LLP.

Up, Up, Up

Defying predictions that the market would sputter, that average rose 28.7 percent in 2006, the steepest increase since 1979, and then jumped 18 percent during the first half of this year.

These days, buyers who dillydally risk getting gazumped. That's British slang for what happens when someone arrives on the scene at the last minute and offers a higher price.

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 pounds and prime flats run about 2.5 million pounds. The most-sought-after property in areas such as Kensington and Chelsea, the priciest of London's 32 boroughs, sells for an average of 2,300 pounds a square foot, according to Knight Frank.

Comparable living space in Monaco, the world's second-most- expensive locale, costs 2,190 pounds a square foot. Similar digs in No. 3 New York fetch 1,600 pounds a square foot, according to Knight Frank.

Risks

The unprecedented surge has brought with it unprecedented risks. Blair's successor, 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 the nation'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 percent.

London home prices sank 27 percent from December 1988 to December 1992.

Now, the thunderheads are gathering once again. As the U.S. Federal Reserve battles a subprime mortgage crisis, the Bank of England is tightening credit to combat inflation. The U.K. central bank has raised its benchmark lending rate five times since August 2006, pushing that rate to a six-year high of 5.75 percent.

Squeezing Borrowers

Tightening credit will squeeze people who've gone deeper than ever into debt in order to buy homes. Since May 1997, the amount of U.K. mortgage debt outstanding has ballooned, soaring 168 percent to a record 1.12 trillion pounds as of May 30, according to the Bank of England.

British homeowners have never been so stretched. A decade ago, first-time buyers typically took out mortgages equal to 2.4 times their annual salaries. Today, that figure has climbed to 3.2 times. About 120 billion pounds of short-term fixed-rate mortgages may have to be refinanced this year at new, higher rates.

London, long attuned to old money and social class, is increasingly a city divided by new wealth. The capital is being split between the rich, who can afford homes, and a growing number of ordinary folks who can't. Laying out his agenda on July 11, Brown told Parliament that many people in Britain have been priced out of the home market. He vowed to build more low- cost housing.

``Putting affordable housing within reach, not of the few, but of the many, is vital,'' Brown told Parliament.

Foxtons Frenzy

No broker has fed the frenzy like London-based 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, along with another British property broker, Countrywide Plc, was gobbled up. The buyer in both cases was the new power in global finance: private equity. London-based buyout firm BC Partners Ltd. bought Foxtons from its founder, Jonathan Hunt, in May for about 390 million pounds. New York-based Apollo Management LP bought Countrywide in May for 1.07 billion pounds.

Hunt's exit is a bad sign, says Peter Nicholls, who sold his own London real estate firm, Royston Estate Agents Ltd., to rival Douglas & Gordon Ltd. in May for an undisclosed price. ``When Jon Hunt sells, you know the market's going to be in trouble,'' Nicholls, 44, says.

Kensington Mansion

Hunt declined to be interviewed for this story, as did Foxtons Chief Executive Officer Michael Brown, former chief operating officer of bankrupt energy trading company Enron Corp.'s European unit.

``I am happy to hand over the reins, knowing that what we have started has a very long way still to go,'' Hunt said in a May 21 statement. London's real estate mania has been good to Hunt: In 2005, he spent 14 million pounds to buy a mansion in Kensington, opposite the home of steel billionaire Lakshmi Mittal.

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 toward 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, who left Foxtons in 2005 and now runs rival broker Marsh & Parsons Ltd.

Mini Coopers

Today, the firm Hunt founded in a former pasta restaurant in Notting Hill employs 1,300 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 a.m.-8 p.m., seven days a week, and typically process 1,000 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.

Big Brother

Photos of employees, ranked by valuations, are projected onto one of the walls. On Friday nights, the team gathers for a meeting during which brokers shout out their weekly sales numbers. Newbies who cut their first deals are rewarded with bottles of champagne.

From his perch in Chiswick Park, manager Jean Jameson, a 37-year-old from South Africa in a gray suit and pink tie, plays a Foxtons version of Big Brother. He can peer into Foxtons offices across London via video camera to check up on brokers and see who's available for assignments.

Foxtons lets its brokers choose how they get to be paid. Some collect 22,000-pound annual salaries and no commissions. Others opt for 10,000-pound salaries and 10 percent of the fees they generate. Still others choose to take 20 percent of their commissions and no salary at all. Fatemi brought in 1.5 million pounds in fees for Foxtons in 2006 and says she pulled down six figures.

``You can write your own check if you work hard enough at it,'' Jameson says.

Bending the Rules

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. Jameson says Foxtons stopped fly-boarding years ago.

