There is a fin de siècle feel about London at the moment. Is this how Ancient Rome felt before the fall? On Tuesday the number of £2 million homes reached a record high. There are a thousand up for sale this week at that price or more, and some are changing hands in only 48 hours. “It is just amazing how much people are charging for homes,” said one estate agent. “You can almost name your price now.” On Wednesday KKR, the private equity firm, bid £11 billion for Boots. Unless every analyst has missed something, that sum is out of all proportion to the high street chemist’s real value.

London house prices are closely tied to the seemingly unstoppable rise of the City. Last year half of all properties over £2 million were bought by foreigners who had nothing to sell back into the market, pushing prices still higher. This trend looks set to continue. London has become the epicentre of global finance and talent is flooding here. Everyone wants a slice of our capital. So those who own property are becoming insufferably smug, and those who do not are feeling increasingly grim.

Is this balloon just going to keep floating up and up? All balloons eventually lose air. The only question is when. The current spate of takeovers, mergers and other deals going on in the City can be read in two ways. On the one hand, there is a lot of money around looking for a home. The City is channelling much of the cash that is generated by Chinese growth and Russian/Middle Eastern oil, and it is gushing up through London like a giant geyser. On the other, I can’t help thinking that the financiers seem to be sprinting ever faster to do ever-larger deals and rake in ever-larger management fees, in case the golden age fizzles out tomorrow.

Last month I dined with New Yorker Steve Schwarzman, the co-founder of the Blackstone private equity group that has made him a billionaire. I tentatively suggested to him that things felt a bit toppy. He was non-committal, sympathising over London’s crazy house prices. Two weeks later Blackstone announced its flotation on the stock market. Its top people are nearing retirement age, and they deserve to enjoy it. But when the smartest money-men start cashing in their chips, it is worth taking note.

This does not mean that we have reached the peak. Markets are as much about psychology as economics. As long as there is still someone more gullible to sell to, you can keep selling. But there seems little doubt that the era of dirt-cheap credit is coming to an end. The Governor of the Bank of England signalled this week that we are reaching the end of the period of noninflationary expansion that began in 1993. The countries that have provided us with cheap goods for so long are now driving up energy and commodity prices as they industrialise. If Mervyn King is to deliver on his promise of a “sharp fall” in inflation, which has started to accelerate, interest rates may soon be at 6 per cent.

That is still low by historic standards. But if inflation takes off around the world, higher interest rates will dampen the takeover spree. Private equity companies borrow heavily to finance their deals. Only two weeks ago the International Monetary Fund issued a warning that investor appetite is inflating the deal values of private equity takeovers and leaving acquired companies vulnerable with huge debts. It suggested that some investors are growing reckless and are not scrutinising deals properly. The deals are still less leveraged than they were in the crazy 1980s, but they are about twice the size.

An interest rate hike would severely affect some households. An awful lot of people have been betting for an awfully long time that they can go on spending beyond their means. The longer they have got away with it, the more it has come to feel like a certainty. In fact, an awful lot of bets have been made that don’t feel like bets at all. One of the biggest bets we have made is that the City will continue to keep the rest of the economy buoyant. With some parts of Britain now running almost exclusively on welfare benefits and public service jobs, we are hugely dependent on financial services.

So it may not be the most sensible time to knock the wealthy. It has become very fashionable, over the past few months, to criticise private equity firms and “non-domiciled” resident foreigners who avoid tax.

And there is no doubt that this boom has created a new class of astonishingly rich people who are deeply resented by the middle class battling over schools and homes. If the boom lasts for 30 years, as some commentators are confidently predicting, we will have to think hard about the inequalities that are already beginning to result. The problem is that it is not clear that the boom will last anything like that long. Gordon Brown’s judgment, which I think is right, is that some tax policies that are rather unfair may be vital to keep stoking it.

In today’s Financial Stability Report, the Bank of England finds that “the UK financial system remains highly resilient”. But it also says that the strong and stable economy has “encouraged financial institutions to expand further their business activities and to extend their risk-taking . . . this has increased the vulnerability of the system as a whole to any abrupt change in conditions”. Let’s not forget a basic rule: you don’t make gazillions without taking risks. That people are taking bigger and bigger risks to get a return, because everyone is doing it, should worry us all.

“I will tell you how to become rich,” Warren Buffett once said. “Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” So do buy that flat if you can – but as an insurance policy, not an investment. It may be wise to do what the rich do: hedge.

Times Recommends

• It’s not just about Iraq, it’s about Blair’s style
• You can’t rank hospitals like football teams
• Minarets are not an essential part of Islam