Ftav - Affordability Backwards

[spyguy]

http://ftalphaville.ft.com/2014/02/19/1776182/affordability-backwards/

Covers a few themes that have been discussed on here many times:

'Homeowners probably felt a lot richer, however, even though their house was only worth the same amount of goods and services as before. That feeling, when applied to income in periods of rising inflation is known as money illusion. It can feel good (for a while at least) to have a rising wage even if inflation is at the same time destroying the purchasing power of that wage.

But for someone who owned a house, they did get richer in the sense that their mortgage payment quickly shrinks as a proportion of their fast growing pay packet. This is where the analysis of affordability on the basis of initial mortgage payments, rather than over the life of a 25 year, is fundamentally flawed.'

Concludes with:

'In a low inflation world then, money illusion is that a mortgage is cheap when its initial payment is low. Without higher earnings growth, repaying the total debt will consume a far greater share of career earnings. With that pattern repeated across the economy, the question for a housing led recovery is similar to that facing buyers – are today’s mortgages short term cheap but long term expensive?'

'Bricky' scores the best post:

'House prices at the top seem to be driven to some extent by foreign investment and London wages.House prices at the bottom are driven by expected cash flow effects in later life which may be a legacy from the 1970's and 1980's. In the middle, nothing much is happening, with people waiting for the arrival of rich foreigners or the return of wage inflation. Still we have the boomer later life sell off to look forward to.

Maybe the next generation will think more about short term disposable income over long term cash flow and the housing market will never be the same. '

Yes, housing is very expensive.

If the 70s saw created the 'housing ladder' illusion.

The 10;s will see the creation of the 'housing anvil' - a massive weight around peoples neck as their real wages are eroded over the term - the last 10 years have seen a a lot of people I know nominal wage's falling 10%, never mind real incomes.

There's a connected post on London houses vs. London wages:

http://ftalphaville.ft.com/2014/02/17/1774432/go-forth-and-multiply-london-edition/#respond

'The experience of the 1970s has even affected our culture. Most people who have started out in the housing market since the year 2000, or are hoping to start out today, have parents who bought their homes in the ‘70s. High inflation and high interest rates during this period meant that many home buyers of the time will remember that they had to make significant sacrifices and experienced very tight finances for the first few years of their mortgage. If you are borrowing money at 15% per year you can only borrow a relatively small amount if you want to have a chance of making the first year’s payments – the initial cashflow. But as shown, if your wages are rising significantly every year then it gets easier quite quickly. This is exactly what happened during the ‘70s. People took out mortgages with challenging cashflows in their initial years, meaning that they felt poor, but inflation and wage increases rapidly improved their lot. This meant that after a few years their debt was actually a very manageable percentage of their salary and their cashflow had considerably eased. At this stage they could choose to trade up to a larger property or simply have more money to spend. The concept of a housing ladder was born.'

[19 year mortgage 8itch]

Yes.

Its going to take a bit more than 2% "real" wage increases to fix this. How many years before that gets realised? Too many.

[TheCountOfNowhere]

In a low inflation world then, money illusion is that a mortgage is cheap when its initial payment is low. Without higher earnings growth, repaying the total debt will consume a far greater share of career earnings. With that pattern repeated across the economy, the question for a housing led recovery is similar to that facing buyers – are today’s mortgages short term cheap but long term expensive?

Q.E.D.

The other problem people face, is not the fact their wages can't keep up...it's the fact there is no job security....if you cant buy a starter house till your 35 just as your reaching peak earning potential before being cast aside at the age of 50 or the company letting you go after 10 years...you wont have any chance of paying back that massive mortgage. The boomers had job security, pensions, cheap cost of living, wage increases, closed shop, post war boom, banking deregulation...everything made the current house prices possible...what do the people leaving uni have now....debt, no jobs, no job security, a pension black hole, house prices at peak supported by low interest rates and insane government support schemes, the smallest houses in europe ( aka flats with every increasing ground rents )....there will be no house price boom to profit them.

The sheeple haven;t ( yet ) worked this out.

Buy a house, no....Buy a one way ticket.

[Brummers]

This is THE crucial factor for consideration by anyone over the age of 40 who is having a complete failure in understanding that it really is different this time, but not in the way they think - it's the argument I used originally to open my parents eyes to the present situation when they first started asking questions like 'have you thought about buying?'. The massive inflation that effectively wiped out their debt in the 70's/80's/90's is not looking likely to return, ergo if I were to chose to buy now then I must make the assumption that it's a house for life and the costs will increase, not the remarkably naive assumption of so many that a £180k two bed flat is a 'first step'.

