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Guest The Relaxation Suite

Who Started The Fraud

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Guest The Relaxation Suite

Just something I was thinking about today. Lots of calculations in my mind about house prices and so on and then realised all were accepting the assumption that houses are affordable when they hit x3/x3.5 joint income. Then I asked myself why this is? Who dreamt that little gem up? Why should the average house cost more than, say, one year's average salary?

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Guest The Relaxation Suite

IT WAS ERIC :lol:

I see... Eric has a lot to answer for in that case. ;) But this is a big assumption that underlines a lot of the logic on this website as well. I still see no reason why an average person and his average wife should have come up with 3.5 salary to buy the average house. Strikes me this figure is calculated as the minimum that will keep that couple working hard for the bulk of their lives. As productive as they can be without breaking.

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Just something I was thinking about today. Lots of calculations in my mind about house prices and so on and then realised all were accepting the assumption that houses are affordable when they hit x3/x3.5 joint income. Then I asked myself why this is? Who dreamt that little gem up? Why should the average house cost more than, say, one year's average salary?

Historicaly it seems to be the point at which fear, greed and panic have the least effect on the decision making process of buying a house. ie the ballance point. Think about it, it allows room for increased interest rates (vis a vis your income/budget), allows you to save cash, gives people the opportunity to move up the tree with time.

At 8 - 10x salary only those who are greedy or terrified (of missing the boat)will jump onto the wagon and will not be making rational decisions. At 1x sallary (the economy would be dog food and unemployment would be 30%+) then I suppose we would have the rich hoovering up the lot and we will be back to pre WW2 private landlord for all. So taking all that into consideration, either the banks (no chance)or the government should reinforce the old 2x the bigger salary + 1x the other salary (nearly always the womans due to baby syndrome) and a 20% deposit. All together would keep prices sensible aka 'the old days' or present day Germany.

Edited by steve99

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I think you maybe right... Too much and they give up and drop out of the game as is what is happening now....;.interesting!!!!

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3.5x joint income is not cheap at all and as you say will keep both adults in work out of necessity for the rest of their days. 3-3.5x single income is the historical bottom. This whole thing about "but dual income is the norm these days, you would expect house prices to double" is such a load of nonsense but it is by far the most common bull myth I encounter in the general population. In the population's collective memory there were no women in work in 1995.

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Guest The Relaxation Suite

Historicaly it seems to be the point at which fear, greed and panic have the least effect on the decision making process of buying a house. ie the ballance point. Think about it, it allows room for increased interest rates (vis a vis your income/budget), allows you to save cash, gives people the opportunity to move up the tree with time.

At 8 - 10x salary only those who are greedy or terrified (of missing the boat)will jump onto the wagon and will not be making rational decisions. At 1x sallary (the economy would be dog food and unemployment would be 30%+) then I suppose we would have the rich hoovering up the lot and we will be back to pre WW2 private landlord for all. So taking all that into consideration, either the banks (no chance)or the government should reinforce the old 2x the bigger salary + 1x the other salary (nearly always the womans due to baby syndrome) and a 20% deposit. All together would keep prices sensible aka 'the old days' or present day Germany.

Intersting what you say about the problems with x1. If the average block of land+property cost x1 salary, joint or single, then Mr & Mrs Average buy and pay off their house by the time they're 25 they have no mortgage. So they have much more disposable income to spend down the high street and much more money to save for a pension. More people across the country would owe their houses outright. The only problem as far as I can see is that FTBs would be able realistically to save over a year or two and buy a house outright while in their early 20s.

And the banks wouldn't like that at all because where would they get their dairy cows from to milk for the next quarter of a century?

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Just something I was thinking about today. Lots of calculations in my mind about house prices and so on and then realised all were accepting the assumption that houses are affordable when they hit x3/x3.5 joint income. Then I asked myself why this is? Who dreamt that little gem up? Why should the average house cost more than, say, one year's average salary?

You'd need to ask the people who'd be prepared to bid more than that with their own cash, I expect you'll find several right here on HPC :)

That group gives a baseline, "honest" valuation to housing. Once people start borrowing in order to buy, prices get bid up even higher, in line with credit availability. So a rule-of-thumb like 3x isn't some justifiable measure of housing value, it's what [experience shows] can be safely lent in the reasonable expectation of having the loan serviced.

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. Then I asked myself why this is? Who dreamt that little gem up?

The belief helps to cloud the issue of just how truly peculiar and abusive the real estate market is.

Why should the average house cost more than, say, one year's average salary?

In terms of production, there is no more reason a house should cost 3.5x wages than a car

Edited by Stars

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You'd need to ask the people who'd be prepared to bid more than that with their own cash, I expect you'll find several right here on HPC :)

That group gives a baseline, "honest" valuation to housing. Once people start borrowing in order to buy, prices get bid up even higher, in line with credit availability. So a rule-of-thumb like 3x isn't some justifiable measure of housing value, it's what [experience shows] can be safely lent in the reasonable expectation of having the loan serviced.

Which makes it (more or less) the maximum price that can be paid

The more interesting question that is missed by this analysis is - why should housing always rise to the maximum price that can be paid?

