Observer Article Yesterday

[Hopeful FTB]

Did anyone see the article on the back page of the Observers "Cash" section yesturday- it was about the ratio of house prices to earnings and covered all areas in the UK aswell as commenting that the "average" house price in the UK is close to 200k.

The ratios were something like this: (they placed the average salaries at about 28K in london, 23K in the south east and 20k pretty much everywhere else)

South east- 10x earnings

London -10.5x

Wales - about 8 x earnings (and still rising)

North - about 7.5 times earnings ( apparently the cheapest!)

South west 8 x earnings

The basic gist of the article was that houses are unaffordable!

If you wanted to buy an average place in london (there was a 2 bed flat for 270K used as an example), then you would need a salary of 80k if lending was based upon the 3.5 times salary premise!

Given that the "average" london salary was calculated at 28k, that kind of rules out a lot of people and I would also doubt the average salarys for some places aswell- its unlikely that the average salary in wales is 20k as its one of the poorest areas in the uk- the "average" house price in wales is about 155k!

To be honest, it just makes you realise even more what a joke the current property market is!

Sorry not to put a link to the article but I dont know how to!

[munro]

Yeah, read this yesterday. Problem is people will just say but these are average properties, you're supposed to start with a one-bed flat or studio flat at £100k, which is, allegedly, affordable, build up equity, trade up, yadeeyadeeya. That you don't get to the average property until your second or third one, you get pay rises, etc etc, and any ftb who thinks they should be jumping straight into these average properties has utterly unrealistic expectations, etc etc. You can fill in the blanks here!

All of which is true, of course, but kind of misses the point. People didn't "build up equity" to any significant level in the past by paying off their mortgages, the equity they built up came directly from HPI. So in a period of low wage inflation when people are already stretched to the limits and are taking out IO mortgages in large numbers (over 25% of current mortgages IO - yikes!) means equity won't happen in this way in the foreseeable future. Globalisation will make sure pay rises don't happen in the UK to any meaningful extent.

So where does that leave us? Well, sure, mortgage to the hilt for the one-bedder, but realise you'll NEVER move up the ladder unless you're paid far more than average. Talking to a friend of mine a couple of days ago whose brother has a £650k house and thinks he's quids in for ever more. But who will buy it in the future? Say he sells to someone who sells a £500k house, all paid for - they have to raise a £150k mortgage. Their buyer sells a £350k house, all paid for, raise a £150k mortgage. Their buyer sells a £200k house, all paid for, raise a £150k mortgage. They sell to an FTB with a 10% deposit, they have to raise a £190k mortgage. If this chain is all couples, all working, and all of them (except the FTB, of course) have completely paid off whatever mortgages they have on their properties, then every single person in this chain (except the two selling up) are earning ABOVE the NATIONAL AVERAGE (that's average, not mean or mode, meaning a wage skewed upwards by high earners). And also every single couple except the FTB and the couple at the top of the chain have completely paid off their mortgages. And there's nothing exceptional in this chain...so how is this supposed to keep on working?

Total fantasy land. What seems to have been lost in all this is the reality of paying debt out of income - of paying off mortgages on houses at present price levels out of income. That's what people need to bear in mind and that's why sooner or later the housing market WILL crash.

edit - typos

Edited December 5, 2005 by munro

[Justice]

Globalisation will make sure pay rises don't happen in the UK to any meaningful extent.

One chance of wages going up and that’s no chance !

Economic migrants are flooding in as Tesco & Co pay bribes to MP’s to allow more in and many jobs are going offshore. What makes anyone think that private sector wages are going to go up especially when laden down with public sector pensions and MP’s pay demands.

No wonder Russians feel more happier about life than people do who live in Slough

Edited December 5, 2005 by Justice

[IP Newcomer]

Economic migrants are flooding in as Tesco & Co pay bribes to MP’s to allow more in and many jobs are going offshore.

True to a point.

