Affordability

[Guest wrongmove]

I'm basically a bear, but here is the strongest bull argument I know of

The graph shows affordability: initial mortgage payments as a percentage of income. Note the big spike around the last crash.

Affordability, measured in these terms, is much the same as it ever has been.

i.e., if you can't afford to buy now, you probably never could in the past, either.

Now I know that a big loan at low rates is worse than a small loan at high rates, but low rates is what we have got. With affordability at its historucal average, where is downward pressure on prices.

Basically, by being bears, we are predicting that IRs will rise, or incomes will fall. This would reduce affordability and cause lower prices. But we are not being honest if we say that houses are less affordable now than they used to be.

I don't want to gamble that IRs will stay low, but if I am wrong, and they do, I suspect I will have to pay the price. I think that "3.5x income" is an outdated measure. Perhaps the real price of houses is "20% of income to service a repayment mortgage". By that measure, there is no boom. There will be no bust.

Please poke holes in this

[NJP]

I'd be interested to know the source of the figures on the graph. It seems strange that affordability hasn't changed much in the last 10 years, while interest rates have been consistently low but prices have tripled, for example.

I know for a fact that houses were much more affordable five years ago than they are now (although I wasn't in a position to buy then since I might have had to relocate for work at short notice).

[Guest Charlie The Tramp]

In 2000 my property was valued at 3.5 times my annual earnings. Giving myself a 5% annual pay rise my property is now valued at 8 times what my earnings would now be if I was still working.

[Guest wrongmove]

The figures are from a respected poster on TMF. I cannot find the exact source.

However, the following link is Nationwide data

http://www.nationwide.co.uk/hpi/historical.htm

They show that affordability is worse than trend, but still way below the levels of the last crash.

My point is that, rightly or wrongly, prices seem to be based on the cost of servicing the loan, relative to income, rather than the total cost of the house, relative to income.

So if incomes do not drop, and IRs do not rise, prices would appear to be only slightly overvalued. Whereas using income multiples as a guide, prices seem to be way out of kilter.

I suspect that the actual situation is somewhere between the two measures. But if IRs drop, or incomes rise, then current prices are probably sustainable.

I.e. prices have always reverted to 3.5x, only because IRs have always reverted to 7%. But at the moment, IRs at 7% look a distant possibility.

[Guest wrongmove]

In 2000 my property was valued at 3.5 times my annual earnings. Giving myself a 5% annual pay rise my property is now valued at 8 times what my earnings would now be if I was still working.

According to the LR, prices in q3 2000 were 108,111, in q3 2005, 193,179, so your area has performed much better than average. But IRs have dropped from 6% to 4.5%, offsetting much of the rise. More importantly, confidence in low rates has strengthened as year after year has passed without a return to the high rates of the past. I have no data, but I expect that fixed rates have dropped far more - 4.75% for 10 years is currently available.

I believe that prices will moderate (that bull in my avatar is taking a sh*t ), but without dropping incomes or higher rates, they will not fall significantly. Your average punter does not look at historical price data, just at monthly cost of living in his house.

We can all give examples of how it is cheaper to rent than buy, but this is only true for a short time. Rents go up with inflation, and the property is never yours, so rents continue forever. IMHO renting should be cheaper because long term, it will certainly cost you more.

[Jason]

Having look at the nationwide data, you can clearly see what's going on:

[Guest wrongmove]

Having look at the nationwide data, you can clearly see what's going on:

Edited: the plot is of the affordability index. It does show a rise, but a much smaller one than the raw price data. It is also still much lower than the last crash. Based on these figures, prices could rise a lot more before it really starts to hurt. Today's figure would have seemed quite normal in the (pre-boom) 80s.

Edited November 28, 2005 by wrongmove

[JonoP]

Edited: the plot is of the affordability index. It does show a rise, but a much smaller one than the raw price data. It is also still much lower than the last crash. Based on these figures, prices could rise a lot more before it really starts to hurt. Today's figure would have seemed quite normal in the (pre-boom) 80s.

