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Average House Price To Average Salaries

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I see quite frequently on this site the comparison of average house prices to average salaries, with house prices usually over 5 X and up to 10X salaries. This is given as evidence that things have gone too far. The trouble with this info is that it completely ignores the equity that the average homeowner has, so it is completely misleading. In addition, FTBers do not buy the average house, so this is not useful to understand that situation either.

I was readng the "We Are Only Two Turns Of The Credit Screw" topic and saw the link to http://www.creditaction.org.uk/debtstats.htm which had some data that I think is more relevant: average mortgages for individualy who currently have a mortgage. The data is:

"Average outstanding mortgage for the 11.7m households who currently have mortgages is £96,648"

I am not an expert of their data but assuming that we can take it as a guide, then as the average house costs around £210K (this will include people who don't have mortgages, I guess) this would suggest that people have an average of approx 50% equity in their homes.

To me the figure of average mortgage to salary does not seem too alarming, especially if you consider that the average house must be purchased by more than one person (min =1, max=2?, so somewhere in between 1 and 2).

I am not for one minute suggesting that there are not people who have stretched themselves too far and who won't struggle after the IR rises, just that I think you have to allow for equity whenever we talk of average house prices and average salaries, we are deluding oursleves if we don't.

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To me the figure of average mortgage to salary does not seem too alarming, especially if you consider that the average house must be purchased by more than one person (min =1, max=2?, so somewhere in between 1 and 2).

Really? And yet demand is being driven by record numbers of people living alone.

How odd.

Or perhaps these are all sidetracks, and the fundamental issue is how much you can borrow...and therefore spend.

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starsign you have a point, but that is only valid for anyone who bought a home at least 5 - 10 years ago. Anyone aged 18 - 30 probably didn't, and are now totally screwed by the current property market. I for one won't inherit sufficient equity to make up the difference in 30 or 40 years time when my parents sadly pass away. What is going to happen in the meantime to allow me to afford a home?

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And FTBs cannot be ignored simply because they do not buy average homes. Eventually, they will. They start out and buy a low end home at a fairly high multiple. They hold on for a few years and gain equity BUT the next rung of the ladder will have gained more equity than they have. Take an example:

FTB buys low end £100k property. Average property £200k. 5 years on and prices rise 20%. Now FTB wants an average property. So his proerty is now 120k so has 20k equity. Sells up and now needs a 220k mortgage to buy an average home. So in fact the multiple is even higher based on static wages. In an ideal world, the inflation will be uniform over housing/wages. Were this the case, the salary multiple would be the same no matter what. If HPI is >wage inflation, the salary multiple gets worse, and vice versa. So in a market with strong HPI and low wage inflation, it does not matter when a person buys the property, the best case scenario will exist today - it will only ever get worse - irrelevant of the equity built up.

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I see quite frequently on this site the comparison of average house prices to average salaries, with house prices usually over 5 X and up to 10X salaries. This is given as evidence that things have gone too far. The trouble with this info is that it completely ignores the equity that the average homeowner has, so it is completely misleading. In addition, FTBers do not buy the average house, so this is not useful to understand that situation either.

I was readng the "We Are Only Two Turns Of The Credit Screw" topic and saw the link to http://www.creditaction.org.uk/debtstats.htm which had some data that I think is more relevant: average mortgages for individualy who currently have a mortgage. The data is:

"Average outstanding mortgage for the 11.7m households who currently have mortgages is £96,648"

I am not an expert of their data but assuming that we can take it as a guide, then as the average house costs around £210K (this will include people who don't have mortgages, I guess) this would suggest that people have an average of approx 50% equity in their homes.

To me the figure of average mortgage to salary does not seem too alarming, especially if you consider that the average house must be purchased by more than one person (min =1, max=2?, so somewhere in between 1 and 2).

I am not for one minute suggesting that there are not people who have stretched themselves too far and who won't struggle after the IR rises, just that I think you have to allow for equity whenever we talk of average house prices and average salaries, we are deluding oursleves if we don't.

Who said you can prove anything with statistics. And these are based on Northern prices.

OK my parents live in say a 300k house with no mortgage they are retired.

A first time buyer will be looking at a house for say £150k say with a £140k mortgage. This gives an average mortgage of £70k to an average house price of £225k not too disimilar to your figures. Is this relevant? Not really.

So say ftb's have an income of 20k this gives 3.5x for joint income - or 7x times single for the mortage. This is the real world. This is what the mortgages for first time buyers have been. The average over the population is bound to be a lot lower than the average for new mortgages/remortgages.

FTB's are the lifeblood of the housing market without them nothing moves. 3.5x joint or more frighteningly 7x single in the above example IS too far. Taking my simplistic example further when mortgages go back to 2.5x joint or 3.5x single be it either by lenders tightening lending or interest rates meaning thats all that is affordable you only get a mortgage advance of £100k for joint £70k for single.