However the large number of Eastern Europeans who are over here are here because:

1) There's a boom on

2) There's no other large economy in the EU to take them

When those two factors change then we may see a sudden exodus.

[Johnny]

Did you see the article in the blog yesterday where Nationwide are tightening their lending criteria on interest only mortgages.

If others follow suit, it could become very difficult for anyone to get an interest only mortgage, they won't qualify unless they already own a house with £150,000 worth of equity in it, and the mortgage they are applying for is less than 66 per cent loan-to-value or they must now include full details of the repayment vehicle chosen to pay off the loan

http://money.independent.co.uk/property/mo...ticle330980.ece

The end of First Time Buyers and interest only mortgages.

[Bankrupt Idiot]

True to a point.

However the large number of Eastern Europeans who are over here are here because:

1) There's a boom on

2) There's no other large economy in the EU to take them

When those two factors change then we may see a sudden exodus.

1. No boom, we just have more expenable income than most eastern europeans.

2. Us along with Ireland and sweden are the only countrys not to apply restraints to eastern europeans!!!

That is why they are here and not in france/germany or their home countries!!!

[The Masked Tulip]

Yes, but once Germany starts growing again where will all the people flocking to the UK go - here or to Germany? I am betting on Germany.

The UK is in boom but it is a credit/debt fuelled boom.

[jellybean]

That is why they are here and not in france/germany or their home countries!!!

Not sure I subscribe to the little brittain attitude so often seen here. My father is a construction manager and he says he would far rather have indian or eastern european labour. Says they are polite educated and hard working. Generally the kind of people you want in a country. Says the majority of natives are a waste of space. Maybe an export policy would be better?

Edited December 5, 2005 by jellybean

[Pheno]

To be honest, it just makes you realise even more what a joke the current property market is!

The problem is, since hardly anybody buys a house outright, the real measure of affordability is not the absolute value of the house, but rather the cost of servicing the debt. So it isn't the price/earnings ratio that is important, but rather the repayment costs/earnings ratio.

Due to extremely low real interest rates, the current affordability of housing is actually still quite low - lower than it was in 1989. This is why there hasn't been a crash.

[red]

Did anyone see the article on the back page of the Observers "Cash" section yesturday- it was about the ratio of house prices to earnings and covered all areas in the UK aswell as commenting that the "average" house price in the UK is close to 200k.

...

The basic gist of the article was that houses are unaffordable!

If you wanted to buy an average place in london (there was a 2 bed flat for 270K used as an example), then you would need a salary of 80k if lending was based upon the 3.5 times salary premise!

...

To be honest, it just makes you realise even more what a joke the current property market is!

Sorry not to put a link to the article but I dont know how to!

(just copy and paste the web address!)

here it is:

http://observer.guardian.co.uk/cash/story/...1656994,00.html

It does make you laugh when you think of the average wage...but then the bulls would have us believe that this is the new paradigm and that we will NEVER return to 3.5 x salary as a mean for home affordability.

It simply isn't sustainable but it doesn't stop the fools piling in...

[IP Newcomer]

Not sure I subscribe to the little brittain attitude so often seen here. My father is a construction manager and he says he would far rather have indian or eastern european labour. Says they are polite educated and hard working. Generally the kind of people you want in a country. Says the majority of natives are a waste of space. Maybe an export policy would be better?

What's that got to do with the price of anything?

The whole point of the immigration debate on this forum is not how polite or hard working the first generation of immigrants are, but the idea that this immigration will increase both the supply of labour and the demand for housing - so justifying a higher price earnings ratio than the historical norm. This is a primary bull argument.

If you want to flaunt your moral superiority go to a political forum and say how you are against little englander attitudes. Yawn!

Edited December 5, 2005 by IP Newcomer

[nodumsunreader]

Did anyone see the article on the back page of the Observers "Cash" section yesturday- it was about the ratio of house prices to earnings and covered all areas in the UK aswell as commenting that the "average" house price in the UK is close to 200k.

