Sunday, Jun 10, 2007
Twisted logic, how can ten times salary be afforded?
Firstrung: Ten times salary for first time buyers could be on the radar - Mortgage Talk
Mortgage Talk believes that the National Housing and Planning Advice Unit (NHPAU) forecast, that first-time buyers will face house prices equivalent to ten times the average income, is entirely credible...
Posted by converted lurker @ 12:58 PM (356 views) Add Comment
28 Comments
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1. Scott said...
In some areas, this has already happened. I could be on 40k in London, but in terms of housing costs here, 40k is nothing. My living standards would be higher living in Stoke working in a supermarket checkout. The same ridiculously high costs of living can be said for most of the south, even dirty industrial slums like Slough.
2. Mark Wadsworth said...
They're idiots
3. Davros said...
This whole argument is so simplistic it's bordering on the ridiculous. What they're saying is that this current boom is solely due to lack of supply, nothing else. We've had a trebling of houseprices since the mid 90s yet this is purely due to a lack of housing. You expect there to be three times as many households or rents to have increased, but no, unless we build more houses, there won't be a downturn.
4. paul said...
So then people will only be buying houses when interest rates are low enough for the banks to be able to afford to offer mortgages on these properties.
Eh?
5. Jonewer said...
By my calculations, a 10x mortgage at 5% would leave me with £450pcm to live on - not including house insurance, council tax, internet, TV license, water phone and energy bills - not to mention the cost of getting to work every day!
6. Prof said...
"Ideally, we'd like to see rises of about 7% or 8% year on year, which would help to keep average prices in check."
So, 7-8% rises are OK are they ? Average pay rises are about 3-4%(?), so 7% house price incrases will make houses even more expensive. Crazy.
7. confused76 said...
.... and owners will be forced to sell when interests are high... so - according to what you say - noone buys at that time, and prices ... of course can only go up, is it right Paul?
8. japanese uncle said...
Buying house will become buying illusion plus lifelong slavery. I don't think so.
9. Stillthinking said...
If house prices are 10x salary, then if interest rates ever went to 10%, they would completely absorb all of the salary. How could a bank risk this? Am I missing something. Salaries are taxed also.
10. uncle tom said...
I caught a quote on Bloomberg recently - I think it was from Roger Nightingale:
"Bubbles don't burst when sensible intelligent people believe they should. They burst when sensible intelligent people no longer believe there is a bubble"
It follows that the more sensible intelligent people there are who subscribe to the notion that the housing bubble can go on forever, the closer we must be to seeing the bubble burst!
11. Gilbert said...
So this Andrew Frankish would like to see HPI at around 8% year on year.
This would mean that today's "average" £200,000 home would cost £863,000 in 2026
Assuming wages continue to increase at 3.7% pa this would mean a ratio of 19x!
But would else would you expect from a mortgage pimp?
12. paul said...
A sensible quote, UT.
I'm wondering what the catalyst will be to start lowering prices - higher rates would certainly do it, but if rates don't go up ... maybe unemployment?
13. confused76 said...
From The Times, some sensible talk about house prices here in London. Take notice... THIS IS A DIRECTOR AT SAVILLS PRIVATE FINANCE, the mortage broker!!!... IF THIS GUY DOES NOT KNOW WHEN THE MARKET HAS PEAKED !? AND GUESS WHAT... HE WAS RIGHT IN 2004!!!!!
Should you sell your home and rent?
http://business.timesonline.co.uk/tol/business/money/mortgages/article1908874.ece
This is not the first time the couple have sold to rent. James, a 35-year-old director at Savills Private Finance, a mortgage broker, sold a two-bedroom flat in Butlers Wharf, on the Thames, in March 2004 and rented for 18 months before buying the St John’s Wood apartment.
He said: “I was lucky because I sold at the peak last time. The market pretty much ground to a halt in summer 2004 and when we bought our flat 18 months later we got it for 30% less than the original asking price because it had been on the market for six months. The flat has since doubled in value and we are selling again because we have just had a child and want a bigger property. I don’t think this is the best time to buy because I think we are at another peak in the market.”
Then there is some WRONG calculation of break even between owning and renting...
"But experts warn that homeowners who decide to rent in the hope of making a profit are taking big risks. House prices need to fall by about 4% to make it financially worthwhile, according to Knight Frank.
For example, it calculates that you would pay £36,100 more over a year to rent a house worth £1m than you would to buy it. The figures assume you have £500,000 equity from your old home so would need to take out an interest-only mortgage of £500,000. They also assume a mortgage rate of 5.75%, rent of £865 a week and that the equity is invested in a savings account paying 5.95%.
Prices would have to fall by at least 3.6% a year to make it worthwhile
This is totally wrong, you can calculate that you are better off renting in London even if prices stagnate. I have sent the Times a comment about that
14. enuii said...
Correct me if I'm wrong but it would take interest rates at or around 3% to make a 10x salary mortgage remotely viable bearing in mind living costs!
15. Pr said...
If person A spent 20k/yr renting a house, they would be throwing money away.
If person B spent 20k/yr paying off a mortgage, they throw away some money into paying interest, whilst invest some of the money paying off the mortgage.
If house prices fall by 2-4%, then the money that person B is giving to pay off the mortgage is offset by loss in house price value, putting them at the same position as somebody who is renting.