[Jason]

Edited: the plot is of the affordability index. It does show a rise, but a much smaller one than the raw price data. It is also still much lower than the last crash. Based on these figures, prices could rise a lot more before it really starts to hurt. Today's figure would have seemed quite normal in the (pre-boom) 80s.

I would love to see this data with interest rate rises. But Nationwide don't show how they calculate there 'affordability index'!

[Guest wrongmove]

I would love to see this data with interest rate rises. But Nationwide don't show how they calculate there 'affordability index'!

The index is the proportion of take home pay (afer NI and income tax) used to service a 90% LTV loan. It is based around q1 1885 = 100.

Your point on IR rises is crucial, IMO. People buying today are gambling that IRs will not shoot up. Many do not even realise that they are making a huge bet on this fact.

However, they could still be right.......

[NJP]

Something that we haven't taken into account is that even if low interest rates make houses less unaffordable than they might be otherwise, they also come hand-in-hand with low inflation which means that it takes much longer to pay the loan off.

I'd still like to know what the graphs represent, though. Do they only include FTBs or all people with a mortgage? Do they only take into account the first year's payments at a discounted rate? Is the income gross or net? You can come up with pretty much any graphs you like by choosing the right figures!

[Prude]

I'm basically a bear, but here is the strongest bull argument I know of

The graph shows affordability: initial mortgage payments as a percentage of income. Note the big spike around the last crash.

Affordability, measured in these terms, is much the same as it ever has been.

i.e., if you can't afford to buy now, you probably never could in the past, either.

Now I know that a big loan at low rates is worse than a small loan at high rates, but low rates is what we have got. With affordability at its historucal average, where is downward pressure on prices.

Basically, by being bears, we are predicting that IRs will rise, or incomes will fall. This would reduce affordability and cause lower prices. But we are not being honest if we say that houses are less affordable now than they used to be.

I don't want to gamble that IRs will stay low, but if I am wrong, and they do, I suspect I will have to pay the price. I think that "3.5x income" is an outdated measure. Perhaps the real price of houses is "20% of income to service a repayment mortgage". By that measure, there is no boom. There will be no bust.

Please poke holes in this

If what you say is true;

then take an average home at £160K (typically would be a small semi, not modernised and not in a desirable area). If you bought this home with a 10% deposit then you would have to mortgage £144K which equates to payments of approx. £10,000p.a on a repayment mortgage for 25 years at todays rates.

The 20% of income figure you quote means you need a £50,000 income to afford this house.

If we are talking about net income then the position is even worse implying that such an individual needs to be on £80K+!!

If what you say is true about affordability then an average salary should find an average house an affordable proposition. I believe the above shows that this isn't the case.

[Guest wrongmove]

Something that we haven't taken into account is that even if low interest rates make houses less unaffordable than they might be otherwise, they also come hand-in-hand with low inflation which means that it takes much longer to pay the loan off.

Yes, we HPCers know this, but the average buyer does not think like this. Dames signature, "low inflation - letting your loan linger longer" summarises this effect nicely.

Mortgages from the 80s are now peanuts. Our generation may not be so lucky. But if low inflation is here to stay, then so are low IRs and high levels of debt.

I'd still like to know what the graphs represent, though. Do they only include FTBs or all people with a mortgage? Do they only take into account the first year's payments at a discounted rate? Is the income gross or net? You can come up with pretty much any graphs you like by choosing the right figures!

The figures simply relate avaerage HPs to average incomes and mortgage rates. They are consistant across the series, so any 'fudges' would apply to old data as well as recent.

The point is, according to income multiples, property is wildly overvalued. However according to mortgage payments, it is maybe slightly overvalued.

[JonoP]

Also - all these 'affordability' figures...

