Thursday, Feb 15, 2007
First time buyers never had it so bad
Firstrung: Affordability is 230 times worse for first time buyers than ten years ago - RICS
RICS' "accessibility index" has found that nationally, constantly rising house prices has meant that accessibility is around 230 times worse than it was ten years ago, and currently as low as 1980. The average first-time buyer couple will now have to save up to the equivalent of 82 per cent of joint income to build up the amount of savings needed to pay for their home, deposit and stamp duty, compared to 25 per cent in 1996. And with house prices expected to rise another 12 per cent over the next two years, the situation is set to worsen.
Posted by converted lurker @ 01:36 PM (120 views) Add Comment
18 Comments
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1. David20040_0 said...
Hardly surprising though is it, it is only going to get worse as well.
2. Jonathan said...
230 times worse? Sorry I fail to get the maths - that's a completely unsubstantiated figure. I'm not arguing that affordability is deteriorating. But one can't just throw in non-sensical figures.
I worked out that my father's house is worth 5 times more now than it would have been in 1968 when he bought it - in real terms taking the most inflationary consumer price index as a marker - so in other words his house has risen in value five times faster than even the most inflationary basked of items.
That's bad enough - 230 times though is bananas.
3. inbreda said...
David - I welcome alternative viewpoints but could you at least substantiate it somehow. Even explaining your opinions rather than just blindly saying "House prices only ever go up". It's starting to irritate me. Justify it or go and do something less moronic elsewhere.
4. C'mon Correction said...
I agree with inbreda. David all you state blindly is "house prices only ever go up" and never a reason why they will never ever return to trend?? why not?
Why has the housing market suddenly stopped following a cyclical trend and will now never go down ever again?? Please explain or at least change you argument to "...house prices won't fall for 2 (or whatever) years because.... ".
5. paul said...
David, I do occassionally wish you could elaborate a bit more sometimes.
Past housing market performance is no guarantee of future gains, but David wouldn't need much elaboration to have a valid point.
I find it interesting that RICS no longer tries to obfuscate affordability statistics, and actaully rather revels in them.
6. David20040_0 said...
No Inbreda, I am not irritating you, stupid rising in house prices is irratating you and me both.
7. David20040_0 said...
OK, I will set out my reasons for why housing will continue to go up and why young people will find it near impossible to own their own home:
Interest rates are low, 5.25% is nothing. The Bank of England does not have the will or the balls to raise them above 5.5%.
Oil, gas and electricity prices are all going to drop this year. Newspaper headlines will then state that inflation is going down and the BoE will either keep rates at 5.25% or more likely drop them.
The UK is a very crowded place, particularly England, the UK also seems to be very popular place to emigrate to. We have very lax immigration laws in this country. Therefore the population will continue to rise at a fast pace. The UK is not building enough new homes, nor do we have the space to do so.
People "expect" house prices to rise 1K per year. As house prices go up the percentage rises will be smaller, but the average house will still rise by 1K a month.
Banks are offering higher and higher multiples of salary. Therefore house prices will continue to rise.
Parents are releasing money from their homes to help their children, by giving them equity from their own homes it further pushes up prices, as prices are then pushed up other parents' houses become worth more and they can then release more money further fuelling higher prices.
I want a house price crash to occur. But have now realised that this is not going to happen.
Houses are the only thing that people have any real confidence in any more. They are seen as safe.
Many ppl are buying other properties as BTLs. The housing market is absolutely full of confidence.
I suspect many people on here, like myself are very bitter and upset that no matter how hard we try we will never have a home of our own. It upsets me quite a lot.
8. Gree D. said...
Jonathan, I am also bemused by this alleged 230 fold worsening in “accessibility”. Still, it’s an impressive figure. I would consider that something has seriously worsened if it’s twice as bad, so surely 230 times must be a catastrophic worsening!
“Mr McKaig says the region's affordability gap actually threatens the whole long-term viability of its economy, particularly the ability to recruit and retain public sector `key workers'.”
This may well be true, but does he really have to bring out the old line about the central importance of “public sector key workers” or even the more general “essential workers”. This is not a slight on this class of workers, but as one of the army of private sector “non-key”, “non-essential” workers I’m just concerned that my employer may read this and realise he needn’t be paying my wages.
His suggested solution of building more “affordable” new homes is rather curious to me. Certainly building more homes (or better renovating empty properties to a good standard) would help ease HPI, but I’m not sure how one builds “affordable” houses. Build them entirely out of MDF? Just one room and a flat roof? I’m sure he really means some sort of financial subsidy of dodgey sharing arrangement. Why not just give first time buyers a £50,000 cheque each – that should help “accessibility”.
