Jump to content
House Price Crash Forum
Sign in to follow this  
English Rose

Just 8 Years?

Recommended Posts

I've seen a few newspaper articles which state that if houseprices remain unchanged, then wages will have caught up within 8 years.

I can't understand this.... possibly because I've never been too good at sums :rolleyes: ... but according to my back of a fag packet calculations:

Let's assume an average house price of £160,000 and average wage of £27,000. Then let's assume average wages rise by an average 4% pa (that's what the Chartered Institute of Personnel reckon they're doing at the moment).

Me and my excel spreadsheet make that 14 years for prices to come back down to x3 average earnings. A heck of a difference from 8 years.

I saw one argument that you had to factor in a 'normal price rise' of 5% to your £160,000 mortgage. Erm... why?

Like I said, I'm not too good at maths, so feel free to point out where I can't add up right! :D

Share this post


Link to post
Share on other sites

The Economist always seems pretty bearish so a calc from them of 15 years to return to normal sounds about right (in fact postively bullish for the Economist, unless their argument was that in that time you're going to be bound to run into a recession which will bring on something a hell of a lot sharper than a soft landing - which is my pet theory!).

Share this post


Link to post
Share on other sites
I've seen a few newspaper articles which state that if houseprices remain unchanged, then wages will have caught up within 8 years.

I can't understand this.... possibly because I've never been too good at sums  :rolleyes:  ... but according to my back of a fag packet calculations:

Let's assume an average house price of £160,000 and average wage of £27,000.  Then let's assume average wages rise by an average 4% pa (that's what the Chartered Institute of Personnel reckon they're doing at the moment).

Me and my excel spreadsheet make that 14 years for prices to come back down to x3 average earnings.  A heck of a difference from 8 years.

I saw one argument that you had to factor in a 'normal price rise' of 5% to your £160,000 mortgage.  Erm... why? 

Like I said, I'm not too good at maths, so feel free to point out where I can't add up right!  :D

You are not the one who can't add up right. If newspaper articles are suggesting that house prices will remain unchanged they have failed to add up that many people are overstretched in a number of different ways not just with their own mortgage. If jobs are lost in retail, manufacturing and indeed any job affected by oil / fuel prices then this is going to impact very quickly. In reality if one section of society had sensibly and realistically managed to buy to a point where they priced out the next generation it might take a lot longer than eight years to restore the situation but that argument is academic. The newspapers are discussing long term stagnation because they can no longer sustain articles about long term house price rises. Give it time and the newspapers will one day be talking about 'Will Mr and Mrs Smith ever get out of negative equity or will the housing bust last for ever?' A long way off yet but it will happen, I'm sure I have faint memories of people saying that they didn't think their house would ever recover the price they paid for it from the last crash. It won't take eight years or fourteen years my longest guess for it to hit the bottom would be four or five years but that is the longest I think.

Share this post


Link to post
Share on other sites

I usually use this:

(1-C/100)=A*(1+E/100)^Y

C = crash percentage (% drop peak to trough, nominal)

E = 4% earnings growth

A = 3.5/5.7 p/e unwind ratio after Y years

some solutions

1. C=0, Y=12.4 stagnation

2. Y=5, C=25% crash

But choose your own values for A ... :)

Edit: I call this the ‘House Price Crash Equation’ B)

Edited by spline

Share this post


Link to post
Share on other sites

with my back of a fag packet calculation it would take another 17 to 18 years of stagnant prices for wages to catch up .....given current income growth!!!!!!!

and restore the HP to income ratio to its 1995 level.....

Share this post


Link to post
Share on other sites
I've seen a few newspaper articles which state that if houseprices remain unchanged, then wages will have caught up within 8 years.

I can't understand this.... possibly because I've never been too good at sums  :rolleyes:  ... but according to my back of a fag packet calculations:

Let's assume an average house price of £160,000 and average wage of £27,000.  Then let's assume average wages rise by an average 4% pa (that's what the Chartered Institute of Personnel reckon they're doing at the moment).

Me and my excel spreadsheet make that 14 years for prices to come back down to x3 average earnings.  A heck of a difference from 8 years.

I saw one argument that you had to factor in a 'normal price rise' of 5% to your £160,000 mortgage.  Erm... why? 