Edited by Stars

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I see... Eric has a lot to answer for in that case. ;) But this is a big assumption that underlines a lot of the logic on this website as well. I still see no reason why an average person and his average wife should have come up with 3.5 salary to buy the average house. Strikes me this figure is calculated as the minimum that will keep that couple working hard for the bulk of their lives. As productive as they can be without breaking.

Well, I don't have an average wife, but I would def. buy our entire street and knock through if the houses all came down from 200k to 25k, or whatever the average wage is. So if there's a few others like me and my not-quite-average-wife around, then the laws of supply and demand would pretty much answer your question for you.

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Guest The Relaxation Suite

Which makes it (more or less) the maximum price that can be paid

The more interesting question that is missed by this analysis is - why should housing always rise to the maximum price that can be paid?

Which is a great question right at the heart of it. I'm not sure I like the idea that Mr Average is responsible for this though, via his bidding up etc. Like the point made about how the house should cost no more than the car, the price of one house/land is "set" by the market, but it is set in line with the general value, and that I think is set much higher up the food chain for reasons I have already mentioned.

If no one had to borrow money to buy a house or a car, then the wealthiest 1% of society wouldn't be the top 1% for very long, would they? Their wealth comes from people toiling lifelong to pay interest payments- invented money - to the top 1%. If people had their homes paid off in their early 20s all this would change. This is why so many banks have problems with people paying off their mortgages/loans in lump sums.

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Guest The Relaxation Suite

Well, I don't have an average wife, but I would def. buy our entire street and knock through if the houses all came down from 200k to 25k, or whatever the average wage is. So if there's a few others like me and my not-quite-average-wife around, then the laws of supply and demand would pretty much answer your question for you.

Those houses would be 25k after a massive market correction. Soon, they would readjust back to a nice cosy 3.5 wage ratio. Funny how it always goes back to around that mark, the minimum level that requires a life of toiling.

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3.5x joint income is not cheap at all and as you say will keep both adults in work out of necessity for the rest of their days. 3-3.5x single income is the historical bottom. This whole thing about "but dual income is the norm these days, you would expect house prices to double" is such a load of nonsense but it is by far the most common bull myth I encounter in the general population. In the population's collective memory there were no women in work in 1995.

Also, the other justification for higher house prices is the increased demand due to single person households. You can't have it both ways.

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Which makes it (more or less) the maximum price that can be paid

The more interesting question that is missed by this analysis is - why should housing always rise to the maximum price that can be paid?

It is not. That is the maximum you can borrow, but the maximum price that can be paid is the maximum borrowings plus deposit.

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If no one had to borrow money to buy a house or a car, then the wealthiest 1% of society wouldn't be the top 1% for very long, would they? Their wealth comes from people toiling lifelong to pay interest payments- invented money - to the top 1%. If people had their homes paid off in their early 20s all this would change. This is why so many banks have problems with people paying off their mortgages/loans in lump sums.

I'm not sure that that's the main reason, I think it's more a question of the bank's funding. Eg if they've sold the mortgage on to a bondholder who expects an income stream over the next 30 years, then there's clearly a cost to the bank of the borrower exiting early, and if they're wise they'll build in penalties/limits/overhead to cover this.

Is it possible for the average person to buy the average modern house in their early 20s? How much does it cost to build an average house (excluding land)? Unless houses are sold below their replacement cost for some reason, that's what someone would have to save in a handful of years even if they were given free land.

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I'm not sure that that's the main reason, I think it's more a question of the bank's funding. Eg if they've sold the mortgage on to a bondholder who expects an income stream over the next 30 years, then there's clearly a cost to the bank of the borrower exiting early, and if they're wise they'll build in penalties/limits/overhead to cover this.

Is it possible for the average person to buy the average modern house in their early 20s? How much does it cost to build an average house (excluding land)? Unless houses are sold below their replacement cost for some reason, that's what someone would have to save in a handful of years even if they were given free land.

A friend of mine happened to owne a plot of land next to his house and he built a house on it, totally from the ground up and then moved into it and sold the other place. It was a long time ago now but I'm sure he told me it cost 30k. They did all the labour themselves, hired no one of any sort as between them (brothers & cousins) they had all the trades required. Apologies if this figure seems crazy because this was 15 years ago and we only ever had one conversation about it so my memory of it is very scratchy.

If this figure is right it would be about 44k today. The house sold last year for 215k. So that gives some clue as to the cost of materials vs land, etc.

In edit I'll add that it might have been 50k as that figure is rattling round as well. But even that would be only 73k today.

Edited by Tecumseh

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A friend of mine happened to owne a plot of land next to his house and he built a house on it, totally from the ground up and then moved into it and sold the other place. It was a long time ago now but I'm sure he told me it cost 30k. They did all the labour themselves, hired no one of any sort as between them (brothers & cousins) they had all the trades required. Apologies if this figure seems crazy because this was 15 years ago and we only ever had one conversation about it so my memory of it is very scratchy.

If this figure is right it would be about 44k today. The house sold last year for 215k. So that gives some clue as to the cost of materials vs land, etc.