[TheCountOfNowhere]

This is THE crucial factor for consideration by anyone over the age of 40 who is having a complete failure in understanding that it really is different this time, but not in the way they think - it's the argument I used originally to open my parents eyes to the present situation when they first started asking questions like 'have you thought about buying?'. The massive inflation that effectively wiped out their debt in the 70's/80's/90's is not looking likely to return, ergo if I were to chose to buy now then I must make the assumption that it's a house for life and the costs will increase, not the remarkably naive assumption of so many that a £180k two bed flat is a 'first step'.

only step more like.

What I think we have here is something akin to one of these:

http://en.wikipedia..../Pyramid_scheme

where the people at the bottom pay in and get nothing and the people at the top benefit most.

Now, who are the people at the top of the housing pyramid ?

I think we are on level 9....where does the 50 million new homes/mugs come from the raise the prices up for the bottom pyramid steppers ?

Edited February 20, 2014 by TheCountOfNowhere

[FreeFall]

Slavery is illegal. Debt slavery, however, isn't.

The powers that be aren't on your side. Ever. You work so they don't have to.

[R K]

1. Inflation is unlikely to remain at 2% for the next 25 years.

2. Real wages goes through cycles. Gambling they'll fall 'forever' might (or not) payoff.

3. There's no consideration of rents over 25 years as the counterfactual. Most people have to choose 1 or the other. It may (or not) be rational to pay more (or less) for one or the other. Price isn't the only consideration. (e.g. Some people buy a car to keep 20 years, others rent via a PCP and pay 2-3x as much for the same asset)

4. It's not east getting a mortgage > 50-60 yrs old. In the long term etc etc......

[19 year mortgage 8itch]

1. Inflation is unlikely to remain at 2% for the next 25 years.

2. Real wages goes through cycles. Gambling they'll fall 'forever' might (or not) payoff.

3. There's no consideration of rents over 25 years as the counterfactual. Most people have to choose 1 or the other. It may (or not) be rational to pay more (or less) for one or the other. Price isn't the only consideration. (e.g. Some people buy a car to keep 20 years, others rent via a PCP and pay 2-3x as much for the same asset)

4. It's not east getting a mortgage > 50-60 yrs old. In the long term etc etc......

You have to be the change you want.

Thinly veiled "buy now or you'll miss the boat" posts don't cut it. You'd be far better off advocating that people get help for their psychological issues. At least that would be true.

[TheCountOfNowhere]

You have to be the change you want.

Thinly veiled "buy now or you'll miss the boat" posts don't cut it. You'd be far better off advocating that people get help for their psychological issues. At least that would be true.

Some boats you just don't want to catch.

[richc]

1. Inflation is unlikely to remain at 2% for the next 25 years.

2. Real wages goes through cycles. Gambling they'll fall 'forever' might (or not) payoff.

3. There's no consideration of rents over 25 years as the counterfactual. Most people have to choose 1 or the other. It may (or not) be rational to pay more (or less) for one or the other. Price isn't the only consideration. (e.g. Some people buy a car to keep 20 years, others rent via a PCP and pay 2-3x as much for the same asset)

4. It's not east getting a mortgage > 50-60 yrs old. In the long term etc etc......

Real wages in developed countries have been consistently falling since the 1970's. Do real wages really go up and down in cycles or was it just that the post WW2 upswing was a function of killing off a good proportion of the global workforce and then locking up the other half in slavery under communist regimes? We could experience the return of the Black Death and that would drive up real wages, but that's probably not a desirable outcome.

[TheCountOfNowhere]

Real wages in developed countries have been consistently falling since the 1970's. Do real wages really go up and down in cycles or was it just that the post WW2 upswing was a function of killing off a good proportion of the global workforce and then locking up the other half in slavery under communist regimes? We could experience the return of the Black Death and that would drive up real wages, but that's probably not a desirable outcome.

Everything was state owned, cars buses, coal mines....they set the rate...globalisation was....less global, technology was localised too, nothing was off-shored.

Everything is pretty much privatised ( at least the profits are ) now and wages are set based on a global workforce maximising profits for the elite.

So, en-masse BIG wage rises are unlikely.

So we have the situation that with wages will stay the same, or fall. based on the fact that the Public sector are still to have their real cuts......

You can only defer reality for so long.