Maybe a series if such a stark warning from the likes of a RICS Director will persuade potential first time buyers to hold fire. I hope so.
9. denzil said...
>>Continued interest rate rises could also lead to a surge in house repossessions in the South West.
Bring out yer dead oh yeah. Incomes around my way are not too high but house prices are like something from Harry Potter.
I'm with Jonathan here, the math leaves me fumbling for a cold compress. Can anyone enlighten me on how the 230 times worse is derived?
10. bidin'matime said...
I think someone got the decimal point in the wrong place. Up 230% maybe? 82% of take home pay compared to 25% is an increase of about 230%.
But whatever, as Paul observes, it's the fact that the sheer impossibility of FTBers buying has become the headline, whoever is writing, that is the interesting development. However, ironically this may encourage the BTLers who assume that this means big profits for them, due to all those people they perceive as being 'trapped' into renting.
I’ve just done an interesting bit of analysis – I created a simple model on a spreadsheet, assuming that someone borrowed the full cost of their BTL (which most seem to, if you count the ‘equity release’ on their home to fund the deposit) and also assuming that the rents increase with inflation. I projected forwards 25 years, adding the rental losses to loan and deducting any (eventual..) profits.
Setting inflation at 5%, interest rate at 6% and commencing net yield (after costs of letting, insurance, repairs etc, but before mortgage interest) at 3% of the cost, after 25 years the mortgage had risen by 57.74%, ie a flat costing £200k would have a mortgage after 25 years of £315,486 if all the losses were financed by simply increasing the mortgage.
So the question is, would the property by then be worth more than mortgage? Well if interest rates are (still) at 6%, then it would be fair to assume that the long-term value would be around 100/6 x the net rent, ie producing a net yield of 6% - which, based on the inflated rent at that time, gives a value of £322,510.
So, ignoring all the risks of double digit interest rates and financial ruin in the meantime, after 25 years of the hassle of running a ‘rental business’, if conditions remain benign, today’s BTL purchaser can look forward to a cash gain of around £7,000. Out of which he has to pay any capital gains tax arising (because the rental losses can't be set against capital gains for tax purposes..). Oh, and with inflation at 5%, £7,000 in 25 years time will be worth just over £2,000.
So not quite the champagne drenched retirement they are all looking forward to….
11. glorious sunshine said...
All the above is bollocks anyway. Comparing the BOTTOM of a property crash to a PEAK is unrealistic. Some where in the middle is about right. Houses were as cheap as chips in '96 so how stupid to bench mark to that!
12. paolo88888 said...
I agree with the conclusion of this article - we have to release some green belt for new development. In my area there is no new-build for miles, yet there are fields of agricultural land sandwiched between large A roads which canot be considered as good countryside for recreational persuits yet could contain a sizeable housing estate.
Also climate change is now recognised as increasing flood risk but we are building more and more developments in flood plains. But flood plain would make an excellent resource for walking and summer camping, so it would be far more suitable to swap it for some high-ground green belt to locate the housing.
13. talking rot said...
Paul said "I find it interesting that RICS no longer tries to obfuscate affordability statistics, and actaully rather revels in them."
I can think of only one reason why RICS would revel in affordability statistics. If houses are unaffordable for the masses (like me) then they have to rent (like me). This means the demand for rental property stays high - so if you are a BTL-er, then it is comforting that your rental property will always be in demand and you will continue to make money; as the only people able to buy are those who are already property owners, prices will continue to remain high. By advertising affordability statistics, the myth that house prices will remain high is perpetulated.
It is a bit conspiracy theorist - something which I believe should be avoided - but this poor explanation is the best one I can think of. There again, it is just past midnight after a long day.
14. geed said...
David
Your observations are probably the most realistic here, we can analyse all we want but David is bang on the money. The general BTler or FTBer does not have a degree in Economics or Business, it doesnt have to make financial sense to them. They are told that houses are safe, they are told that they will go up forever, they are pressurised by mates and family who have already made (on paper) 1000's and 1000's of pounds over the last few years that they "better get in now or your stuffed". It will take a sharp shock to stop this nonsense.
A few 0.25% interest rate hikes mean nothing, of course it is pressurising people that are over stretched but do you think they will baulk at taking out more debt to cover the repayments from another source, remember these plebs have already taken a huge risk by self-certing there interest only, 7X multiple mortgage, do you really, truly think that an extra 50-100 quid a month is going to force them to sell? These people are blindly living on another planet and while the lenders and the government make this fantasy easy, things are not goig to change in a hurry.
I've done my sums and it doesnt make sense to buy to live or buy to let, so why am I so different?
C'mon you bullied David into a more detailed response, the least you could do is provode him with one im return.
15. Davros said...
David's talking nonsense.
