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House Prices In Relation To Historic Average Salary Multiples.

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keep seeing al kinds of graphs etc showing lines of house prices against average salaries with the historic average over the last 30, 50 years etc.

the average seems to be a multiple of just over 3.

these graphs are usually followed by a statement similar to " therefore we need to see further falls of 15% to bring us in line

with the historic average of circa 3 times salary" followed by the new price of the average property required to achieve this 3 times average salary multiple, eg £133,000.

on the surface this all seems a very reasonable argument.

my point is this we going from a recession into a depression and we are carrying record levels of personal and government debt into this new era along with zombie banks and financial institutions, add to this the growing effects of globalisation on the employment prospects of western workers etc etc and our inability to compete against our lower cost competitors and i ask you WHERE WILL THE MONEY COME FROM TO PAY OUR HIGH WESTERN SALARIES THAT WILL ALLOW US TO PAY £133,000 FOR THE AVERAGE HOUSE,THE WORLD IS CHANGING.

the graph is still valid we probably will revert to circa 3 time multiples for the average home , but you may find that

the average salary will be £8k and the average house circa £27k, more likely is the possibility that we will keep our high salary levels and indeed be able to pay hundreds of thousands, millions even for our homes but by then our currency will be trashed and imported bmw mini will cost £100k.

things over the next 30 years will be very different to the last 30 years and it will not be an improvement.

many people in the uk have just bought their last new car they just don,t know it yet.

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I'd tend to agree that technology will mean that salaries will equalise for knowledge jobs around the world:

IT, accountants, lawyers, etc.

Just as surely as they have for call centre workers

Certain professions that have to be performed locally, eg. teachers, taxi drivers, plumbers, etc. like to claim immunity based on the fact that they are based locally, but the substitution effect will drag their wages down too

Still, although we'll get poorer, net the world should be richer... ;)

I wouldnt be rushing to buy a £1m house in the SE of the UK on a 25 year mortgage right mow though... :(

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keep seeing al kinds of graphs etc showing lines of house prices against average salaries with the historic average over the last 30, 50 years etc.

30, 50 years ago there weren't many dual income households.

So its 3x times joint salaries you need to look at these days.

Average wage is 25K so 50K joint. 3x50K = 150K

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30, 50 years ago there weren't many dual income households.

So its 3x times joint salaries you need to look at these days.

Average wage is 25K so 50K joint. 3x50K = 150K

B0ll0cks.

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30, 50 years ago there weren't many dual income households.

So its 3x times joint salaries you need to look at these days.

Average wage is 25K so 50K joint. 3x50K = 150K

mmm

Average household income is £33K if i remember rightly

so 3x£33k= 100K so 30% to go then...

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I'd tend to agree that technology will mean that salaries will equalise for knowledge jobs around the world:

IT, accountants, lawyers, etc.

Just as surely as they have for call centre workers

Certain professions that have to be performed locally, eg. teachers, taxi drivers, plumbers, etc. like to claim immunity based on the fact that they are based locally, but the substitution effect will drag their wages down too

Still, although we'll get poorer, net the world should be richer... ;)

I wouldnt be rushing to buy a £1m house in the SE of the UK on a 25 year mortgage right mow though... :(

exactly, but most people tend to believe that the uk ,western europe and the us has this god given right to be wealthy and have a higher standard of living off the backs of the labour and SAVINGS of the chinese etc etc, but this is all about to change

but people think it will be business as usual when this will just not be possible REMEMBER "ITS DIFFERENT THIS TIME" is very true just not in the people believed.

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exactly, but most people tend to believe that the uk ,western europe and the us has this god given right to be wealthy and have a higher standard of living off the backs of the labour and SAVINGS of the chinese etc etc, but this is all about to change

but people think it will be business as usual when this will just not be possible REMEMBER "ITS DIFFERENT THIS TIME" is very true just not in the people believed.

Well a lot of it has been supported through cheap credit available to western banks and governments through Asian, Middle Eastern and other nations considering our banks and governments "safe" and wanting to put their savings/forex reserves there

Having seen massive losses they wont necessarily regard western institutions as "safe" again

Fact is saving rates need to approximately treble in the UK and US to be closer to 20%; in China they save 40% of their income; Japan 30%

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30, 50 years ago there weren't many dual income households.