I agree with you looking at averages for the whole country is misleading but looking at the section of the market that dictates the rest of the market then the horror stories are true and relevant.

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Reasonable point to put forward.Very few people leave the housing market permanently and so those with the equity(printed for them by the MPC)can play swaperama with each other at what ever fictitious price they choose with only a marginal loss in equity of stamp duty.Meanwhile if you haven't received Eddie and Merv's endowment you remain priced out.

Edited by crashmonitor

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FTB buys low end £100k property. Average property £200k. 5 years on and prices rise 20%. Now FTB wants an average property. So his proerty is now 120k so has 20k equity. Sells up and now needs a 220k mortgage to buy an average home. So in fact the multiple is even higher based on static wages. In an ideal world, the inflation will be uniform over housing/wages. Were this the case, the salary multiple would be the same no matter what. If HPI is >wage inflation, the salary multiple gets worse, and vice versa. So in a market with strong HPI and low wage inflation, it does not matter when a person buys the property, the best case scenario will exist today - it will only ever get worse - irrelevant of the equity built up.

Yep. And nobody I explain this to ever understands it :(

Rising house prices are bad for the majority of homeowners.

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There's no single statistic that captures the reality of the housing market from every individual's perspective. Looking at average house prices in the context of average earnings is just one data point, but that doesn't make it an invalid one, in fact it's a crucial component of any sensible data set on housing.

The UK property market is complex, it's tempting to reach for headline grabbing individual statistics, but it's misleading to do so.

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Guest DissipatedYouthIsValuable
Who said you can prove anything with statistics. And these are based on Northern prices.

OK my parents live in say a 300k house with no mortgage they are retired.

A first time buyer will be looking at a house for say £150k say with a £140k mortgage. This gives an average mortgage of £70k to an average house price of £225k not too disimilar to your figures. Is this relevant? Not really.

So say ftb's have an income of 20k this gives 3.5x for joint income - or 7x times single for the mortage. This is the real world. This is what the mortgages for first time buyers have been. The average over the population is bound to be a lot lower than the average for new mortgages/remortgages.

FTB's are the lifeblood of the housing market without them nothing moves. 3.5x joint or more frighteningly 7x single in the above example IS too far. Taking my simplistic example further when mortgages go back to 2.5x joint or 3.5x single be it either by lenders tightening lending or interest rates meaning thats all that is affordable you only get a mortgage advance of £100k for joint £70k for single.

I agree with you looking at averages for the whole country is misleading but looking at the section of the market that dictates the rest of the market then the horror stories are true and relevant.

Here's my take. You can get to ****** if you think I'm paying out more than 30% of my net income for housing. And since I've had to wait until 35 to achieve comfortable solvency I'm looking straight at a 4 bed house if I'm going to start a family.

If that's not on offer here in the UK, I'll find somewhere where it is. Everywhere needs doctors.

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And FTBs cannot be ignored simply because they do not buy average homes. Eventually, they will. They start out and buy a low end home at a fairly high multiple. They hold on for a few years and gain equity BUT the next rung of the ladder will have gained more equity than they have. Take an example:

FTB buys low end £100k property. Average property £200k. 5 years on and prices rise 20%. Now FTB wants an average property. So his proerty is now 120k so has 20k equity. Sells up and now needs a 220k mortgage to buy an average home. So in fact the multiple is even higher based on static wages. In an ideal world, the inflation will be uniform over housing/wages. Were this the case, the salary multiple would be the same no matter what. If HPI is >wage inflation, the salary multiple gets worse, and vice versa. So in a market with strong HPI and low wage inflation, it does not matter when a person buys the property, the best case scenario will exist today - it will only ever get worse - irrelevant of the equity built up.

There is a bit of inter-generational subsidy going on to sustain the status quo.Parents downsize and give children money to upsize and no new money is required.Or parents MEW and children get to upsize.MEW could hit the buffers in credit crunch though.

Edited by crashmonitor

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:blink: ...but, but, but...

£134,000,000,000,000 of debt in the UK. How much capital does someone with a 100% mortage have in their house?

Ok, lets ignore what history has shown us.

You are half correct. Todays housing market only reflects what people can borrow. It does not reflect what people can actually afford which is related to their income.

Any healthy housing market need first time buyers and most cannot even afford the cheapest housing in many areas. Where are they going to get the money to get on the housing ladder? From their fixed salaries? If there are no first time buyers, the buying chain breaks down. You have heard of a buying chain?

When we have nearly 2 million mortage resets - in the next few months - some people are going to find out that they borrowed too much at a time of easy credit. Where is everyone going to get the extra 40% need to service that debt today?

