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frugalista

Affordability Since Mid-1990s

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This thread does not contain any new data or stories. I just wanted to post a graph that does not seem to get aired very often.

It seems to have become "common knowledge" in the media and amongst the public that high prices are a reaction to "mortgage affordability". That is, people only look at the monthly payments when figuring out how much to spend on a house.

The theory goes that if mortgages are offered which lower these monthly payments as a proportion of take home pay, then house prices will rise as a consequence. So recent rises are supposedly to be explained by "more affordable than ever" mortgages.

But this is a myth.

The graph attached shows mortgage payments as a percentage of take home pay and comes from the Nationwide. The graph is based on what mortgage offers were around at the time in the UK mortgage market. The assumption is that we are looking at initial mortgage payments (i.e. the first payment you make on a new mortgage). We assume the borrower earns the average wage and is borrowing 75% of the average house price.

Note, that in the mid-1990s typical initial mortgage payments were under 25% of take home pay. They are now over 40%. HPI has not just put people in more debt, it has made home ownership a lot less affordable. The affordability explanation for HPI just does not stack up!

frugalista

payments.gif

post-1586-1141594946.gif

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This is quite an astonishing graph. I know some people who must have mortages payments that sap most of their salaries, more than 40%. Hoever, I also know people who bought in the late 90s who have mortgages with monthly payments the same size as the rent a shop assistant pays to live in a slum. One group lives in self-imposed poverty while the other has a nice, affordable standard of living and they cancel each other out.

It seems, though, that the vast mortgages of the last few years are starting to have a big impact on the overall picture.

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Does this graph make any allowance for the abolition of mortgage interest tax relief?

Yes. To quote the notes accompanying Nationwide's data:

[... ] mortgage payments prior to Q1 2000 have been adjusted to reflect Mortgage Interest Relief at Source (MIRAS). [...]

frugalista

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The graph attached shows mortgage payments as a percentage of take home pay and comes from the Nationwide. The graph is based on what mortgage offers were around at the time in the UK mortgage market. The assumption is that we are looking at initial mortgage payments (i.e. the first payment you make on a new mortgage). We assume the borrower earns the average wage and is borrowing 75% of the average house price.

frugalista

It seems pretty optimistic to presume that the average buyer is only borrowing 75% of the average house price. This would flatten the effect of the increases of the last few years.

Do you have a link for the Nationwide data?

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It seems pretty optimistic to presume that the average buyer is only borrowing 75% of the average house price. This would flatten the effect of the increases of the last few years.

Do you have a link for the Nationwide data?

Okay, here is the link.

http://www.nationwide.co.uk/hpi/downloads/...ge_payments.xls

I think the 75% assumption is a reasonably fair one. The average buyer might be a bit younger so has to look at a less-than-average house. Or, they could be seen as putting in a 25% deposit (but how likely is that these days?).

frugalista

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Okay, here is the link.

http://www.nationwide.co.uk/hpi/downloads/...ge_payments.xls

I think the 75% assumption is a reasonably fair one. The average buyer might be a bit younger so has to look at a less-than-average house. Or, they could be seen as putting in a 25% deposit (but how likely is that these days?).

frugalista

Then there's all the shared ownership and joint purchasing as well.

The buyers aren't younger though. Average FTB is 34 these days, no?

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It's also important to remember that the Nationwide figures don't include property purchased under the right to buy scheme - this tends to dramatically exaggerate the size of monthly payments as a proportion of take home pay at the time of the last crash as the many millions of ex-LA properties bought during the late 80s boom at a huge discount to market value are excluded.

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The comparison with the mid to late 90's is important in that this is the time when houses were VERY undervalued (see the graph about house prices).

That was the window of opportunity that will NEVER be repeated ever again - if you missed it then its just tough !

The reality of the repayments graph is that, whilst high, it is not massively over the top - it doesn't show a bubble, unlike 89/90.

This my friends explains why prices won't crash under the current level of IRs - mortgages are affordable at a stretch. It also explains why house prices won't go shooting upwards - we are at the limit of whats comfortable.

Its going to be a long, very long wait for you guys !

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The graph only shows the affordability for the first month of the loan. In a higher inflation environment the affordability of the loan improves over time. This is why the 89/90 affordability is not so startling. Very few people actually took on loans at that time and at that affordability. Those that did rapidy found the affordability improve as their wages did, reducing the window in which they were vulnerable to job loss, sickness etc.