So its 3x times joint salaries you need to look at these days.

Average wage is 25K so 50K joint. 3x50K = 150K

I agree.

The relatively new trend for mothers to put children into care and continue working is also a factor that makes your logic more plausible.

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I agree.

The relatively new trend for mothers to put children into care and continue working is also a factor that makes your logic more plausible.

Except that childcare costs a ridiculous amount.

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Except that childcare costs a ridiculous amount.

And the "average" household income" is more like £16-23k.... The notion that it is anything like £50k is complete and utter b0ll0cks.

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I agree.

The relatively new trend for mothers to put children into care and continue working is also a factor that makes your logic more plausible.

The problem with this logic is that it assumes that the average household (house buyer) will contain two people earning average (male) wages

this isn't true because

1) average womens pay is substantially less

2) many households have only one earner (they are single or their partner cannot or would rather not work)

3) the two working man+woman households will earn a convolution of the wage distributions for the two groups, for skewed income distributions such as the wage distribution this will be less than the the sum of the average male and female wage....

the other factor with needing two earners to pay a mortgage is payment stability, if the probability of one being made redundant during a recession is 10% the probability that the household will lose an earner is now 100-9^2=19% rather than 10% for only one wage earner paying the mortgage. Thus in a society of households with two earners paying a mortgage the effects of recessions on repossesion rates is made much worse. I expect this fact to be important in what plays out over the next year or two

edit typos

Edited by debtlessmanc

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And the "average" household income" is more like £16-23k.... The notion that it is anything like £50k is complete and utter b0ll0cks.

Average household take home income is almost 30K according on the Office of National Stats, thats about

2500 a month take home per household.

More than enough to service a 150K mortgage.

The 30K figure is after tax but includes things like tax credits and child benefit.

A single person needs to earn 45K a year before tax inorder to take home 30K.

Edited by Mammon

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I guess I am the eternal optimist but I really think that the coming change will be for the best in the long run. Owning a big flat screen will be seen as excessive. A simple walk in the park and a visit to the library will be acceptable pastimes with no costs. Picnics will be in fashion with salmon paste part of a staple diet. People will work on their own cars (as they used to) and keep the old banger going a lot longer. In fact you and your mates can have a good old natter while you work on it. Houses will be places to live in and renting will be seen as being as smart as buying.

A good old fashioned trade will be seen as something to aspire to (be a plumber my son and you will never be short of work) instead of looking to be a "financial advisor" or paper shuffler. People will help one another out of necessity and grow your own veggies will be all the rage. There may even be tele programmes on this instead of property crap. Just a few changes for the better IMHO.

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30, 50 years ago there weren't many dual income households....

you're right to a degree but [exact published statistics have been posted on here dozens of times], the number of extra women in the workforce since, say, 2001 [when property prices were entirely sensibly priced and affordable, although they started to take off at the very end of the year], is neglible, far far fewer than the number of houses that have been built since then.

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Average household take home income is almost 30K according on the Office of National Stats, thats about

2500 a month take home per household.

More than enough to service a 150K mortgage.

The 30K figure is after tax but includes things like tax credits and child benefit.

A single person needs to earn 45K a year before tax inorder to take home 30K.

Guess 90% of the people I know are living in squalor then.

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Don't forget income tax rises everybody! :rolleyes:

It was an eye-opener to see what the rates were just 10-20 years ago (I seem to remember seeing 25-30% as the 'normal' rate).

I guess any rises are than 12-18 months off for now though.. (or are they??)

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Back on topic...

So before the "global ecomony" took off, back in my grand parents day for example, where did the money come from? How come they had a larder full of food, a house and a car? Given the world economy was pretty shabby post war too! I'm just curious.

I ask because I don't get it. If the UK survived before mass Eastern imports then it must be possible? I read this week that we actually manufacture more than ever before and even produce more food than we ever have done. It would be great if someone could confirm that (or not) with some stats.

My own experience of the global economy is interesting. I used to work for an IT firm that outsourced to India. Costs went down, quality plummeted. The company was eventually purchased by the Indian outsourcers! The workers who got themselves up to speed and became competent left to seek jobs in the West! They got replaced by people a tenth of the cost and a tenth productive. I eventually left because I got fed up of re-writing the work of 10 people which, whilst I was doing this, made management think the experiment was working. Several years later and the Indian owners are now recruiting more local UK IT geeks! Ironic really!

