A fantastic song.
There's some discussion that it was originally called and so about Liverpool Sunset but no one explains in that case why the lyrics mention Waterloo undergound. There's no underground railway system in Liverpool!
Here's some stuff from Ray himself :
Ray Davies (From Uncut magazine January 2009): "It came to me first as a statement about the death of Merseybeat. But I realized that Waterloo was a very significant place in my life. I was in St. Thomas' Hospital when I was really ill as a child, and I looked out on the river. I went to Waterloo every day to go to college as well. The song was also about being taken to the Festival of Britain with my mum and dad. I remember them taking me by the hand, looking at the big Skylon tower, and saying it symbolized the future. That, and then walking by the Thames with my first wife (Rasa, who left Ray, taking his two daughters, in 1973) and all the other dreams that we had. Her in her brown suede coat that she wore, that was stolen. And also about my sisters, and about the world I wanted them to have. The two characters in the song, Terry and Julie, are to do with the aspirations of my sisters' generation, who grew up during the Second world War and missed out on the '60s."
The hospital, the Festival of Britain, the Thames and crossing the river presumably on Waterloo Bridge all indicate that the song is about London.