Today we have affordability improving very slowly over the length of the loan, particularly with interest only. Those that bought 2-3 years ago are still vulnerable, particularly given that lack of equity buffer they have. Also, these people may never be able to trade up... their first loan may push their limits of affordability for perhaps a 10 year period. This is also exacerbated by the fact that first time buyers now average 34 years old, a time when many people are at or near their peak earnings potential.

A bleak road ahead for those 30-somethings stretched to afford their two bed apartment or terrace.

T&T

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The reality of the repayments graph is that, whilst high, it is not massively over the top - it doesn't show a bubble, unlike 89/90.

This my friends explains why prices won't crash under the current level of IRs - mortgages are affordable at a stretch.[...] Its going to be a long, very long wait for you guys !

Well, we can see from the graph that when the figures went from 40% (about the current level) to 60 % (crash level) last time it happened in a space of about a year or so. Not a very long wait for some. This time around, IR does not have to go as far as 14% at all for the same effect though.

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The repayment to THP graph from Nationwide closely mirrors Table 539 from the ODPM, and, like that one, rather than “disproving” the affordability argument actually supports it rather well. Remember that we have *two* contributions to the current house price peak – part comes from affordability type arguments (price-IR seesaw at const repayment to earnings) and part from speculation (affordability stretch or bubble, about 2003 onwards); they are not mutually exclusive explanations and the presence of one does not exclude the other.

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The other point to remember here is that this graph does not take any account of the rate at which loans are being repaid. In the early 90's repayments were a very high % of THP however this is partly because (due to high inflation) they were being repaid very quickly (basically over 10 years rather than 25).

If you adjust the graph to reflect this then as a % of THP repayments go up to over 70% of THP.

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The repayment to THP graph from Nationwide closely mirrors Table 539 from the ODPM, and, like that one, rather than “disproving” the affordability argument actually supports it rather well. Remember that we have *two* contributions to the current house price peak – part comes from affordability type arguments (price-IR seesaw at const repayment to earnings)

Some great replies in this thread -- thanks to everyone for your somewhat vain efforts to keep the thread going.

I think the graph shows that the affordability explanation that spline mentioned is not very justified.

People will tell you "prices won't come down because they are supported by fundamentals". You say "what fundamentals?" and they reply "it's all about affordability you see, the monthly cost of mortgage repayments has come right down since the mid nineties, and people have bid up prices to compensate". And yet the graph shows that this cannot be the main explanation for HPI.

I think there is this false memory that it was incredibly hard and expensive to get a mortgage in the mid-90s Perhaps this is how people delude themselves about why they did not buy in those times. Perhaps it is a kind of blurring with the early 90s which were quite different. The reality I think is that it was property sentiment which was keeping demand low from 1993-1998.

and part from speculation (affordability stretch or bubble, about 2003 onwards); they are not mutually exclusive explanations and the presence of one does not exclude the other.

I agree completely. But people will not admit the speculative element is significant because deep down they know the speculative element can disappear without job losses or interest rate rises; just a year or two of flat prices will do it. And then what happens to the market?

frugalista

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The comparison with the mid to late 90's is important in that this is the time when houses were VERY undervalued (see the graph about house prices).

That was the window of opportunity that will NEVER be repeated ever again - if you missed it then its just tough !

Its going to be a long, very long wait for you guys !

Complete and utter B-O-L-L-O-C-K-S!!! as ususal IMup North......

You mean in the mid to late 90's they were at their correct long term trend value, a value to which they are falling inexorably towards now and probably below, for a long while.......

I see your facinating, but shallow economic insight extends to nothing more incisive than 'Get onto the ladder now or you never ever will' type merchant? Oh how boring.....

You obviously have no idea what you are talking about and have not even the most elementary understanding of how markets and herds function.

I am so glad that you are lumbered with several overpriced flats which are bleeding your finances more and more each and every month.

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The comparison with the mid to late 90's is important in that this is the time when houses were VERY undervalued (see the graph about house prices).

That was the window of opportunity that will NEVER be repeated ever again - if you missed it then its just tough !