Anyway, I moved somewhere that believed in hiring a small number of highly productive and motivated individuals who were enthusiastic about pushing standards and development methodologies as far as possible. I have no doubt that my current company is in the order of 20 times more productive than my old one! Thanks to the Internet we operate and draw money in globally and I genuinely believe our quality and speed continue to give us an advantage on a global stage.

Sure in 10 or 20 years people will be up to our level, but we will have pushed ahead too. I see the same flaw in poster's logic time and time again, they seem to assume we will just stop and let this happen. Maybe this is the difference between those of us who are able to buy a house comfortably and those that aren't. I dunno..? I'm not just going to sit here and moan, I'll be doing something about it :)

Edited by Orbital

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Guess 90% of the people I know are living in squalor then.

Most of the people you know are probably in the bottom 20% of households.

Average houshold final income (after tax but + benefits) by quintile:

Bottom 20% 15K

Next 20% 20K

Next 20% 26K

Next 20% 32K

Top 20% 52K

Average/mean is 29.5K.

Although the median seems to be 26K.

http://www.statistics.gov.uk/cci/nugget.asp?id=334

Edited by Mammon

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The problem with this logic is that it assumes that the average household (house buyer) will contain two people earning average (male) wages

this isn't true because

1) average womens pay is substantially less

2) many households have only one earner (they are single or their partner cannot or would rather not work)

3) the two working man+woman households will earn a convolution of the wage distributions for the two groups, for skewed income distributions such as the wage distribution this will be less than the the sum of the average male and female wage....

the other factor with needing two earners to pay a mortgage is payment stability, if the probability of one being made redundant during a recession is 10% the probability that the household will lose an earner is now 100-9^2=19% rather than 10% for only one wage earner paying the mortgage. Thus in a society of households with two earners paying a mortgage the effects of recessions on repossesion rates is made much worse. I expect this fact to be important in what plays out over the next year or two

edit typos

Some valid points.

However I don't believe that you can use redundancy risk in the argument. Even if you agree the correct multiple is 3X average salary, redundancy risk can then be used to argue that this is too high. In fact redundancy risk can be used to rule out house purchase altogether if you take a zero risk approach.

I'm not even sure that the overall average salary is the correct figure to use. I believe that about 20% of households live in social housing and it is reasonable to assume that these are, on average, the lower income households. If you assume that the remaining 80% represent the group from which the majority of house buyers are drawn then you need to use the average salary of this group, which will be higher.

However it was once observed that 'somebody used statistics as a drunken man uses a lamp post - for support rather than enlightenment'. I suppose we are all guilty of that to some extent.

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Don't forget income tax rises everybody! :rolleyes:

It was an eye-opener to see what the rates were just 10-20 years ago (I seem to remember seeing 25-30% as the 'normal' rate).

I guess any rises are than 12-18 months off for now though.. (or are they??)

do you really believe taxes are lower now?

the state takes a larger percentage of gdp in tax now than its ever done, they have achieved this with stealth taxes

when they increase the tax base rates do you think the stealth taxes will disapear?

sure they will try to tax us more to pay for bailouts and stimulus plans but this will just reduce consumer spending further leading to more job losses and less tax revenues its the law of unintended consequences at work, they cannot take any more tax than they already do as they will cross the threshold where it gives them more income, they know this but it won,t stop them doing it anyway as they don,t know what else to do. :o

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Back on topic...

So before the "global ecomony" took off, back in my grand parents day for example, where did the money come from? How come they had a larder full of food, a house and a car? Given the world economy was pretty shabby post war too! I'm just curious.

I ask because I don't get it. If the UK survived before mass Eastern imports then it must be possible? I read this week that we actually manufacture more than ever before and even produce more food than we ever have done. It would be great if someone could confirm that (or not) with some stats.

My own experience of the global economy is interesting. I used to work for an IT firm that outsourced to India. Costs went down, quality plummeted. The company was eventually purchased by the Indian outsourcers! The workers who got themselves up to speed and became competent left to seek jobs in the West! They got replaced by people a tenth of the cost and a tenth productive. I eventually left because I got fed up of re-writing the work of 10 people which, whilst I was doing this, made management think the experiment was working. Several years later and the Indian owners are now recruiting more local UK IT geeks! Ironic really!