It is of course hard to compare, because mortgages are more dynamic than rent, and there is the emotional value of being in a place you own, and, one would expect to rent a smaller place than one would buy, because its a temporary thing rather than a massive investment, and the focus will be on saving up a deposit for the next place. The point is, that, if there is a correction, i.e. a sudden 10%+ fall, or a crash, i.e. 20%+ fall, then person B is worst of. If there is a soft landing with 2-4% fall or stagnation, then person B is still sitting happy enough, treading water in the bad yrs, getting ahead in the better ones. Last time around, the first falls were in crash territory, but leveled out to a soft landing (see the homepage graph). A crash should take 1 to 2 yrs, but expect a few yrs of soft falls after that once interest rates have peaked and take a while to bottom out. If things happen like last time, I'll be buying about 1 or 2 yrs after a crash. Things could be different this time around however, with global inflation due, we could get stagflation, where interest rates have to keep rising, even after the crash has run its natural course, as could be happening in America.
16. tony marshall said...
Confused - good link - I just posted my comments on the Times site, but my comments never make it past the censor, to I'm not holding my breath. I wrote :-
"The so called expert from Knight Frank needs to take a course in basic maths. If you sell and invest your equity at 5.95%, then even if you pay tax at 40%, this produces £17,850 net. Set this against the rent of £45k and you are paying out £27,150. Compare this to paying 5.75% on a mortgage of £500k, which costs £28,750 and you are better off renting – with £1,600 in hand. And for every quarter point rise in interest rates, this advantage rises by £2,000pa. Perhaps you should think about speaking to proper experts in future…"
17. confused76 said...
Tony,
besides... consider an average of £4k of maintenance costs and service charges, which for a £1m property in London is not unusual. If you are a BTL, then consider the ullage, the 10% management fees on the GROSS RENTAL that Foxtons gets from your pocket.
And, if you instead invest money there are several tax friendly ways of doing it... ISAs, SIPPs, funds on which you pay capital gain taxes, etc
In short, take the house price appreciation away and the economics of "owning" simply does not stack up. You need at least 2% house price inflation p.a. (that is 20k on a £1m property) to make the numbers work. Are you sure houses will even go up in 2008 (not according to Lombard)
However I am still VERY surprised that the Times reported the opinion of the Savills director. That guy knows what he is talking about (I mean.. he does know the market) and to come forward and say openly "I am getting out of this craze" ... that is the single most powerful opinion / testimony reported by the press in the past weeks.... reminds of friends of mine working in the Internet industry who sold stocks in 2000
Compare with the benevolent words of these superficial, generalizing, ill-informed macro-economists a la David Smith... to learn about a market go talk with the trader... forget the academics
18. David20040_0 said...
I remember stating that I believed that house prices could be 10* salary soon and that the banks would start offering them and was laughed at.
I was right.
This is just stupid though, ten times, unfortunately I suspect it will become the new reality.
19. Deadspider said...
"The market pretty much ground to a halt in summer 2004 and when we bought our flat 18 months later we got it for 30% less than the original asking price because it had been on the market for six months. The flat has since doubled in value and we are selling again"
The Savills Directror is talking bull .
He's saying that since around January 2006 house prices have doubled where he is ?
A flat which he purchased at 30% below asking price ??
Bollox !
20. talking rot said...
James, a 35-year-old director at Savills Private Finance said " ... when we bought our flat 18 months later we got it for 30% less than the original asking price because it had been on the market for six months."
How on earth did he manage to get a 30% discount? Any clues anyone?
21. uncle tom said...
'How on earth did he manage to get a 30% discount?'
An old trick of estate agents is to spot a property that's being sold by someone who lives a long way away - usually someone who has inherited the property, and doesn't know the area. Put it on the books, but don't advertise it - so buyers don't know it's for sale. Keep telling the vendor that there's been no interest, and suggest they need to drop the price to get a sale.
Then the EA steps in and buys the property himself, or offers it to a friend in return for a well stuffed brown envelope...
22. paul said...
The estate agency industry is a well known safe harbour for ex convicts and disgraced company directors.
Whenever the sums don't seem to quite add up, it's usually because they don't.
23. Orwell said...
UT,
This is making a secret profit which he may have to account for.... Also not exactly best publicity to do this... and of course there are also criminal sanctions from the Trading Standards etc..
What people think they may be doing is selling to their contacts and then buying back again but this is difficult to detect...
24. confused76 said...
Well... this guy may be a disgraced company director... fact of the matter is that he is selling his flat and waiting 18 months... folks take notice
UT -- "sold by someone who lives a long way away - usually someone who has inherited the property, and doesn't know the area. Put it on the books, but don't advertise it - so buyers don't know it's for sale. Keep telling the vendor that there's been no interest, and suggest they need to drop the price to get a sale."
I do not think so, people are not so naive to give properties just to one agent, and there is competition to sell for the fees. Housing market in 2004 froze to a halt. This guy was right at the time and will be right this time too.
25. uncle tom said...
'I do not think so, people are not so naive to give properties just to one agent'
- Oh yes they are - sometimes - and yes they do!
26. confused76 said...
... what can I say, then they deserve to be sc*@**d
hovewever, trust my word, property in the area of the Savills guy were selling at 20% to 30% discount vs asking price in 2004
27. inbreda said...
Seconded UT.
I know someone who bought several houses through an estate agent friend at vastly knocked down prices. I do not know the individual circumstances behind each sale, but i would guess old people, or people that have inherited but live a long way off.
It does happen.
28. night said...
I was speaking to a mortgage advisor the other day and he basically told me that on my 33K I couldn't afford *anything* in the south (without waiting another 3 years to save a 30K deposit). His advice? Get a friend or partner to buy with.
Now this is the real cause of the problem (although it probably seems very sexist to say it). Mr Brown's tax policies don't favour families, and more and more women have been going to work. That means that your average family now has 2 wages to pay a mortgage rather than just the one. I'm not saying this is good or bad, I'm just pointing out that this is a big contributing factor to higher house prices as it has increased affordability.
I'll just have to be patient; don't think I'd want to buy right now anyway. Interested to hear other people's opinions on whether this is as big a factor as I suggested, or even a factor at all.