Average House Price To Average Salaries

[tara747]

Yes, please provide empirical evidence of a link between housing rents and salaries.

Going purely off memory, rents for housing properties in the last property crash (early '90s) were falling whilst salaries were still increasing.

OK, fair point.

I will expand.

Rents can fall due to oversupply - but they can only rise in accordance with people's willingness and ability to pay. If every LL in the UK tried to raise rents by 40% tomorrow, a LOT of people would move back with the folks, rent a room from a friend etc. Some would be force to stay in their rented places, but demand would then reduce way down so that some LLs would have to break ranks and reduce rents top stay afloat.

So yes, rents can fall if demand from tenants falls - but there is a ceiling beyond which they cannot go. For example, rents could never rise 5x faster than wages for ten years.

Edited August 23, 2007 by tara747

[Objective Developer]

OK, fair point.

I will expand.

Rents can fall due to oversupply - but they can only rise in accordance with people's willingness and ability to pay. If every LL in the UK tried to raise rents by 40% tomorrow, a LOT of people would move back with the folks, rent a room from a friend etc. Some would be force to stay in their rented places, but demand would then reduce way down so that some LLs would have to break ranks and reduce rents top stay afloat.

So yes, rents can fall if demand from tenants falls - but there is a ceiling beyond which they cannot go. For example, rents could never rise 5x faster than wages for ten years.

I get that. Sorry, but the way you put it was as if you had a graph in front of you.

Unfortunately, we can't just rely on logic to explain things when it comes to housing....

[tara747]

I get that. Sorry, but the way you put it was as if you had a graph in front of you.

Unfortunately, we can't just rely on logic to explain things when it comes to housing....

I know, sorry, I would google to get a graph but I am snowed under at work today! Believe it or not

If anyone can get graphs/figures please post them!

Rents are affected by supply and demand, but to a lesser extent than property prices as there is no 'speculative' element in renting. i.e. there is no incentive to borrow money in order to pay the rent.

Therefore rents are ultimately constrained by incomes, whereas house prices are constrained by borrowing limits.

Nicely put.

[Goat]

Yes, please provide empirical evidence of a link between housing rents and salaries.

Going purely off memory, rents for housing properties in the last property crash (early '90s) were falling whilst salaries were still increasing.

In the short term it is perfectly possible for that to happen; the relationship between rent and salaries is of course not strictly linear (it is a function of tax, the cost of other goods and people's relative preference for property v all other goods and services).

My point is that rents are limited by peoples ability to pay them; in the longer term they can be no more than a certain percentage of average income (perhaps 30%).

[tara747]

Unfortunately, we can't just rely on logic to explain things when it comes to housing....

I would change that to 'we can't just rely on logic to explain things when it comes to BUYING houses'... doing the sums for renting generally does not stray far from logic.

[Guest d23]

I would change that to 'we can't just rely on logic to explain things when it comes to BUYING houses'... doing the sums for renting generally does not stray far from logic.

rents rose a lot during the the last crash; I'm not sure why that will be different this time

[BTLlivingthedream]

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.

dont want to be too pedantic but your posts never have a space between the full-stop and the next word. It's just one big block of text...

[drrayjo]

Jan Hatzius, Chief Economist of Goldman Sachs:

"Our working assumption has been that US home prices are about 15% overvalued. This relies on a simple "affordability" measure which essentially adjusts the home price/income ratio by the level of (nominal) mortgage rates. Depending on one's assumption about income growth, the likelihood of overshooting on the downside, and the length of the adjustment process, this suggests cumulative nominal home price declines of 5-15% in the next few years.

However, affordability is becoming an increasingly problematic concept because it ignores changes in credit availability and changes in nonconforming mortgage rates. Hence, it may be better to look at simpler price/income or price/rent ratios to get a sense of house price valuation. These paint a more dire picture.

Even if we assume that the long-term trend for price/income and price/rent is higher now than the average of the 1975-2000 period (because interest rates are likely to stay lower), cumulative nominal price declines of 15%-30% are possible."