Foxtons has always played tough, Rollings, 45, 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,'' Rollings says.

Fatemi says competitors are worse. 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.

Gazumper's Market

Her advice: Buy now, before prices rise even more. People who are unwilling to pay top dollar can end up getting gazumped. Gazump is a Cockney corruption of gezumph, a Yiddish word that means to swindle or overcharge. Gazundering is gazumping in reverse: It happens when a buyer threatens to pull out of a deal unless the seller cuts the price.

These days, London is a gazumper's market. Old landmarks vie with new monuments to Londoners' love affair with bricks and mortar. 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 5,000 pounds per square foot, according to Edward Lewis of London-based Savills Plc, 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.

Aston Martins

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 pounds 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 pounds.

``You can name your price right now,'' des Forges, 38, says.

He's still bleary-eyed from a trip to Moscow where, he says, he pitched six Russian billionaires on the London market. To the east, a thicket of 30 construction cranes rises around the dome of St. Paul's Cathedral, Christopher Wren's 17th- century masterpiece.

At nearby Millennium Bridge, on the River Thames, developer Amir Zarbafi is converting a building that once housed a tea company into luxury flats. Zarbafi, 43, bought the building in 1997 for 3 million pounds. It's worth 50 million pounds now, he says. Zarbafi says he's stunned by the prices that people are paying for homes. ``But I haven't seen anything that suggests the momentum is stopping,'' he says.

Prophets of Doom

People have been warning of doom for years. So far, the market has confounded home buyers and research analysts alike.

Former JPMorgan Chase & Co. banker Mario Vaccarino says he bought a three-bedroom flat overlooking Porchester Square Gardens, in west London, for 275,000 pounds in 1998 and sold it for 420,000 pounds in 2002, when he moved back to his native Italy, figuring prices had topped out.

``I thought prices were going to fall,'' Vaccarino, 33, says. Wrong. His old flat is now worth about 770,000 pounds, Marsh & Parsons broker Keith Gorny says.

Analysts at Lehman Brothers Holdings Inc. predicted in 2005 that the market would sputter. In a May 25 report, Lehman analysts Alan Castle and Peter Newland said it was hard to explain why prices have kept rising instead. By their reckoning, U.K. home prices may exceed fair market value by as much as 15 percent.

Estate agents and property developers say zooming prices reflect basic economics: Demand outstrips supply.

Supply and Demand

Planning laws protecting everything from London's medieval street plans to views of the Palace of Westminster and St. Paul's make it difficult to build high-rise housing, Zarbafi says. At the same time, City bankers and rich foreigners, particularly from the former Soviet Union, all want to live here -- and have the means to bid up prices, he says.

Ordinary Londoners can't compete with the money pouring into the market. Roman Townsend says he's lucky to have found a 400-square-foot studio in a building owned by the municipal government in Battersea, south of the Thames, for 110,000 pounds. For that price, Townsend, a 2002 graduate of Cambridge University who works in public relations, gets graffiti in the elevator and a view of Big Ben.

``I looked around and found what I could afford,'' Townsend, 28, says. ``I'm happy.'' He says he put no money down and financed the entire purchase with debt.

As prices have spiraled higher, a new breed of London real estate speculator has emerged. Londoners who can afford to buy several homes are snatching them up and then renting them out, a strategy known as buy-to-let. Nationwide, the value of outstanding mortgages for this sort of purchase rose 29 percent to 94.8 billion pounds in 2006 from the previous year, according to the Council of Mortgage Lenders.

Speculators

The buy-to-let trend troubles Simon Nimmo, co-founder of Alexander Hall Associates Ltd., Foxtons' mortgage brokering unit. ``You think, 'Oh crikey, if this all goes wrong, you know, there's a lot of people exposed to property,''' Nimmo, 44, says. He sold his 30 percent stake in Alexander Hall to Hunt in 2003.

Fatemi says she's not worried. On a rainy June Monday, she's picking up keys to listed properties at the Foxtons office on Park Lane, opposite Hyde Park. The place looks more like a cafe than a real estate office. A beaming blonde receptionist offers cappuccino and sparkling water. Plasma TV screens flash pictures of hot properties. Buyers leaf through listings while sipping lattes.

``We still get people coming in and saying, 'Can I have a latte and a hot chocolate''' Fatemi says. ``Like, no, you have to buy a property.''

Zara and Chanel

Fatemi has what it takes to court an international clientele. She graduated from University College London in 1998 with a bachelor's degree in Spanish and French. She joined Foxtons in 2000. Fatemi is dressed to sell. She's wearing a black skirt and jacket by Spanish retailer Zara and a bright turquoise top. Her black Chanel handbag matches her high heels. Sparkling on her wrist is a diamond-studded Chanel watch, a gift from Hunt in 2005.