The ratios were something like this: (they placed the average salaries at about 28K in london, 23K in the south east and 20k pretty much everywhere else)

South east- 10x earnings

London -10.5x

Wales - about 8 x earnings (and still rising)

North - about 7.5 times earnings ( apparently the cheapest!)

South west 8 x earnings

The basic gist of the article was that houses are unaffordable!

If you wanted to buy an average place in london (there was a 2 bed flat for 270K used as an example), then you would need a salary of 80k if lending was based upon the 3.5 times salary premise!

Given that the "average" london salary was calculated at 28k, that kind of rules out a lot of people and I would also doubt the average salarys for some places aswell- its unlikely that the average salary in wales is 20k as its one of the poorest areas in the uk- the "average" house price in wales is about 155k!

To be honest, it just makes you realise even more what a joke the current property market is!

Sorry not to put a link to the article but I dont know how to!

You might just as well quote the earnings ratio to Google shares or gold prices. When will you HPC dreamers realise that FTB's are irrelevant to the housing market of 2005? The housing market is now predominantely driven by investors as it used to be around 50 years ago. The phenomenon of house purchase by 20 something FTB's was a late 20th century anomaly NOT the historical norm. Houses are merely a commodity just like oil, gold and equities and are seen as a good long term bet for investors (and an even better bet after April 2006) to provide an income/future equity release mechanism. You wannabe FTB's who have missed the boat permanently will just have to get used to renting in the same way that your great grandparents had to.

[red]

You might just as well quote the earnings ratio to Google shares or gold prices. When will you HPC dreamers realise that FTB's are irrelevant to the housing market of 2005? The housing market is now predominantely driven by investors as it used to be around 50 years ago. The phenomenon of house purchase by 20 something FTB's was a late 20th century anomaly NOT the historical norm. Houses are merely a commodity just like oil, gold and equities and are seen as a good long term bet for investors (and an even better bet after April 2006) to provide an income/future equity release mechanism. You wannabe FTB's who have missed the boat permanently will just have to get used to renting in the same way that your great grandparents had to.

What a pleasant man you are.

I won't even bother with the rest of your post...

[nodumsunreader]

What a pleasant man you are.

I won't even bother with the rest of your post...

Only pointing out the facts Red. I know it's not pleasant but the most depressing thing is seeing wannabe ftb's posting on this site that prices are dropping when they really know that that it is all just a dream. Cut your losses, face the facts and get on with life. The investor has won. The HPC is dead (in fact it was never born).

[since the beginning]

Only pointing out the facts Red. I know it's not pleasant but the most depressing thing is seeing wannabe ftb's posting on this site that prices are dropping when they really know that that it is all just a dream. Cut your losses, face the facts and get on with life. The investor has won. The HPC is dead (in fact it was never born).

I will agree with you when the average people per house rises to something like 5 from a present 2.2 and the percentage of people owning a house starts to fall. Otherwise your talking rubish.

[murpaul]

Only pointing out the facts Red. I know it's not pleasant but the most depressing thing is seeing wannabe ftb's posting on this site that prices are dropping when they really know that that it is all just a dream. Cut your losses, face the facts and get on with life. The investor has won. The HPC is dead (in fact it was never born).

Bearing in mind yields are not covering the costs of financing their 'investments' ( if purchased at todays prices ), how can you say the 'investor' has won?

Oh yeah, I forgot, its a new paradigm, like techstocks, tulip bulbs, etc., etc..

[canny man]

Be careful what you assume when investors are involved. Prices go up, prices go down, and 'investors' generally act to increase volatility - especially those that rely on momentum - as is the case with property

[IPOD]

My father is a construction manager and he says he would far rather have indian or eastern european labour. Says they are polite educated and hard working.

The fact that they are also prepared to work for peanuts might have something to do with it.

The problem is, since hardly anybody buys a house outright, the real measure of affordability is not the absolute value of the house, but rather the cost of servicing the debt. So it isn't the price/earnings ratio that is important, but rather the repayment costs/earnings ratio.