An important financial Big Balls has spoken. He says it's simple. Bearishly so. And the principle is universal, wherever there's overvaluation in house prices, US, UK, wherever. There's plenty of that round my neck of the woods. I can feel it.

Source:

A Froth-Finding Mission: Detecting US housing bubbles

HSBC Macro US Economics, January 2006

http://neweconomist.blogs.com/new_economis...dingmission.pdf

[visaria]

Too many statements of such-and-such can't happen...very bad form.

Property markets are financial markets. They can do whatever they want, including diverging away from any supposed relationships between income and rents.

Edit: I'm referring to the rent/salary discussion. As for Goldman Sachs and indeed any investment bank, their economists are basically entertainers.

Edited August 23, 2007 by visaria

[tara747]

rents rose a lot during the the last crash; I'm not sure why that will be different this time

Seriously, I think we do need evidence for this claim!

Anyway, Ireland's property market is crashing AND rents are static/falling (see www.thepropertypin.com/forum for much evidence of this) - so maybe the UK is in for the same!

You know, BTL barely existed in the last boom compared to now - I think that with all the BTL/buy to sit that's gone on, rents will go only one way and that's down. There is a HUGE oversupple of rental property in most areas.

[tara747]

Too many statements of such-and-such can't happen...very bad form.

Property markets are financial markets. They can do whatever they want, including diverging away from any supposed relationships between income and rents.

Fair point, but I think you'll find that rents can't exceed salaries.

In fact, they can only go so high before people start to take measures to get around the increase, as I detailed in a previous post. That will take care of a huge chunk of demand. And we know what happens then. Rents are quite price inelastic IMO.

Edited August 23, 2007 by tara747

[Guest d23]

Seriously, I think we do need evidence for this claim!

Anyway, Ireland's property market is crashing AND rents are static/falling (see www.thepropertypin.com/forum for much evidence of this) - so maybe the UK is in for the same!

You know, BTL barely existed in the last boom compared to now - I think that with all the BTL/buy to sit that's gone on, rents will go only one way and that's down. There is a HUGE oversupple of rental property in most areas.

check here: http://www.communities.gov.uk/pub/401/Hous...b_id1156401.pdf

page 126 of the report (acrobat 136)

it shows mean private rents at £59 a week in 1990 (start of the crash) and in 95 (start of the upswing) they were £84.

Thats a 42% increase during a period of around 28% inflation.

The populations increased by 3 million people since then without a proportionate amount of new properties being built, so don't think the supply / demand situation has changed that much.

I don't know enough (or care?) about the Irish situation to comment tbh

[visaria]

Interesting find, d23.

The next crash, whenever that may be, may see rents falling or rising, who knows? I don't think there's any golden rules...

Edit: the link is a 404

Edited August 23, 2007 by visaria

[Goat]

Anybody want to make the obvious call about Visaria?

[the end is a bit nigher]

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.

I thought the average mortgage taken out was up over 15% compared to last year (BoE). Heaven knows what it is compared to 5 years ago, in which time salaries have increased approx. 30% compounded.

[danlightbulb]

Surely what SHOULD happen as we enter a period of low inflation is that people should be REDUCING their mortgage term, overpaying on their mortgages, and effectively saving more (for retirement especially).

What has ACTUALLY happened is the opposite. The runaway credit train has positively grabbed people by the throat and force-fed them like foie gras geese with debt.

Not sure I agree with this. I would love a large house in the country and if a line of credit was available to me to go and buy this dream then why wouldn't I take it? If everyone else does the same then demand drives up prices the same as any other market or product.

You are assuming that

(1) everyone is happy where they live and don't want to upgrade

(2) everyone is financially prudent

The upshot being that instead of people reducing their debt and increasing their savings, they have increased their debt (due to the mirage of greater "affordability"), reduced their savings and driven house prices skywards.