In edit I'll add that it might have been 50k as that figure is rattling round as well. But even that would be only 73k today.

That's interesting, but £75k (or even £44k) is still a lot of money for most people and with chargeable labour it would have come to a lot more (builder told me that his rule of thumb is 50% materials, 50% labour).

You're right to note that land costs dominate; my point is that even with free land the base cost of a modern house is going to be rather high, taking many years of saving for most people.

Of course, there's nothing (outside of the planning laws :)) to say that we must all live in modern houses, or that we shouldn't live in a caravan or shack while slowly working on our home...

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That's interesting, but £75k (or even £44k) is still a lot of money for most people and with chargeable labour it would have come to a lot more (builder told me that his rule of thumb is 50% materials, 50% labour).

You're right to note that land costs dominate; my point is that even with free land the base cost of a modern house is going to be rather high, taking many years of saving for most people.

Of course, there's nothing (outside of the planning laws :)) to say that we must all live in modern houses, or that we shouldn't live in a caravan or shack while slowly working on our home...

You make a valid point here. Someone here has a signature claiming that everyone in the world could live in Australia and have 1/4 of an acre. The logical corollary to this is that the rest of the world's land surface could easily provide more than enough materials and food and water to keep everyone alive and happy, and that therefire the system we have now is imposed on us and totally unfair, benefiting as it does only a tiny fraction of the human population.

Anyway, if we got that 1/4 of an acre each, free - and as I point out above there is no reason why this is not possible - then we would still need to save 75k to put the house up. How long would it take someone on 25k to save this? If it's a couple on 25k we're talking joint 50k, and therefore after tax 25k. If the land they were on was free, as it is on our model, they have no land rent to pay, just other bills, so I would suggest they could save for the house to be built and owned outright in less than five years between them.

Somewhere in a parallel universe this system works very well I should think.

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You make a valid point here. Someone here has a signature claiming that everyone in the world could live in Australia and have 1/4 of an acre. The logical corollary to this is that the rest of the world's land surface could easily provide more than enough materials and food and water to keep everyone alive and happy, and that therefire the system we have now is imposed on us and totally unfair, benefiting as it does only a tiny fraction of the human population.

Anyway, if we got that 1/4 of an acre each, free - and as I point out above there is no reason why this is not possible - then we would still need to save 75k to put the house up. How long would it take someone on 25k to save this? If it's a couple on 25k we're talking joint 50k, and therefore after tax 25k. If the land they were on was free, as it is on our model, they have no land rent to pay, just other bills, so I would suggest they could save for the house to be built and owned outright in less than five years between them.

Somewhere in a parallel universe this system works very well I should think.

They would have to pay rent on the intrinsic value of whatever building they occupied ... which would depend on whatever rental yields might be under such a model (and also on the extent to which they were prepared to "rough it").

Perhaps a more important question is, to what extent are these joint 50k incomes predicated on our high-land-value/high-debt/high-cost economy, and sustained (for the time being) by the current model in the first place?

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This thread started on a wrong assumption:

Nobody ever said 3.5x joint income, but rather 3.5x single income or 2x joint income!!

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Just something I was thinking about today. Lots of calculations in my mind about house prices and so on and then realised all were accepting the assumption that houses are affordable when they hit x3/x3.5 joint income. Then I asked myself why this is? Who dreamt that little gem up? Why should the average house cost more than, say, one year's average salary?

Fred Harrison gives an argument in his book: basically, it is based on the working lifetime of a person and how much they can afford to pay given natural interest rates and levels of taxation. You can also approach it from the angle of interest rates and equilibrium return on investments (comparing owning a house and renting it, or just selling the house and loaning the money.) Alternatively, one can calculate the man hours required to make the materials and build a house, together with infrastructure costs and an analysis from this angle gives a similar figure.

The elastic aspect of house prices is the land value. The cost to build a house is probably about 2 times annual household income. The utility of land is quite low, so even at 3 times household income there is a premium existing on land due to the availability of credit. Whether that is one annual salary for an average block (as it usually is), or 4+ years annual salray as it is now) is all down to credit availability in conjunction with planning restrictions (limiting of supply).

Edited by D'oh

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Just something I was thinking about today. Lots of calculations in my mind about house prices and so on and then realised all were accepting the assumption that houses are affordable when they hit x3/x3.5 joint income. Then I asked myself why this is? Who dreamt that little gem up? Why should the average house cost more than, say, one year's average salary?

I would say that 3x5 times income is affordable, with average interest rates say 7% payable over an average working life to retirement say 60 to 65.

When you start to mess around with this you can still buy your house but the chances of eventually being debt free unless you can sell it are less likely, so will be paying for it until you die....more risks=more failures. ;)

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The utility of land is quite low, so even at 3 times household income there is a premium existing on land due to the availability of credit. Wether that is one annual salary for an average block (as it usually is), or 4+ years annual salray 9as it is now) is all down to credit availability in conjunction with planning restrictions (limiting of supply).

It has nothing to do with credit availability, only with planning permission restrictions!

Less credit is good as it forces prices down.

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  • 259 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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