Do they include capital repayment as well as interest?? I suspect not and while IR's are historically low (which drives up 'affordability'), values of houses, hence capital repayments, are at an all time high.

I susepct if you add the two together, you get a more accurate picture.

Of course - I may be wrong and repayments may be included. Does anyone know??

[Guest wrongmove]

If what you say is true about affordability then an average salary should find an average house an affordable proposition. I believe the above shows that this isn't the case.

Many houses are brought by couples, more so than in the past. Us single buyers find it very hard to compete.

Also, the average buyer will probably already own a house, so can offset gains in this property. The average buyer is not, and never has been, a single FTB. A single FTB on average earnings with no equity and no substantial savings will not be looking at average houses (unfortunately).

[NJP]

The figures simply relate avaerage HPs to average incomes and mortgage rates. They are consistant across the series, so any 'fudges' would apply to old data as well as recent.

I'm not saying that the graphs are 'wrong', just potentially misleading or meaningless.

For example, I could argue that first-time-buyers don't earn average salaries or buy average houses, so that measure of afforability is meaningless.

[Prude]

Many houses are brought by couples, more so than in the past. Us single buyers find it very hard to compete.

Also, the average buyer will probably already own a house, so can offset gains in this property. The average buyer is not, and never has been, a single FTB. A single FTB on average earnings with no equity and no substantial savings will not be looking at average houses (unfortunately).

One of your prev posts clarifies that we are talking about net income, therefore we now need gross income of £80K to buy an average house with a 10% deposit according to the 20% affordability stat. (The Nationwide index is based on a 10% deposit). So even if it is a couple ... £40K each... they're upwardly mobile professionals... Do they want this house? They'd be offered a £300K mortgage if they pushed for one! This doesn't make any sense. Correct my maths and/or assumptions please.

[Guest wrongmove]

One of your prev posts clarifies that we are talking about net income, therefore we now need gross income of £80K to buy an average house with a 10% deposit according to the 20% affordability stat. (The Nationwide index is based on a 10% deposit). So even if it is a couple ... £40K each... they're upwardly mobile professionals... Do they want this house? They'd be offered a £300K mortgage if they pushed for one! This doesn't make any sense. Correct my maths and/or assumptions please.

Hi Prude. My original post was pasted from a post on another forum. I do not know exactly what the 20% applies to, but it must be gross income. The point is, historically, the figure is not high.

For the exact figures, check here : http://www.nationwide.co.uk/hpi/downloads/...ge_payments.xls

NW quote 43% of one person's take home pay, the same as it was in 85. Again, historically not very high, and much less than the late 80s crash (peaked at 63% in 89).

Your point that two incomes of £40k could get £300k loan is very relevent though. 3x joint (and even higher) are now available, and in the short term, affordable. This has never been the case before and it is a result of confidence in low IRs, and the availability of longterm fixes at less than 5%, for the less confident. This IS 'different this time', and unless the situation reverses, this has big implications for the sustainable level of prices IMHO.

I agree that this is a crap situation, and although I am less bearish than a year ago, I will personally continue renting for now in the expectation of better value later. I do accept however, that I may be wrong. And I will not wait forever.

In the long run, prices will be better, but in the long run.............

[IPOD]

The index is the proportion of take home pay (afer NI and income tax) used to service a 90% LTV loan

The pre-'89 affordability is made to look artificially higher than it actually was because of exclusion of double MIRAS effects. With this taken into account you will see that current affordability levels are the same if not worse as the peak of the last crash.

[Guest wrongmove]

The pre-'89 affordability is made to look artificially higher than it actually was because of exclusion of double MIRAS effects. With this taken into account you will see that current affordability levels are the same if not worse as the peak of the last crash.

MIRAS is taken into account

In both examples, the mortgage payment is calculated as a capital and interest payment mortgage. In addition, mortgage payments prior to Q1 2000 have been adjusted to reflect Mortgage Interest Relief at Source (MIRAS). The calculation also assumes interest paid annually, whereas more recently most lenders now calculate interest on a daily basis.