Due to extremely low real interest rates, the current affordability of housing is actually still quite low - lower than it was in 1989. This is why there hasn't been a crash.

A ) 25% of all properties are bought outright (with cash).

http://216.239.59.104/search?q=cache:H-Uip...+for+cash&hl=en

B ) The real interest rate now is about 2% (give or take a couple of tenths of a %). The real interest rate in 1990 was about 4%. This is hardly a world-shaking difference.

C ) What are you using to measure "affordability"??

http://www.moneyweek.com/article/478/inves...ing-market.html

According to some analysts, including John Hawksworth at PwC and Tim Crawford at Halifax, mortgage payments as a percentage of earnings are still way below the 1989 peak. But this is misleading because they only include the interest portion of a mortgage. Capital Economics looks at actual monthly mortgage repayments and uses disposable income rather than pre-tax earnings. As a result, it has come up with a different, and more realistic, picture. It concludes that UK households currently spend nearly 15% of their disposable income on mortgage repayments. This is worryingly close to the 15.8% level the UK reached in the second quarter of 1989 at the very top of the last house-price cycle.

Worse, if you add the costs of servicing unsecured debts, the nation is already spending more than 20% of disposable income on debt servicing. No matter that interest rates are low in relative terms, thanks to our huge debts, we are now suffering just as much as we were at the top of the last housing bubble. If there is a maximum limit to what we can take before we crack, then it is fair to say we have now reached that point.

[munro]

The problem is, since hardly anybody buys a house outright, the real measure of affordability is not the absolute value of the house, but rather the cost of servicing the debt. So it isn't the price/earnings ratio that is important, but rather the repayment costs/earnings ratio.

Due to extremely low real interest rates, the current affordability of housing is actually still quite low - lower than it was in 1989. This is why there hasn't been a crash.

Aren't these affordability indices linked to all outstanding mortgages? If so, then affordability generally is good, because of low IRs, but this doesn't alter the position of would-be FTBs. Large numbers of IO mortgages will tend to flatter "affordability" measures in any case.

Nodumsunreader, I sincerely hope housing IS a speculative/investment market now. I've been involved for over 20 years on the sideline of a market that became spectacularly investment driven in the 1980s, the classic car market. In '87 I think the FT named it as the market showing the biggest increases of all, in no small measure because there's no CGT on cars (wonder how many of you knew that?!). Well, it crashed spectacularly in the early 90s, values in some cases dropping to 20% (a Ferrari I had a hand in selling). Main area I'm involved in, was speaking to a friend in the trade and he said prices are 10-20% below the NOMINAL prices of '89; to take two models I know of, one was selling for £250-260k, other for £500-550k. If you bought one of the first, you could now sell for about £220k, the latter, £450k on a good day. So 16 years later you won't even get the big figure back and that's ignoring maintenance/insurance costs (cars not looked after deteriorate just as houses do) and the money you would have got for doing nothing other than putting it in the bank.

I've long thought that what props up housing is that it's a universal need so not subject to these sorts of speculative forces. If that's changed, and housing is just a commodity to speculate on like any other, than that's MORE likely to bring about a crash. So if you're right then thanks, that's cheered me up no end - I'll be ftbing when the speculators decide to move on leaving all those who bought in late to get their fingers burnt. Badly. I wonder how you'd feel if you bought an "asset" for £525k in 1989 - and I know people who did - and you found out 16 years later that you wouldn't even get the original price back on sale?

[Pheno]

A ) 25% of all properties are bought outright (with cash).

http://216.239.59.104/search?q=cache:H-Uip...+for+cash&hl=en

Point taken, but

1) 25% still isn't very high

2) My suspicion is that the majority of that 25% are people who've used a sold house to pay for the new house and so aren't relevant to discussions regarding affordability.

B ) The real interest rate now is about 2% (give or take a couple of tenths of a %). The real interest rate in 1990 was about 4%. This is hardly a world-shaking difference.

That's a 100% difference! Definitely world shaking for a lot of people who's outgoings only just cover their earnings every month.