You are forgetting that current house prices are being caused by a credit bubble. This current bubble has gotten totally out of control. Eventually it will burst. Then house prices will come back to what average people can actually afford.

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And since I've had to wait until 35 to achieve comfortable solvency I'm looking straight at a 4 bed house if I'm going to start a family.

If that's not on offer here in the UK, I'll find somewhere where it is. Everywhere needs doctors.

(Y)

edit: Ok... no thumbs up smiley on here :(

Edited by RichB

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:blink: ...but, but, but...

£134,000,000,000,000 of debt in the UK. How much capital does someone with a 100% mortage have in their house?

£1,340,000,000,000 but it's heading that way.

Edited by crashmonitor

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There is a bit of inter-generational subsidy going on to sustain the status quo.Parents downsize and give children money to upsize and no new money is required.Or parents MEW and children get to upsize.MEW could hit the buffers in credit crunch though.

If MEW stopped tomorrow the economy (esp retail) would be f*cked.

:blink: ...but, but, but...

£134,000,000,000,000 of debt in the UK. How much capital does someone with a 100% mortage have in their house?

Ok, lets ignore what history has shown us.

You are half correct. Todays housing market only reflects what people can borrow. It does not reflect what people can actually afford which is related to their income.

Any healthy housing market need first time buyers and most cannot even afford the cheapest housing in many areas. Where are they going to get the money to get on the housing ladder? From their fixed salaries? If there are no first time buyers, the buying chain breaks down. You have heard of a buying chain?

When we have nearly 2 million mortage resets - in the next few months - some people are going to find out that they borrowed too much at a time of easy credit. Where is everyone going to get the extra 40% need to service that debt today?

You are forgetting that current house prices are being caused by a credit bubble. This current bubble has gotten totally out of control. Eventually it will burst. Then house prices will come back to what average people can actually afford.

Good post.

One point which I am sure you know already but I may as well say it:

FTBs or specuvestors make up the bottom of the chain. FTBs have been priced out for some time now and there are rumours that specuvestors are becoming thin on the ground. Watch Ireland for an example of what could happen to the UK when NOBODY is buying the bottom end houses. Then it won't matter what precious 'equity' people have as it will slowly (or quickly) evaporate.

:lol:

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I see quite frequently on this site the comparison of average house prices to average salaries, with house prices usually over 5 X and up to 10X salaries. This is given as evidence that things have gone too far. The trouble with this info is that it completely ignores the equity that the average homeowner has, so it is completely misleading. In addition, FTBers do not buy the average house, so this is not useful to understand that situation either.

To me the figure of average mortgage to salary does not seem too alarming, especially if you consider that the average house must be purchased by more than one person (min =1, max=2?, so somewhere in between 1 and 2).

Wrong. The high ratios not only make it difficult for first time buyers (who now at very low levels now), by also made trading up very expensive. High ratios are a nightmare for people in a low inflation climate. Aspiring to home ownership means accepting a life of poverty. Is it any surprise that emigration from the UK is running at record levels.

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There is a bit of inter-generational subsidy going on to sustain the status quo.Parents downsize and give children money to upsize and no new money is required.Or parents MEW and children get to upsize.MEW could hit the buffers in credit crunch though.

Quite right - it is most horrid that one cannot make ones own way these days.

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£1,340,000,000,000 but it's heading that way.

oops....yeah...sorry

Here in Northern Ireland the average income is estimated to be £16K, the average house is estimated at £240K.

Hello Mr Bank Manager. I'm a first time buyer, can I have £150K to buy a council house at over 9 times my average salary. I know the repayments will be more than my net income, but I can pay the extra on my credit card while I live on sunshine and fresh air!!!

Oh, what's that Mr Bank Manager, fook off, you say :( 1/3 of my net income is what I can actually afford. But that lovely council house is cheapest I could find :( What's that... I need to allow 1/3 of my income for food and stuff and that last 1/3 is my disposable? So the only house I can afford is about £50K OMG that's only 3.5 times my income? Oh hang on, what happens if I tell you I'm earning £45K a year...

...subprime lending anyone :)

Edited by Belfast Boy

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I see quite frequently on this site the comparison of average house prices to average salaries, with house prices usually over 5 X and up to 10X salaries. This is given as evidence that things have gone too far. The trouble with this info is that it completely ignores the equity that the average homeowner has, so it is completely misleading. In addition, FTBers do not buy the average house, so this is not useful to understand that situation either.

I was readng the "We Are Only Two Turns Of The Credit Screw" topic and saw the link to http://www.creditaction.org.uk/debtstats.htm which had some data that I think is more relevant: average mortgages for individualy who currently have a mortgage. The data is:

"Average outstanding mortgage for the 11.7m households who currently have mortgages is £96,648"

I am not an expert of their data but assuming that we can take it as a guide, then as the average house costs around £210K (this will include people who don't have mortgages, I guess) this would suggest that people have an average of approx 50% equity in their homes.