Like I said, I'm not too good at maths, so feel free to point out where I can't add up right!  :D

Housing runs in cycles. Houses peaked in 1989 then dropped and then returned to same levels in 1999. It took 10 years approximately. they then doubled beteen 2001-2004. So if we have the same prediction houses will drop and return to the same levels in 2013-2014.

Share this post


Link to post
Share on other sites
with my back of a fag packet calculation it would take another 17 to 18 years of stagnant prices for wages to catch up .....given current income growth!!!!!!!

and restore the HP to income ratio to its 1995 level.....

1995 was the classic undershoot that a crashing market with momentum exhibits. 3x average wages is not the norm, but the trough. Dont keep holding out under the "certainty" that prices will return to these levels. I would personally be happy buying at a level of 4x my gross anual wage.

Share this post


Link to post
Share on other sites
Guest Riser

Don't believe the VI spin about soft landings and plateaus, heres my guess about what will happen:

predict.gifNationwide House Price Cycle - Into the Future

post-1619-1127202974_thumb.jpg

Share this post


Link to post
Share on other sites

Jpidding’s point about how far the p/e is likely to unwind is a good one – the current peak had a p/e of 5.7 in mid-2004, and as it fell to about 3.2 after the last peak it’s natural to suppose that this will happen again. But, as I’ve argued in other threads, the level of last trough, following the 1989 bubble, was exceptional – the bubble was pre-inflated by the removal of MIRAS and the current peak (and future trough?) are ‘lifted’ by the lower IRs environment post-1992. Also note that as the minimum *nominal* price always occurs before the minimum p/e ratio, the nominal trough could easily be at a p/e closer to 3.8 and hence, from the HPC equation, a crash of only 19% over 5 years. IMHO one of the biggest questions about the impending HPC, and important for those waiting for a hard crash, should really be about getting a handle on the possibility of it turning into a bit of a damp squib. :unsure:

Share this post


Link to post
Share on other sites

If the house-price-to-income level is currently about 5.7 times and incomes grow at an average of 4.5% a year (the MPC has said this level of income growth is consistent with its 2% CPI target) then it would take eight years of flat prices to hit a ratio of four times incomes.

Ten years would take the ratio back to a little over 3.6 times and it would take more than 13 years to hit 3.2 times.

Optimists (for example, Lombard Street Research) argue the long-term house-price-to-incomes ratio has risen to about 4 - on the back of things like slightly lower real interest rates etc.

However, it is reasonable to expect an overshoot (even if you agree the ratio has taken a permanent rise) and with the economy slowing as it is at present we might find incomes do not grow by 4.5% per year on average.

This stagnation argument also requires "everything else to go right" too - so the UK economy is not hit by any shocks like Hurricane Katrina, further oil price spikes... and, having delivered (as Gordon Brown boasts) "the longest period of unbroken economic growth since records began" it will now delivered a further decade or so of unbroken growth.

Truly an economic miracle that will see Gordon Brown go down in history as the country's greatest ever chancellor.

A whole host of things that COULD go wrong mustn't if the stagnation theory is to work out... in short, we need a Goldilocks scenario for the next decade or so.

All a little too convenient I would argue.

Share this post


Link to post
Share on other sites
a crash of only 19% over 5 years.

...on a house that is currently valued at £200000, would be £38000.

A lot of people who have bought in this boom are expecting their property to double (at least) in that time, and have taken out interest only mortgages, paying as much as they can afford. They hope that capital growth will pay off the repayment part of the mortgage, and also provide them with some capital gain.

So fast forward to 2010 and just think what will it will be like after 5 years of falling prices. The general public will look back on the past five years and see housing as a way of tying up your money for years without any benefit. YOu would make more money if you put the deposit in a bank account, and rent for 5 years. Thats why it takes years for the market to recover.