[Dorkins]

1. Inflation is unlikely to remain at 2% for the next 25 years.

The price level in Japan is below where it was in the early 1990s. The UK in 2014 resembles 1990 Japan much more than it resembles the UK in 1970.

[R K]

The price level in Japan is below where it was in the early 1990s. The UK in 2014 resembles 1990 Japan much more than it resembles the UK in 1970.

Is there a rule for how soon Japan is referenced on a discussion about inflation?

If not I'd like to propose one. RK's rule.

Nearly every post on this forum for the last 5 years has been about inflation being > 2%. That's during the 'depression' phase. It's nothing like Japan.

Mid 1970s looked nothing like 1970 either - that's the point. Fooled by randomness an' all that.

But I'm happy to come back in 25 years and we can see whether you're right. You might be.

The issue isn't really about private sector house prices anyway, it's about the very obvious need to build at least 1m social (or whatever passes for social these days) houses for rent. Nobody is proposing to do that and so it won't happen. If it eventually does then we might see some progress. Simply increasing supply in the private sector (as City am propose for instance) won't have much impact 'cause builders will simply stop building as soon as/if prices fall. That's their model. Pretending it is otherwise (as they do) is just silly.

[R K]

Real wages in developed countries have been consistently falling since the 1970's. Do real wages really go up and down in cycles or was it just that the post WW2 upswing was a function of killing off a good proportion of the global workforce and then locking up the other half in slavery under communist regimes? We could experience the return of the Black Death and that would drive up real wages, but that's probably not a desirable outcome.

But house prices have been consistently rising since the 1970s, as have price/earnings multiples, whilst nominal yields have been falling (more or less).

I'd agree that there does seem to be a widely held view that since wages have been falling for 40 years that must continue forever. That could be true but I'd suggest there might be a flaw in that argument for reasons that aren't yet apparent. But as said, even if they do, that doesn't seem to have much of an impact on the supply/demand or price of UK houses. It doesn't mean it won't in the future of course.

[underscored]

But house prices have been consistently rising since the 1970s, as have price/earnings multiples, whilst nominal yields have been falling (more or less).

I'd agree that there does seem to be a widely held view that since wages have been falling for 40 years that must continue forever. That could be true but I'd suggest there might be a flaw in that argument for reasons that aren't yet apparent. But as said, even if they do, that doesn't seem to have much of an impact on the supply/demand or price of UK houses. It doesn't mean it won't in the future of course.

Interest rates have been dropping in the same period. No lower can they go.

Credit has expanded exponentially also. No higher can it get.

[R K]

You have to be the change you want.

Thinly veiled "buy now or you'll miss the boat" posts don't cut it. You'd be far better off advocating that people get help for their psychological issues. At least that would be true.

I'm not interested in that at all and I take (moderate) exception to your allegation.

I'm more interested in what's happening with asset prices (not just house prices) and the drivers.

I agree house prices are probably moderately overpriced (20% outside of London, London appears to be a special case). Something may happen to change that. They may all of a sudden fall to 20% undervalued, but that's not the outcome that looks likely to me in the short-term (next few to say 5 years). London being a possible exception.

Be the change you want - no issue with that at all. But wishing it doesn't mean it'll happen. I'm more interested in what is actually happening and is likely to happen and why. Hope that's clear.

[R K]

Interest rates have been dropping in the same period. No lower can they go.

Credit has expanded exponentially also. No higher can it get.

Rising rates don't correlate with falling house prices as any look at history will reveal.

There's almost a generation who don't have a mortgage. So credit (for that cohort) could go significantly higher. I'm not arguing that's a good thing, simply that it seems a little odd to suggest it's impossible.

[Dorkins]

Is there a rule for how soon Japan is referenced on a discussion about inflation?

If not I'd like to propose one. RK's rule.

Sorry, I guess it must be uncomfortable when somebody posts a real counterfactual to your glib assumption that inflation will always be positive over a 25 year period.

[underscored]

Rising rates don't correlate with falling house prices as any look at history will reveal.

There's almost a generation who don't have a mortgage. So credit (for that cohort) could go significantly higher. I'm not arguing that's a good thing, simply that it seems a little odd to suggest it's impossible.

I am a generation Y'er with no mortgage. I cannot afford a mortgage. I am for now in the top couple of percent of PAYE earners (for any age group and have been for a while).

Credit cannot expand by the further exponential required.

No single variable will correlate perfectly with any single outcome. There are too many variables and as the system keeps changing.

[TheCountOfNowhere]

I am a generation Y'er with no mortgage. I cannot afford a mortgage. I am for now in the top couple of percent of PAYE earners (for any age group and have been for a while).