To me the figure of average mortgage to salary does not seem too alarming, especially if you consider that the average house must be purchased by more than one person (min =1, max=2?, so somewhere in between 1 and 2).

I am not for one minute suggesting that there are not people who have stretched themselves too far and who won't struggle after the IR rises, just that I think you have to allow for equity whenever we talk of average house prices and average salaries, we are deluding oursleves if we don't.

In a nutshell Starsign you are saying in effect "it's different this time" - just as all the muppets/speculators/ VIs have always done whenever there has been a bubble - the simple fact is that it isn't different this time and never has been - end of.

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In a nutshell Starsign you are saying in effect "it's different this time" - just as all the muppets/speculators/ VIs have always done whenever there has been a bubble - the simple fact is that it isn't different this time and never has been - end of.

erm, interesting conclusion but that isn't the point i was trying to make!

I am not saying that there won't be a crash, that people haven't over stretched themselves, that credit tightening won't have an impact, that FTBers are not struggling or anything else either.

My point is, comparing one average (house prices) to another average (salaries) and excluding equity can be really misleading. And the average home owner has equity, so why ignore this fact?

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I am not for one minute suggesting that there are not people who have stretched themselves too far and who won't struggle after the IR rises, just that I think you have to allow for equity whenever we talk of average house prices and average salaries, we are deluding oursleves if we don't.

The figures to look for are the ones for loans compared with salary for new purchases - this removes all your equity points - the ratio has always been used and everything you argue has always been included so we are still comparing like for like

as Bearfacts has said, you seem to want to change the rules to accommodate high prices

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Exactly. For the housing market to continue functioning as we have known it, we need the housing ladder to exist. For that we need wage inflation, in order to erode the debt and build equity, ready for the step up to the next rung.

This is no longer happening.

We now live in a low(er) inflation (and more importantly lower wage inflation) environment. The maths behind the traditional housing ladder no longer adds up.

The environment that we now live in (and will probably continue to live in for the foreseeable future) requires the majority of equity to be built by hard saving.

Low interest rates are not the nirvana that the vested interests make them out to be. They simply change the rules of the game. They do not (and the maths bears this out) make higher borrowing multiples possible in the long term.

People need to understand that 3 to 3.5x income multiples are just as relevant today as they were when interest rates were at 10%. The money saved each month when interest rates are low needs to be set aside (i.e. really saved!) to compensate for the loss of equity growth that is inevitable in a low inflation environment.

Moving up the ladder is going to be much harder in coming years. It will require much greater discipline than our parents were ever required to exercise.

Perhaps it would be more accurate to say that the traditional housing ladder was more like a housing escalator and that it has now finally been replaced by a true housing ladder.

Seconded! Can this post be pinned somwehere?

erm, interesting conclusion but that isn't the point i was trying to make!

I am not saying that there won't be a crash, that people haven't over stretched themselves, that credit tightening won't have an impact, that FTBers are not struggling or anything else either.

My point is, comparing one average (house prices) to another average (salaries) and excluding equity can be really misleading. And the average home owner has equity, so why ignore this fact?

What the *** is equity, though???? It's just a notional figure - it can vanish as quickly as it built up. If your house is 'worth' £200k this year and £120k next, what's happened to your 'equity'????

WAGE INFLATION is more valuable than equity when it comes to the housing ladder. At present and for the foreseeable future, wages are not inflating.

*bangs head against wall*

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The figures to look for are the ones for loans compared with salary for new purchases - this removes all your equity points - the ratio has always been used and everything you argue has always been included so we are still comparing like for like

as Bearfacts has said, you seem to want to change the rules to accommodate high prices

wish i knew which rules you were on about.

As my post starts out, we still get the headline comparing average house price to average salary. Looking at loans vs salary for new purchases - I could not agree more, and this is the essence of the point i was making. No rule changing so far?

Except the average mortgage seems to be much less than the average house price, according to the data i saw, about 50% less. If we are talking averages and the average home has 50% equity, then that does tell a different story on affordability on the average vs salaries. Not FTBers, not people who have pushed themselves to the limit, or anyone else, just the average.

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I am not for one minute suggesting that there are not people who have stretched themselves too far and who won't struggle after the IR rises, just that I think you have to allow for equity whenever we talk of average house prices and average salaries, we are deluding oursleves if we don't.

Yeah I agree. Also look at the amount of mortgage repayment as a % of income stats. These are always much lower than HPC regs can believe and always dismiss them as "must be rubbish".

I think however the argument goes that it only requires a small % of people to be forced into distressed sales for things to turn around. So although the number of people in trouble may be small, it's still enough to turn things around. Or is it? I think we have more waiting to do... time will tell :)!

Edited by Orbital

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