There is only a finite supply of money, that is the average salary. Once the proportion of the average salary is so high that there is nothing left at the end of the month, the average house price can only increase at annual rate of earnings. This is the absolutely best case scenario. The reality is, that once anyone who has invested in property sees that returns don't match what you could get in a saving accounts, the demand will slump. Then prices.
It's all very well talking about parents lending the money, higher multiples etc. but it is all debt that has to be paid back by someone. The ability to pay it back is based on peoples earnings. It's as simple as that.
16. European-bear said...
To me, David has described why he believes house prices will keep going up and should be commended. However, the same arguments can make a classic pyramid scheme!!! To keep prices rising it needs more money all the time form the bottom. Oneday, maybe this year, maybe next year, maybe 3 years the money will run out and like every pyramid scheme it will collapse!!
17. paul said...
Okay, I'll respond to David.
"The Bank of England does not have the will or the balls to raise them above 5.5%."
Second guessing the Bank is unwise. We know that of 50 economists, one predicted the January rate rise - so much for expertise. Price stability is the priority, but RPI is the bargaining chip which is prone to mortgage interest repayment hikes. It therefore follows as night follows day that while there is an imbalance between mortgage interest repayments and salaries, the imbalance will be reflected by steadily increasing RPI.
I know, I know ... its CPI being used now, but RPI is used as the basis for wage netiotiations still.
Talking to a very wealthy Japanese investor yesterday, he wryly observed that in 1989 the Japanese yen was superstrong and property was super expensive, and this looks uncannily like the current UK situation. He said he doubts market mentality has changed much in the last twenty years.
"The UK is a very crowded place, particularly England, the UK also seems to be very popular place to emigrate to."
Don't really buy this demand and supply argument at all. Remove the speculation element (including second guessing interest rate trends) and price trends would be much flatter. There's no reason to believe that immigration fundamentals have changed or that new immigrants are now much richer than they used to be (and therefore able to buy property).
The core of the housing market is not rooted in reality or market fundamentals of supply and demand. Its just cheap money and speculation.
"People "expect" house prices to rise 1K per year. As house prices go up the percentage rises will be smaller, but the average house will still rise by 1K a month."
Sellers expect what they're told to expect. Buyers know what they can afford. Only one side can compromise.
"Banks are offering higher and higher multiples of salary. Therefore house prices will continue to rise."
The banks are running up a steeper and steeper curve here. The days of cheap money are over.
18. C'mon Correction said...
David - I dis-agree prices will continue to rise £1k a month for ever and a day!? I take on board reasons you state, many are valid now, but can not keep on un-abated, ever increasing. Credit supply isn't limitless, although it may seem so at this point in time. The banks are seeing bad-debts shooting up and will likely double year on year for at least 3 years because affordability is so pushed due to low wages. BTL yields in the majority of markets is very poor now and within 2 years (maybe less) the 'less-smart' money will realise this (smart money already has !!) and move to better investments. People simply do not earn enough to live and service huge debts in this country, a bigger and bigger push will be put on wages thus increasing inflation, thus increasing interest rates etc, etc. Bad debts will go up even more. The UK economy is in decline, our service& financial industry is only thing proping us up. Sadly our manufacturing, oil fields and wealth creating companies (being taken over) are all in decline. The government is quickly realising that immigration is now harming the economy (rather than the benefit it was), adding to huge social/ economic imbalances and will begin to slow rapidly due to goverment measures and the fact that the money that majority of immigrants earn here, barely covers living costs.
Prices are currently approx 40% over-trend, every market reverts back to trend - fact. My main reason (above all others!) is - that credit WILL dry up, both by source and bank policy to protect against bad debts. When a correction? - who knows, it is a very slow process and has been made slower (ie. no crash when predicted by many back in 2003-04). Delay caused by - New Labour softening immgration policy (& new EU member states), New Labour changing inflation setting from RPI to CPI just when prices would have moderated, cheap source of money from Japan etc for the banks to lend here and above all (like you rightly pointed out) sentiment of the UK poplation who now think prices only go up.
There were many factors contributing to the boom and it took 10 years to get going, think how sentiment has changed from 10-12 years ago, people at that time saw that their house was the same real-term value as 15 years previous!!! Likewise there will be many factors that will contribute to the correction (we have seen the start of many currently in motion), and will take time for people to realise. Please see graph on here of last crash, it too took years to turn around and it won't reflect exactly this time round.
I live in Cardiff and the housing market here is particularly poor, prices are approx what they were 2 years ago and getting worse (see land reg figures for last 6 months in cardiff). Currently I'm seeing falling prices and my rent has never been raised. This will happen more and more in other parts of the UK. Try to be postive.
Have faith, save and be happy for now. "All good things come to those who wait"