Share this post


Link to post
Share on other sites
Guest Riser
Jpidding’s point about how far the p/e is likely to unwind is a good one – the current peak had a p/e of 5.7 in mid-2004, and as it fell to about 3.2 after the last peak it’s natural to suppose that this will happen again. But, as I’ve argued in other threads, the level of last trough, following the 1989 bubble, was exceptional – the bubble was pre-inflated by the removal of MIRAS and the current peak (and future trough?) are ‘lifted’ by the lower IRs environment post-1992. Also note that as the minimum *nominal* price always occurs before the minimum p/e ratio, the nominal trough could easily be at a p/e closer to 3.8 and hence, from the HPC equation, a crash of only 19% over 5 years. IMHO one of the biggest questions about the impending HPC, and important for those waiting for a hard crash, should really be about getting a handle on the possibility of it turning into a bit of a damp squib.  :unsure:

My understanding of the housing cycles is that they are driven by sentiment. The technical factors will indeed be different each time, last time MIRAS, this time Buy to Let, yet it is the cummulatitive effect of all these factors have on sentiment that matters.

Share this post


Link to post
Share on other sites

Yes, I agree that sentiment is hugely important in driving house price bubbles, but I’ve recently been surprised at how constant the repayments:income ratio (the ODPM figures) has been, apart from the obvious stretching during a bubble, and have explored the idea that this could provide a baseline house price onto which a sentiment bubble could be superimposed.

This simple idea does a remarkable job of tracking the last two bubbles, much better than I had expected, and seems to show (at least as far as I’ve tested the idea, last two cycles) that affordability really does drive the price – *except* during a bubble when sentiment dominates. :) It also shows that 1989 bubble fell back by an unusually large amount (boosted pre-peak by MIRAS and dragged down post-peak by improved affordability with lower IRs). And it shows that the current 2004 bubble is lifted by further by improving affordability (and of course by BTL and other bubble drivers) but crucially this affordability ‘support’ won’t evaporate along with the bubble – surprisingly, it actually provides a basis for estimating the exit p/e in (say) 2009.

On this basis, it looks to me that the potential for unwinding of this bubble is much smaller than the last one, limited to something like about 30% (46% p/e overvalue), and hence that the nominal falls will be smaller at around 15-20% over 5 years.

I think there is an interesting debate to had on "what is the expected exit p/e in 2009?" I am saying, at least for the moment, something in the range 3.7 to 4.0 on the HBOS figures.

Share this post


Link to post
Share on other sites
A lot of people who have bought in this boom are expecting their property to double (at least) in that time, and have taken out interest only mortgages, paying as much as they can afford.  They hope that capital growth will pay off the repayment part of the mortgage, and also provide them with some capital gain.

I must admit that I don't quite see how it works. You sell the house to pay of the capital, and get a capital gain (in the theory) - but you don't have a house. :o

So why's it a good plan?

Peter.

Share this post


Link to post
Share on other sites
I expect that BTL support will evaporate when people (and their angry friends of friends) have lost hundreds a month for 4 or 5 years and (if I remember your estimate) lost 19% of their house price (ie. all their capital on a typical 85% BTL, and a touch of negative equity) and had all the hassle, repair, etc. of landlordism.

Absolutely, the bubble drivers and sentiment *will* evaporate but the affordability from low IRs wont. And as the model shows that the current peak is part ‘bubble’ and part ‘affordability’ it can only part deflate (down to the affordability baseline).

Share this post


Link to post
Share on other sites

Spline,

Can I suggest you start a separate thread on the subject - perhaps with your graphs etc to show what you mean?

The whole "affordability" issue is interesting and has questions/issues of its own. I think it is worthy of its own thread and you seem to raise some interesting points.

Share this post


Link to post
Share on other sites

London-Loser – Thanks for the encouragement, I will try to collect the various bits and start a new thread. And yes, Durch, any argument with a even a slight hint of ‘new paradigm’ really needs bucketloads of caution … excellent point :)

Share this post


Link to post
Share on other sites

I've seen a few newspaper articles which state that if houseprices remain unchanged, then wages will have caught up within 8 years.

I can't understand this.... possibly because I've never been too good at sums :rolleyes: ... but according to my back of a fag packet calculations:

....house prices may have caught up with earnings...but what about the extra ependiture in council tax/utility bills/petrol etc that have sapped out any additional spending power you might have had.

The figure that needs to be reduced is TOTAL EXPENDITURE vs INCOME.

the house price "stagnation" thing is yet another illusion,masking the bigger problem.

Share this post


Link to post
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • 301 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%



×
×
  • Create New...

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.