Friday, Apr 10, 2009
May the ramping recommence
Times: After G20, reasons to be cheerful
At the first available opportunity, Old Noshbag Smith jumps back into his well worn groove.
"However, the ratio of house prices to average earnings has now fallen to 4.34, says the Halifax, which is close to the long-run average of 4, and well down from its peak of 5.84 in summer 2007. This should add stability to the market. "....
Read my lips: High house prices not good for the majority !!
Posted by voiceofreason @ 07:43 AM (1230 views) Add Comment
16 Comments
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1. japanese uncle said...
One rubbish rigging after another. O'RLY Bird must be busy these days.
2. voiceofreason said...
you speak in tongues JU ...
3. waitingfor hpc said...
the guy is a complete idiot. i would trust my nans better judgement than his!
4. stillthinking said...
I never heard of that before either. You truly learn something new everyday.
http://www.urbandictionary.com/define.php?term=o+rly
5. drewster said...
Time for some maths lessons, David Smith.
The current house-price-to-earnings ratio is higher than the 4.34 quoted by Noshbag, from the Halifax. The Halifax index uses the FT's National Average Earnings figure when calculating the E part of the HP/E ratio. However the earnings index is lagging badly - until March this year, it had been rising constantly since 1991.
Pressure on employers to reduce or axe bonus payments in the teeth of the recession has led to the first monthly fall in total average earnings since comparable records began in 1991.
Average earnings including bonuses fell by 0.2 per cent in January compared with the same month in 2008 according to the Office for National Statistics .
In the private sector the fall reached 1.1 per cent while average earnings including bonuses in the public sector rose by 3.7 per cent in January
Needless to say, the growth in public sector earnings is hardly sustainable. Already, HM Revenue & Customs staff have been axed - and with the decline in tax revenues and the rise in government debt, more cuts will no doubt be on the way. All told, the average earnings figure should fall further - which means the HP/E ratio will remain higher unless house prices fall even further. Which they will.
However if lots of people lose their jobs, this won't be reflected in the average earnings figure. Similarly if a million Polish workers leave the country, this won't affect the average earnings either (in fact the figure might rise slightly at first, since those Poles often work in low-paid jobs). We need to look at a different measure.
Introducing..... the Total Housing Price to Total Earnings ratio.
I don't have numbers for this one. However I'm sure somebody with time could calculate the total housing price (number of houses * average price of houses) and divide that by the total earnings (number of full-time workers * average full-time earnings, + number of part-time workers * average part-time earnings). This would give us a far more meaningful figure; it would capture new workers entering the workforce; it would also capture more houses being built, and it would capture the differences between full-time and part-time workers. Anyone care to work it out, over a historical period?
Earnings alone can't predict house prices. Disposable income would be a more reasonable calculation. If our monthly bills for food, petrol, utilities, and council tax are rising, then we have less left over to spend on mortgage servicing.
One final nit-picking point from DS's article:
Contrary to some views, not all business is contracting. Among the luckier is a company called Champagne Warehouse, who is seeing business increase in the recession as drinkers switch from costly famous labels to less well known brands.
In other words, less Selfridges, more Poundland. How is that in any way bullish?
6. drewster said...
7. timmy t said...
Drewster - your maths calculates the average income of people wth an income, not the average income of people as a whole. The point being that a rise in unemployment would have no impact on your calculation whereas in reality, the TOTAL level of earnings drops as a result.
8. drewster said...
Timmy - that's what I meant, the total level of earnings. Under my formula, if the number of people working falls, the total level of earnings falls. Apologies if it wasn't clear the first time.
TE = nFT * avgFTE
Total Earnings = Number of Full-Time-workers * Average Full-Time-Earnings
Advanced version to capture part-time workers: TE = nFT*avgFTE + nPT*avgPTE
9. stillthinking said...
drewster, I agree, that would be quite interesting. the wall of money versus the wall of property. timmy t, it would capture that because unemployment would reduce the multiplier of people in work.
There is a rough measurement that reflects this though, which is government revenue from income tax. Which is crashing. And also, as it never was a housing boom, as the price of construction didn't go up more than inflation, more a land value bubble, you could even treat land as a constant (cos the UK isn't expanding).
Maybe a long calculation for something we already know..
10. timmy t said...
Just read it again - you're right - sorry!! But they are wrong - that's the main thing!
11. drewster said...
While we're on the subject of averages vs totals, here's another gem from David 'noshbag' Smith:
Official figures showed that the number of mortgage approvals rose to just under 38,000 last month.
Supposing last year there were 500,000 mortgages approved, each one for £200,000. This year there are 600,000 mortgages approved, each one for £150,000. Approvals are up. Total amount lent is down from £100bn to £90bn. Forget economics - can't Noshbag do arithmetic? Or does he just like to cherry-pick the numbers?
12. cornishman said...
"However, the ratio of house prices to average earnings has now fallen to 4.34, says the Halifax, which is close to the long-run average of 4, and well down from its peak of 5.84 in summer 2007. This should add stability to the market. "....
If the long-run average of house prices to earnings is 4 (leaving aside all the valid points made by others above) and it has peaked at 5.84 in summer 2007 - then it will not gently go back to 4 and stop there. For 4 to be the average over time - there has to be a time when the number is less than 4. My calculation makes the trough 2.16 times earnings - before it climbs back towards 4.
Some way to go yet then...
13. drewster said...
cornish,
Quite right.
Between Sept 1992 and Oct 2001, the ratio was below 3.5
Between Feb 1995 and Jun 1999, the ratio was below 3.2
(source: Halifax house price index [Excel spreadsheet - see last tab for Price/Earnings ratio])
14. cornishman said...
@ drewster - interesting data on your link - thanks.
The long run average of the ratio does come out at 3.99 - but this is made up of short high peaks and then long periods when it is around 3 - which can be seen by using Excel's line graph function.
My calculation above did not take account of the short periods of high spots and longer periods of lows. So 2.16 is likely to be wrong. If it can be assumed that the years between 1983 and now are typical (a big assumption...), then a drop to 3 x earnings - followed by a long period of stability at that sort of level would seem to be more likely.
15. drewster said...
cornishman,
The nadir in the P/E ratio is 3.09. I think it's sensible to assume that the current crash will be at least as bad, hence house prices will fall to at least 3.1. That means the average price will fall from the August 2007 peak of £200k to £106k, not accounting for any rise in earnings. As the FT article (cited above) shows, earnings can fall too.
It's interesting to compare unemployment and house prices. Although the trough in P/E was 1995-1999, unemployment peaked in 1993 and was declining from 1993 onwards. (source: UK unemployment 1991-2006) Nevertheless, the house-price-to-earnings ratio didn't start to recover until 1999. Applied to the present situation, we can expect house prices to plummet and stay low for the best part of a decade: an L-shaped recession.
16. Ash4781 said...
makes sense rising unemployment wrecks personal balance sheets