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DonnieDarker

Average Earnings Ratio...new Paradigm.

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Blue-sky thinking here...

... there is a lot of talk of average earnings to price ratio being way way higher than it has been historically.

But what do we mean by average earnings?

We know that the "average" FTB is 35. Surely we should then take the average earning power of the average 35 year old?

I wonder what this would do to that ratio?

Is this the new paradigm? People buy when they're older and have a higher salary and more savings.

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Is this the new paradigm? People buy when they're older and have a higher salary and more savings.

if only! Try "more debt"

and throw in "less time to pay off the mortgage" while you're there - and perhaps a dash of "less scope for salary increases" and the mix looks a lot less appealing.

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Blue-sky thinking here...

... there is a lot of talk of average earnings to price ratio being way way higher than it has been historically.

But what do we mean by average earnings?

We know that the "average" FTB is 35. Surely we should then take the average earning power of the average 35 year old?

I wonder what this would do to that ratio?

Is this the new paradigm? People buy when they're older and have a higher salary and more savings.

Oh dear, bit of circular logic here.

House prices are so high that only a few can now afford them, this means that the average income of buyers has risen so house prices are ok after all.

By this logic, if the price of the average 2 bed flat went up to £1 million this would be fine because the average wage of the buyers would increase to £300,000. Of course more than 99% of the population of the UK would be unable to buy and your 2 bed flat would generate a rental yield of 0.78%.

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Also add in the average age a couple have kids. If that keeps rising, then we're in for the

population decreasing (not including immigrants)

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What the country could move towards is a "whole life" costing of their housing asset and mortgage. This would give buyers a better feel for the commitment they are taking on, how it could be affected by interest rates swings, CPI etc. Eg As an average earner on £25k you estimate your reasonably attainable salary increases over your working life and NPV that back to give a present value of your available cashflows; you set against that the NPV of your finance costs (ie mortgage principal and interest over 25 years say) and see how much of your future earnings your house costs. It would get a bit complicated if you had to make assumptions re interest rates and inflation (you could also factor in the NPV of your other expected lifetime outgoings) but perfectly possible. A good Excel modeller could do it given time so you could just plug in the figures. It would show the effects of low interest rates and inflation on debt burden and the real total cost of the house. All sorts of variables could be played around with throughout your life so you always knew where you stood. You could even factor in HPI!

Actually maybe it is too complicated for Joe Bloggs but the point is people have committed to recent prices on the basis of a 2-5 year look forward and crossed their fingers for the rest of the period! They have often even moved the the whole thing back by repeatedly taking out fresh 25/30 year mortgages each move/remortgage effectively pushing back their retirement and raising the long term risk profile of their finance commitment materially (eg risk of unemployment as you get older is higher so you don't want overly high/extended mortgage commitments into your 60s which many people who have entered fresh 25/30 year mortgages in their mid to late 30s will belatedly wake up to.

They may not be so willing to pay historically high asset prices if they see in black and white the long term effects on their lifetime weatlh and lifestyle later on...

Edited by Tempest

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Blue-sky thinking here...

... there is a lot of talk of average earnings to price ratio being way way higher than it has been historically.

But what do we mean by average earnings?

We know that the "average" FTB is 35. Surely we should then take the average earning power of the average 35 year old?

I wonder what this would do to that ratio?

Is this the new paradigm? People buy when they're older and have a higher salary and more savings.

When I bought my first flat in 93 I paid £38k and was earning around £9000 a year.!! I was lucky enough to have been given some shares from my grandfather which was the £8k deposit I put down so I had a £30k mortgage. For the same job I did then the salarys now are ranging from £19k to £22k and my original flat is valued around £140k..

On this scenario property is around 30% plus overpriced!!!.

Lou

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I agree with the circular argument comment. The average age of the FTB is 35 and not younger because only older people tend to have the higher income needed to pay today's inflated prices.

Notice many reports do not state the type of average used and the MEAN can be distorted by a very few people with exceptionally high incomes. (The Liberal Democrats recently made the point income inequality has widened under Labour even compared with Thatcher, and this would make the Mean less representative of the general population.) The MEDIAN indicates 50% of the population earn more than this and 50% earn less. It is a better measure if income is unequally distributed, and is often quoted in US statistics. Used in the average price to earnings ratio, the Median indicates where house prices are in relation to half the potential market. With the mean average you don't have a clue: it might be 10% of the market or 90%.

See How To Lie With Statistics by Darrell Huff for more details on averages.

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  • 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%



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