Over the next few hours, Fatemi will crisscross west London in her Cayenne to inspect a one-bedroom duplex near Paddington station, listed at 450,000 pounds; a two-bedroom apartment in Marylebone, the area where Madonna lives, which can be leased for 48 years, rather than bought outright, for 1.495 million pounds; and an interior-designed apartment on Green Street, in the hedge fund district of Mayfair, that was on the market for 4.65 million pounds.

`Still Crazy'

``It's still crazy,'' Fatemi says of the housing market as she pulls out of Connaught Square, her black hair swishing over diamond-stud earrings. ``It's been going up and up and up.''

Fatemi has had quite a run herself. She says she once tried to cram a Saudi Arabian princess -- along with the royal's maid and security guard -- into a Foxtons Mini. (They couldn't fit.)

Another time, a Russian businessman asked her to find a 1 million-pound flat for his 20-year-old daughter and ended up spending 6 million pounds.

Then there was the time an Englishman kept her searching for an apartment for two years. Nothing would do. Finally, the man told her why: He was looking for a flat with a back door. ``He said, 'Becky, I have a certain number of girlfriends, and if my wife's ever at home, I need a back entrance,''' Fatemi says.

She says she found him a flat with a fire exit. The price: more than 2 million pounds.

Feeding a parking meter on Green Street, Fatemi counts the ways anxious buyers send her bids. Offers come in over the phone and via courier, e-mail and text message. People have instant messaged 1.5 million-pound offers, she says.

Dinner at Nobu

Inside the Green Street apartment, Fatemi surveys the mock- croc tables and blue-grey velvet sofa draped with a faux-fur throw. Martha Lane Fox, co-founder of travel Web site Lastminute.com Plc, and members of the Saudi royal family live opposite, she says.

People who can afford a home like this won't be put off by a 1 or 2 percentage point rise in rates, Fatemi says. ``That's one or two less dinners at Nobu, do you know what I mean,'' she says.

All the same, Fatemi knows firsthand how frustrating it can be to find a home in London these days. She bought a flat near Regent's Park last December for 452,000 pounds. It's now worth 550,000 pounds, she says.

``It was the most horrific thing I've ever been through,'' Fatemi says of the purchase. She says she had to fend off seven rival bidders.

`Unprecedented Market'

Des Forges, the Knight Frank broker, has played the market too. He bought a home for 490,000 pounds in 2001 and sold it in June for 1.05 million pounds. He's moved up to a larger, 1.4 million-pound house in Hammersmith. ``We're in an unprecedented market,'' he says.

Des Forges, the son of a Herefordshire farmer, is an architecture aficionado who favors Hackett suits with a traditional English flavor. He attended Ampleforth College, a North Yorkshire boarding school run by Benedictine monks, and went to work in real estate at the age of 19 as, he puts it, a ``tea boy.''

By his own account, he sold 135 million pounds of property from April 2006 to April 2007. On this late-June day, des Forges is padding across walnut floors in his socks inside a redbrick town house in Sloane Gardens, off Sloane Square. The Victorian interior has been gutted and given a sleek modern look that includes a laser-cut steel staircase, exposed brickwork and a seamless glass elevator shaft.

London's Future

The ground-floor maisonette -- with a sweeping, cantilevered walnut staircase, storage for 1,200 bottles of wine and a 42-inch (1-meter) plasma TV hidden behind a walnut panel in the master bedroom -- is on the market for 3.95 million pounds. Des Forges says an Italian banker and his wife have bought one of the places upstairs for 5.75 million pounds. An Israeli couple has purchased another for 4.7 million pounds.

When des Forges looks at buyers such as these, he sees the future of London and its housing market. London, a global nexus of finance, law and media, is luring the best and brightest from around the world, he says. ``I think it's just the beginning,'' des Forges says of London's ascent. ``Where else is going to compete with it, really?''

Good times don't last forever. As the price -- and risk -- of buying London real estate climbs, many people are asking when this boom will end.

One June afternoon at Frankie's, a bar and grill in Knightsbridge, Savills broker Brian D'Arcy Clark is nursing a beer while a colleague sips champagne. Up walks the restaurant's French manager, Jean-Christophe Slowik.

``Les agents immobiliers!'' Slowik exclaims. ``It's crazy, your market, huh? Is it going to collapse one day?''

``Tomorrow,'' D'Arcy Clark quips.

``Good!'' Slowik says. He's hunting for an apartment.

To contact the reporter on this story: Simon Clark in London at sclark4@bloomberg.net

Last Updated: July 24, 2007 19:40 EDT