[Smell the Fear]

One of your prev posts clarifies that we are talking about net income, therefore we now need gross income of £80K to buy an average house with a 10% deposit according to the 20% affordability stat. (The Nationwide index is based on a 10% deposit). So even if it is a couple ... £40K each... they're upwardly mobile professionals... Do they want this house? They'd be offered a £300K mortgage if they pushed for one! This doesn't make any sense. Correct my maths and/or assumptions please.

I think "servicing the loan" refers only to interest, not capital repayments as well.

E.g. a couple, earning £25k each, have a total of say £35k after tax/NI. Interest on a loan of £144k at 4.5% would be £6480, which is 18.5% of net income.

Perhaps the fact is that net HOUSEHOLD income determines the relationship. Today, the dual income is the norm. This may also help to explain the fact that the relationship between net income and interest payments has been maintained, despite rocketing prices - average household income has gone up significantly due to both partners working and earning, on average, an average wage.

This model perhaps proves that interest rates (and hence affordability) determine house prices. As rates rise, the spike will appear in the graph. People will not respond until prices become unaffordable, and then they respond slowly due to the illiquid nature of the housing market.

The fact is, rates are at a historic low. Do you want to bet that they will not go up? That is the big question unfortunately.....

[Dames]

Affordability might look lower , but this time round there is a lot more unsecured debt running alongside which doesnt seem to be taken into account.

Dames

[Guest wrongmove]

This model perhaps proves that interest rates (and hence affordability) determine house prices.

Bingo !!

The fact is, rates are at a historic low. Do you want to bet that they will not go up?

Personally, no. But that is the bet we are all making by staying out of the market. I hope we are right, but we have to accept that we may be wrong.

ps. STF, your other points have been dealt with previously, or details can be obtained from the NW website for clarification. Basically, the figures relate average HPs to average (single) take home incomes and mortgage rates

[IMupNorth]

Not sure about the graphs and the exact figures but the broad thrust of this argument is true.

For the vast majority of people their mortgages are affordable. Probably only some lunatics buying in the last two years are going to get caught out. But so be it.

The average loan is 75% of the value of the property and is £130k. Making the value of the property £173k.

And £130k for most I suspect this is split between two people. Now when I was a lad it was 3.5x the main breadwinners + 1x the other partners. This reflected the tendancy of young ladies to have babies and hence give up work for a while, meaning 4.5 salary in total.

Doing the numbers gives average salary of £29k for both

So depending on how your mortgage lender allows figures to be manipulated then prices are not that unaffordable. i.e. a £130k at 3.5x earnings is £38k - for two people thats £19k per annum each.

Until IRs go up substantially, there will be no crash.

[IPOD]

net HOUSEHOLD income determines the relationship. Today, the dual income is the norm.

This idea that a couple where both partners work is now the normal household configuration has filtered into the public consciousness without any real verification. As the link below shows, actually this is far from the truth:

http://www.spiked-online.com/Printable/00000002D3A7.htm

According to a study conducted by the UK Future Foundation for Abbey National in January 2002, for the first time more people are living alone or in one-parent households than in a traditional family unit - or as one article summed it up, 'Living alone is now the norm in the UK' (1).

The rising number of singletons seems to be an all-pervasive global phenomenon, impacting on industrial societies throughout the world. In 1950, about three percent of the population of Europe and the USA lived alone. Today in the UK, seven million adults live alone - three times as many as 40 years ago. The UK statistics bible Social Trends estimates that by 2020, one-person households will make up 40 percent of total households.

In France, the number of people living on their own has more than doubled since 1968, and about 40 percent of Swedes now live alone. The shift towards solo living is most pronounced in the big urban centres of the West - with over 50 percent of households in Munich, Frankfurt and Paris containing just one person, while in London nearly four in 10 people live on their own.

The fact is, double-income households are NOT the norm.