Credit cannot expand by the further exponential required.

No single variable will correlate perfectly with any single outcome. There are too many variables and as the system keeps changing.

Generation X dream for 30 years of bring mortgage free....well done, you are ahead of THEIR GAME.

[underscored]

Generation X dream for 30 years of bring mortgage free....well done, you are ahead of THEIR GAME.

Indeed. Now I just need some tenancy rights, and I will be happy.

[19 year mortgage 8itch]

I'm not interested in that at all and I take (moderate) exception to your allegation.

I'm more interested in what's happening with asset prices (not just house prices) and the drivers.

I agree house prices are probably moderately overpriced (20% outside of London, London appears to be a special case). Something may happen to change that. They may all of a sudden fall to 20% undervalued, but that's not the outcome that looks likely to me in the short-term (next few to say 5 years). London being a possible exception.

Be the change you want - no issue with that at all. But wishing it doesn't mean it'll happen. I'm more interested in what is actually happening and is likely to happen and why. Hope that's clear.

I'm sorry but posts that intimate you should buy sensibly sooner rather than later and things will turn out ok are rather grating.

Asset prices are daft. Chances are that if you are yoing and have to work, you will not accumulate any significant assets in your life. Spending your live trying to pay for an asset that won't bring you a fraction of the wealth you expect is not exactly a life lived.

[Snugglybear]

<snip> Simply increasing supply in the private sector (as City am propose for instance) won't have much impact 'cause builders will simply stop building as soon as/if prices fall. That's their model. Pretending it is otherwise (as they do) is just silly.

This is precisely why volume builders are pulling out of areas where incomes are low, like the South Wales Valleys - Persimmon being a case in point. That company claims that it is Welsh Government regulations that are to blame. This is nonsense. What it actually means is that once it has bought the sites and materials and built the units to regulations, it cannot then add to the costs of those things the amount of profit it wants to make, because people in the area don't have the money to pay the resulting prices.

[Executive Sadman]

But house prices have been consistently rising since the 1970s, as have price/earnings multiples, whilst nominal yields have been falling (more or less).

I'd agree that there does seem to be a widely held view that since wages have been falling for 40 years that must continue forever. That could be true but I'd suggest there might be a flaw in that argument for reasons that aren't yet apparent. But as said, even if they do, that doesn't seem to have much of an impact on the supply/demand or price of UK houses. It doesn't mean it won't in the future of course.

the two are certainly linked, people have more to spend on mortgages as cars, holidays and food cost less.

Though at least in 'murica houses, though a median home costs more, they are far bigger, with more utilities like standard air conditioning, swimming pools etc, so I guess you can at least say you get more for your money. Here, no such improvement. Houses are actually shrinking.

Imagine though if we were able to spend less on cars, holidays and food AND housing. We'd probably all have our own helicopter, motoryacht, and be able to work a 3 day week, or maybe the average family would be able to get their kid a good non-state school education, good private healthcare or something, or, maybe even actually provide for their old age!

Thats whats been stolen by the banks and their ponzi credit pyramid.

[wonderpup]

The other problem people face, is not the fact their wages can't keep up...it's the fact there is no job security....if you cant buy a starter house till your 35 just as your reaching peak earning potential before being cast aside at the age of 50 or the company letting you go after 10 years...you wont have any chance of paying back that massive mortgage. The boomers had job security, pensions, cheap cost of living, wage increases, closed shop, post war boom, banking deregulation...everything made the current house prices possible...what do the people leaving uni have now....debt, no jobs, no job security, a pension black hole, house prices at peak supported by low interest rates and insane government support schemes, the smallest houses in europe ( aka flats with every increasing ground rents )....there will be no house price boom to profit them.

It's often said that the generation who lived through the Great Depression passed the scars of that onto their children, who were cautious borrowers as a result- so it's probably not that unlikely that the generation that lived through a period of high job security and rising wages passed that meme onto their kids.

But it often strikes me that we have institutions whose entire Modus operandi are founded on a set of norms that were established in the 1950's and have remained largely unexamined since.

Lurking deep in the subconcious mind of every politician, business manager and economics 'expert' is a pristine vision of that perfect 1950's nuclear family- a happy stable couple whose rising income and job security are guaranteed forever and ever.

Lets face it- no one who was really operating in the reality of 21st century employment would be stupid enough to imagine that anyone could guarantee to repay a sum large enough to buy a decent place to raise a family.