What are you basing this on? Not a massive amount has changed in the UK since the 1990s. As far as I can see the comparison between say 1996 and 2006 is as follows:

Same lowish interest rates.

A lot more private debt.

A few more people have jobs.

Productivity still very low by international standards.

Same trade deficit.

Housing supply/demand equation basically the same.

More globalization.

Housing sentiment is a lot more bullish.

Taxation level is slightly higher.

Planning laws have been slightly liberalised.

So, not a great deal has changed really. So why shouldn't the housing market go back to 1990s affordability? All it takes is for some credit tightening, a few job losses and the evaporation of sentiment and it will seem just like the 1990s again.

frugalista

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I think the graph shows that the affordability explanation that spline mentioned is not very justified.

I think there is an tiny element of the straw man about this, or possibly some confusion between an explanation of *part* of the rise and an explanation of *all* of it. ;)

The basis of the affordability argument is the approximate seesaw between house prices and interest rates at a constant repayment to earnings ratio. It says nothing more complicated than if interest rates fall then prices must rise, all else being equal, and, obviously, the reverse when interest rates go back up again. In normal times, between price peaks, this happens at a baseline affordability of (say) 20% of gross earnings or 30% of THP; but when prices move higher as a result of speculative pressure, or (equivalently) bubble behaviour, the affordability is stretched. The maximum stretch seems to be limited to about 30% gross, or 40—45% THP, and corresponds to an approximate upper bound on prices. Note that “affordability stretch” = “bubble”. This approach reconciles affordability *and* bubble ideas into a single model and *in no way* suggests that prices are fully supported; in fact the full unwinding of the speculative part, in other words the affordability stretch, brings us back to the baseline level and allows us to estimated the likely size of the crash, quite useful really! B)

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I think there is an tiny element of the straw man about this, or possibly some confusion between an explanation of *part* of the rise and an explanation of *all* of it. ;)

The basis of the affordability argument is the approximate seesaw between house prices and interest rates at a constant repayment to earnings ratio. It says nothing more complicated than if interest rates fall then prices must rise, all else being equal, and, obviously, the reverse when interest rates go back up again. In normal times, between price peaks, this happens at a baseline affordability of (say) 20% of gross earnings or 30% of THP; but when prices move higher as a result of speculative pressure, or (equivalently) bubble behaviour, the affordability is stretched. The maximum stretch seems to be limited to about 30% gross, or 40—45% THP, and corresponds to an approximate upper bound on prices. Note that “affordability stretch” = “bubble”. This approach reconciles affordability *and* bubble ideas into a single model and *in no way* suggests that prices are fully supported; in fact the full unwinding of the speculative part, in other words the affordability stretch, brings us back to the baseline level and allows us to estimated the likely size of the crash, quite useful really! B)

I basically agree with you, but the nature of bubbles is that they exceed reasonable expectations. I think a lot of people are now beyond reasonable max affordability (40-45%), but people feel they have to buy at any cost, or forever be shut out. And the banks keep on lending.

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Guest wrongmove

So, not a great deal has changed really. So why shouldn't the housing market go back to 1990s affordability? All it takes is for some credit tightening, a few job losses and the evaporation of sentiment and it will seem just like the 1990s again.

frugalista

I think what has changed (rightly or wrongly) is confidence in the future.

IRs were low in the late 90s, but for the first time in 20 years or more. Now we have had many years of low and relatively stable rates. In the mid 90s, memories of double digit rates were still very fresh. Politicians still set the rates directly.

Employment was pretty good in the mid to late 90s, but again, the recession (which was deep and long) was still fresh in peoples minds. Now it is a distant memory to most, and a whole generation cannot remember it at all.

People paying today's HPs are "gambling" that low IRs and high employment are here to stay. If they are right, they win the gamble and get a house. If they are wrong, then we win, and will be able to buy cheaply in the future. But either way, it is a gamble, and there is no guarentee that the bears are right, despite what some may say here.

I believe the balance of probability is on the bears side, but only just IMHO - you may as well toss a coin.

Edited by wrongmove

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The comparison with the mid to late 90's is important in that this is the time when houses were VERY undervalued (see the graph about house prices).

That was the window of opportunity that will NEVER be repeated ever again - if you missed it then its just tough !

The reality of the repayments graph is that, whilst high, it is not massively over the top - it doesn't show a bubble, unlike 89/90.