Anyway, I moved somewhere that believed in hiring a small number of highly productive and motivated individuals who were enthusiastic about pushing standards and development methodologies as far as possible. I have no doubt that my current company is in the order of 20 times more productive than my old one! Thanks to the Internet we operate and draw money in globally and I genuinely believe our quality and speed continue to give us an advantage on a global stage.

Sure in 10 or 20 years people will be up to our level, but we will have pushed ahead too. I see the same flaw in poster's logic time and time again, they seem to assume we will just stop and let this happen. Maybe this is the difference between those of us who are able to buy a house comfortably and those that aren't. I dunno..? I'm not just going to sit here and moan, I'll be doing something about it :)

I think you are mistakenly assuming that western people are inately cleverer / more productive that other nationalities

NEWSFLASH: most people are average

Given the same education most people turn into average performers and all that is needed to perform average jobs averagely is the average

I'm pleased for you, maybe the law of averages says you are genuinely above average... ;)

Just a simple question, I seem to remember IT people in the UK were paid a lot in the 1980s, but this doesnt seem to be the case now, or am I just misinformed?

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Average household take home income is almost 30K according on the Office of National Stats, thats about

2500 a month take home per household.

More than enough to service a 150K mortgage.

But this only remains valid if banks will lend at 5x salary multiples.

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30, 50 years ago there weren't many dual income households.

So its 3x times joint salaries you need to look at these days.

Average wage is 25K so 50K joint. 3x50K = 150K

So, how does that work when you want kids or one partner gets unemployed?

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I guess I am the eternal optimist but I really think that the coming change will be for the best in the long run. Owning a big flat screen will be seen as excessive. A simple walk in the park and a visit to the library will be acceptable pastimes with no costs. Picnics will be in fashion with salmon paste part of a staple diet. People will work on their own cars (as they used to) and keep the old banger going a lot longer. In fact you and your mates can have a good old natter while you work on it. Houses will be places to live in and renting will be seen as being as smart as buying.

A good old fashioned trade will be seen as something to aspire to (be a plumber my son and you will never be short of work) instead of looking to be a "financial advisor" or paper shuffler. People will help one another out of necessity and grow your own veggies will be all the rage. There may even be tele programmes on this instead of property crap. Just a few changes for the better IMHO.

don,t agree with the cars bit, modern cars are now so complicated that all apart from a basic service or brake disc change is beyond a diy mechanic.

until recently i owned a bodyshop and we had an audi a3 in for repair the owner asked me to replace the brake light bulb at the same time , it took me about 30 mins as i had to remove and replace all kinds of linings and also a cd multichanger/sat nav control unit just to get enough clearance to enable removal and refitting of a £3 brakelight bulb i also had specialist tools that most people dont have lying around the house, its not like working on your old ford escort in the 80,s anymore :lol:

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Back on topic...

So before the "global ecomony" took off, back in my grand parents day for example, where did the money come from? How come they had a larder full of food, a house and a car? Given the world economy was pretty shabby post war too! I'm just curious.

If your grandparents had "a larder full of food, a house and a car" in the post war era, they were not average earners! Even in the 70's, a fairly low percentage of households had cars.

Over the last couple of decades we have seen a public acceptance that if they wan't something that everyone considers to be a 'must have', they will have to pay through the nose for it. Think of things like Apple products (mostly inferior through the 90's, but over priced) or three figure sums for jeans or a pair of shoes etc.

To address the OP, over the period of HPI to buy your own property was a 'must have' and people paid through the nose. We're now at the stage of average prices being 5 or 6x average single salary. Will average wages come down? It's a fair question to ask, but I would counter with another question. Why do you think we'll return to average house prices being 3x average wage? Joe public has already accepted that they have to 6x, so if averages come down to 4.5x they'll think they're getting a bargain!

I know that this is simplistic, and the economic factors have a huge pressure on house prices etc. etc. I'm just asking the question :rolleyes:

P.S. No come backs saying Apple products are the greatest thing since sliced bread, I'm no' listening!

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