C ) What are you using to measure "affordability"??

http://www.moneyweek.com/article/478/inves...ing-market.html

That was the point of my post. The important measure of affordability relates to people's ability to make their loan repayments every month. This is the one which will determine whether we have a house price crash or not.

[jellybean]

What's that got to do with the price of anything?

Nothing really.

The whole point of the immigration debate on this forum is not how polite or hard working the first generation of immigrants are, but the idea that this immigration will increase both the supply of labour and the demand for housing - so justifying a higher price earnings ratio than the historical norm. This is a primary bull argument.

I dont subscribe to that. My father had a few building firms in Germany during the boom times. Came home when it ended as did most Britts.

If you want to flaunt your moral superiority go to a political forum and say how you are against little englander attitudes. Yawn!

Yawn? Tell me, what's it like in smugland? Is that the internet equivalent of back to where you came from?

Edited December 5, 2005 by jellybean

[Pheno]

Aren't these affordability indices linked to all outstanding mortgages? If so, then affordability generally is good, because of low IRs, but this doesn't alter the position of would-be FTBs. Large numbers of IO mortgages will tend to flatter "affordability" measures in any case.

I'm not sure what you mean? I'm a first time buyer, and whether I can afford a certain house depends on whether I can afford the monthly repayments on the mortgage, which in turn depends directly on the real interest rate.

[IPOD]

I'm a first time buyer, and whether I can afford a certain house depends on whether I can afford the monthly repayments on the mortgage, which in turn depends directly on the real interest rate.

Actually whether you can afford it in the short-term depends on the nominal, not real, interest rate. In the long-term a whole host of other factors such as income growth, inflation, economic growth dictate whether you can "afford" it.

(Also the idea that simply because you can pay the monthly mortgage repayments makes a house affordable is questionable. I'm sure by devoting 70% of my post-tax income to servicing a mortgage I could afford a hovel in darkest Tower Hamlets, but this would be financial suicide, and probably not very smart from a personal safety point of view either.)

[munro]

I'm not sure what you mean? I'm a first time buyer, and whether I can afford a certain house depends on whether I can afford the monthly repayments on the mortgage, which in turn depends directly on the real interest rate.

Affordability tends to be averaged across all mortgages, so people with tiny mortgages make mortgages generally look more affordable as a percentage of income. Millions of people with tiny mortgages taken out years ago doesn't help an FTB who has to borrow maybe six times their salary to buy.

As for IO, the main point is that your monthly outgoings are lower than for a repayment mortgage (ignoring the money you're saving in a cash ISA to pay off the capital sum ). If as I think is now the case 25% of mortgages are IO then all those people have lower mortgage repayments than they would have if they were on a repayment mortgage, so it looks as if afordability (interest payments as a percentage of income) is improved.

All depends on how the figures are worked out in the first place, but it isn't much help to be told that cuts in IRs improve affordability for those with a £30k mortgage on a house now worth £400k when you just want to buy a 2-up/2-down for less than the GDP of a small African country.

[Pheno]

Actually whether you can afford it in the short-term depends on the nominal, not real, interest rate.

There doesn't seem point in me arguing against this, since it supports my argument heh. The nominal interest rate is VASTLY lower now than it was in 1990, by your logic making houses vastly more affordable in 2006.

In the long-term a whole host of other factors such as income growth, inflation, economic growth dictate whether you can "afford" it.

Since long term expected income growth and economic growth are the same now as they were in 1990, they are irrelevant. Real interest rate internalises inflation which is why I used it.

(Also the idea that simply because you can pay the monthly mortgage repayments makes a house affordable is questionable. I'm sure by devoting 70% of my post-tax income to servicing a mortgage I could afford a hovel in darkest Tower Hamlets, but this would be financial suicide, and probably not very smart from a personal safety point of view either.)

The whole point is you'd have had to devote 70% of your post-tax income to afford an equivalent hovel in 1990. It's just that back then the purchase price was lower.