This my friends explains why prices won't crash under the current level of IRs - mortgages are affordable at a stretch. It also explains why house prices won't go shooting upwards - we are at the limit of whats comfortable.

Its going to be a long, very long wait for you guys !

I am not baiting - I want a serious answer. I dont want you dismissing anything I just want YOUR opinion on what will happen?

Are you sitting comfortably?... Then I will begin,

I 100000% agree with you that houses were UNDERVALUED in the mid to late 90's. I strongly believe that houses are OVERVALUED now. We only have to see the trend on the graphs to see that the average price should be about £130K i think. We are between £165 and £205k on the indices so lets say £185K as the average price today?

Lets assume that I am an average person. I am with an Average girl. Our average income is £40K?

Lets assume we have a 5% deposit, plus fees. We are to purchase at £185 so the mortgage is £175K.

This is 4.37x our joint income. Lets assume that the bank dont find this a problem and they grant it.

Our mortgage will be £1014pcm REPAYMENT or £700 interest only. I have based this on 4.8%. Our NETT pay is £2550 pcm.

If we were to go I/O then its 28% of our income. On repayment it is 40% of our income.

OK Lets say this is affordable in this CURRENT low IR situation. Lets see how IR's will affect us?

APR  Repayment	 I/O5.00%	 £1,035 	 £729 5.25%	 £1,061 	 £766 5.50%	 £1,087 	 £802 5.75%	 £1,114 	 £839 6.00%	 £1,141 	 £875 6.25%	 £1,168 	 £911 6.50%	 £1,196 	 £948 6.75%	 £1,223 	 £984 7.00%	 £1,251 	 £1,021 

OK now dont say IR's CANT BE 7%. All mortgage guidelines ask you to consider 12% so 7% is more than updated. I do realise that WAGE inflation will increase if you lucky at 2% per annum coz GB is capping it at that!!!

NOW TO MY POINT!

I do not subscribe to I/O because you need to find another investment model to have the capital at the end of the 25 years to buy the house. NO-ONE EVER INCLUDES THIS IN THEIR EXAMPLES! I would guestimate that it will need at least £350pcm to appreciate enough - even then it probably wouldnt, and it would work out cheaper to be a repayment anyway!

Now I personally would go with the repayment. So IF IR's rose to 7% over the next 2 years. I would look at my mortgage going from £1,014 to £1,251. An increase of £237 p.c.m. or an increase of 23%. This is a LARGE increase in payments and would NOT be covered by WAGE INFLATION. But I could, at a stretch, pay this. If I could not, I would not have taken the mortgage in the first place <period>.

BUT THIS IS MY KILLER QUESTION....

On the I/o Mortgage which A LOT of people have been taking their payments will go from £700 to £1,021 - an increase of £321 p.c.m. or an increase of 46%. THIS IS DOUBLE THE INFLATION OF WHAT A REPAYMENT MORTGAGE IS.

So we do not need the 15% rates that we had in the 80's. 7% will be WELL enough. It would be interesting to see what percentage of mortgages are I/O? These people are probably going I/O because they could not AFFORD the repayment so they are stretched at 4.8%. I believe 6% will be enough to cause MASS bankruptcy.

Honest thoughts please.....

TB

Edited by teddyboy

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I have to admit to being more than slightly gobsmaked by the shear scale of the sales – they seem to have been flying of the shelves like very expensive hot cakes, and it looks like people (at least for the moment?) are able to find the money to pay for them. It's a bit like watching a dodgy firework that's sort of gone out but just won't stop fizzing. :unsure:

Edited by spline

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Teddy - My back-of-the-fag-packet calculation measured IR trough to peak in the last crash as +87%. Applying this to the low IR basin of 2003 gave 6.5% IRs to "have the same again" so to speak. 15% would bust every bugger who bought in the last decade.

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Teddy - My back-of-the-fag-packet calculation measured IR trough to peak in the last crash as +87%. Applying this to the low IR basin of 2003 gave 6.5% IRs to "have the same again" so to speak. 15% would bust every bugger who bought in the last decade.

I know this..... 6-7% is MASSIVE with this debt level. Im trying to get it through to ImUpNorth!!!

;)

TB

Edited by teddyboy

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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% +
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      • up 5%



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