Jump to content
House Price Crash Forum

Archived

This topic is now archived and is closed to further replies.

twatmangle

House Prices.

Recommended Posts

I'm just thinking out loud here.. so bear with me.

Prices tripled in a decade [1997-2007]. OK, so it's a bubble, but what is a more realistic price? How can you put a value to what it should be?

Is it really right to be comparing prices of 2007 to 1997? After all, you're comparing a trough and a peak, so it's no surprise that prices have gone up enormously. Wouldn't it be more useful to compare peak-peak or trough-trough? Perhaps comparing 1988 with 2006 would be better way to get a picture of where we are now. I know there is a trendline in the NW data set, but this isn't all that helpful.

(So what should a house bought at the height of the last peak be worth now? 200%, 300%, 400%?)

Another indicator is average earnings, but again, is this a flawed method, and more specifically are things like-for-like when compared to previous generations?

Let me expand, with a hypothesis. Thirty or more years ago, many many people knew that buying a house was not for them. People accepted that, and there were LA houses available.

Properties were generally purchased by those that could afford them, those that couldn't, were catered for with LA houses. Thus 3x salary was achievable, because the lowest n% of earners didn't apply, it was a restricted, self-selecting group, who could afford the mortgage. So the 3x historical mortgage deal was not 3x average salary of the population, it was 3x of those earning enough to afford a house. The lowest earners never applied and their salaries were never entered in the data set.

These days, everyone wants to be a home owner, and together with the fact that there is not the availability of LA housing as there used to be, more people on lower salaries are looking to buy when previously they wouldn't. So relatively speaking, the average salary of the applicant is actually decreasing as more people come at the bottom end. Logically multiples are required to be higher. Maybe this isn't true, it's just a discussion point.

The target is for 50% of people to go through higher education, you now have 50% of the people thinking they've become middle class, and thus should be able to afford their own home, when sadly in previous generations they wouldn't have had that opportunity, they would have gone straight into the factory or mill and lived in a more modest or LA house. So I'm suggesting that using raw salary multiples is flawed as well.

So is there a good way of normalising the data to exclude external influencing factors such that there is true like-for-like historical house prices comparison data?

For example, if someone said, my grandfather was a Captain in the army in the 50s at the peak of a boom, and could buy number 52 Festive Road for 3x salary, and my father was also a Captain in the army, and could afford that same house at 3.5x his salary in the 70s boom, and I am also a Captain in the army now and I can't afford that house unless I buy at 6x my salary.

Or a bank manager in the 60s in Croydon could buy a 4 bed detached, but a bank manager at the same bank now could only buy a 3 bed semi etc.

Newly qualified teacher in Aberdeen etc...

(I've seen house prices expressed as ounces of Gold, but gold has its own peaks and troughs to distort the data.)

Put simply, is there an equivalent BigMac Index or a more useful PPP that can be applied to houses?

Share this post


Link to post
Share on other sites
I'm just thinking out loud here.. so bear with me.

Prices tripled in a decade [1997-2007]. OK, so it's a bubble, but what is a more realistic price? How can you put a value to what it should be?

Is it really right to be comparing prices of 2007 to 1997? After all, you're comparing a trough and a peak, so it's no surprise that prices have gone up enormously. Wouldn't it be more useful to compare peak-peak or trough-trough? Perhaps comparing 1988 with 2006 would be better way to get a picture of where we are now. I know there is a trendline in the NW data set, but this isn't all that helpful.

(So what should a house bought at the height of the last peak be worth now? 200%, 300%, 400%?)

Another indicator is average earnings, but again, is this a flawed method, and more specifically are things like-for-like when compared to previous generations?

Let me expand, with a hypothesis. Thirty or more years ago, many many people knew that buying a house was not for them. People accepted that, and there were LA houses available.

Properties were generally purchased by those that could afford them, those that couldn't, were catered for with LA houses. Thus 3x salary was achievable, because the lowest n% of earners didn't apply, it was a restricted, self-selecting group, who could afford the mortgage. So the 3x historical mortgage deal was not 3x average salary of the population, it was 3x of those earning enough to afford a house. The lowest earners never applied and their salaries were never entered in the data set.

These days, everyone wants to be a home owner, and together with the fact that there is not the availability of LA housing as there used to be, more people on lower salaries are looking to buy when previously they wouldn't. So relatively speaking, the average salary of the applicant is actually decreasing as more people come at the bottom end. Logically multiples are required to be higher. Maybe this isn't true, it's just a discussion point.

The target is for 50% of people to go through higher education, you now have 50% of the people thinking they've become middle class, and thus should be able to afford their own home, when sadly in previous generations they wouldn't have had that opportunity, they would have gone straight into the factory or mill and lived in a more modest or LA house. So I'm suggesting that using raw salary multiples is flawed as well.

So is there a good way of normalising the data to exclude external influencing factors such that there is true like-for-like historical house prices comparison data?

For example, if someone said, my grandfather was a Captain in the army in the 50s at the peak of a boom, and could buy number 52 Festive Road for 3x salary, and my father was also a Captain in the army, and could afford that same house at 3.5x his salary in the 70s boom, and I am also a Captain in the army now and I can't afford that house unless I buy at 6x my salary.

Or a bank manager in the 60s in Croydon could buy a 4 bed detached, but a bank manager at the same bank now could only buy a 3 bed semi etc.

Newly qualified teacher in Aberdeen etc...

(I've seen house prices expressed as ounces of Gold, but gold has its own peaks and troughs to distort the data.)

Put simply, is there an equivalent BigMac Index or a more useful PPP that can be applied to houses?

To compare like with like, any index would need to equate the cost of a house to disposable income i.e. income after the essentials of life have been covered. I suspect looked at in this way houses are no more expensive than they used to be.

Share this post


Link to post
Share on other sites
To compare like with like, any index would need to equate the cost of a house to disposable income i.e. income after the essentials of life have been covered. I suspect looked at in this way houses are no more expensive than they used to be.

Generally the other essentials of life such as running a car/paying for public transport, buying food and clothes have got cheaper in real and in nominal terms. And working family tax credits muddy the waters.

But I don't think that the sum total of such factors gets very close to counterbalancing the tripling in house prices.

Share this post


Link to post
Share on other sites
Generally the other essentials of life such as running a car/paying for public transport, buying food and clothes have got cheaper in real and in nominal terms. And working family tax credits muddy the waters.

But I don't think that the sum total of such factors gets very close to counterbalancing the tripling in house prices.

I suspect you are right about the last 10yrs or so, but over a longer term, say +15yrs, I think it evens out.

Share this post


Link to post
Share on other sites

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   292 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.