This was inevitable due to human nature. If house prices were more affordable then there would be more demand which would drive up prices. Back to square one. If house prices stopped low enough for everyone to afford then everyone would want the nice ones and would be fighting at the gates.

Nobody really benefits from higher house prices that I can see except, guess who? Gordon and the banks. Fiscal drag and higher stamp duty, IHT etc cream off some of the "equity" and the banks magic endless loans to generate increasing cash flow via interest repayments.

You are correct that some individuals will benefit, some won't but central government and banks will always benefit.

Somewhere along the line the concept of a house as an investment opportunity needs to be replaced with the concept of a house as somewhere to live, and that lower house prices are better for everyone in the long run.

Lower house prices will only occur with a combination of severe credit tightening and mass unemployment bought about by economic recession. Supply and demand says that house prices cannot reduce in isolation, otherwise everyone would afford the nice ones!

It is bizarre that people want to pay the lowest price for just about everything else in life they can get away with (notwithstanding ego-driven fashion and cars etc) but with houses the more expensive it is the better it must be. It is a scam driven by government, bankers and associated VIs.

You think people want to pay £200k for a sh*thole in a sh*t area? As with all areas of life we compromise from our dreams. My dream is a nice detached house in the country with an acre of land to bring up my kid in. A better quality of life. I can't afford that so I make compromises. So I look for a lower spec house. Of course, everyone else is doing the same and so on down the ladder so prices rise across the board. Eventually there are compromises people are not willing to take and you reach the level of £75k firebombed dumps in gangster land. The only way to significantly reduce prices is to reduce demand. Demand will be reduced by severe credit tightening AND mass unemployment (which forces homeowners to sell). Both are needed.

Given the choice I wouldn't pay £200k for a house of the standard that money gets you these days, but the non financial benefits of house ownership are imprinted in our pysche and that is here to stay. Peoples property dreams, which in the old days were just dreams, are now made reachable through cheap credit. You expect people to just sit there and pass this by?

[Guest d23]

Interesting find, d23.

The next crash, whenever that may be, may see rents falling or rising, who knows? I don't think there's any golden rules...

Edit: the link is a 404

apologies, correct link:

http://www.communities.gov.uk/pub/401/Hous...b_id1156401.pdf

[Ash4781]

What percentage of FTB's take out interest only mortgages, and what percentage have repayment vehicles ?

Edited August 23, 2007 by Ash4781

[ParticleMan]

it shows mean private rents at £59 a week in 1990 (start of the crash) and in 95 (start of the upswing) they were £84.

Thats a 42% increase during a period of around 28% inflation.

You've wheeled this one out a fair few times so it's time to ask - against what kind of a trend in employment participation rates and salaries?

[visaria]

Anybody want to make the obvious call about Visaria?

I beg your pardon?

[bobthe~]

I remember in the 90s, possibly coming out of the last property crash, being told by someone from NWide or somewhere that the long term trend of property was in line with earnings growth and that we were undershooting that at the time. Funny that no-one is using that any more.

There is obviously going to be a correlation over the long term with that and I would like to see that charted somewhere, if only to demonstrate how far off that place we are at the moment.

While I sympathise with the OP about the pitfalls of using avge earnings and avge prices, if it is data that is collected consistently over a number of years, then it tells you how much further away from the average salary, the average house price is, so while the current figure may not reflect what is going on in the real world, it kind of does, because so many people are priced out at the moment.

This was inevitable due to human nature. If house prices were more affordable then there would be more demand which would drive up prices. Back to square one. If house prices stopped low enough for everyone to afford then everyone would want the nice ones and would be fighting at the gates.

I heard this a lot back in the 80s before the last crash. Desire is not the same as demand. And what I hear you telling me is that the prices of nice houses in nice areas won't go down very much because everyone wants to live in a nice house in a nice area. To an extent it is true, but when prices go down in the not so nice areas, or on main roads in nice areas, then even if banks let you borrow so much money (the other part of demand is availability), the premium you pay for living in the expensive area gets very large and people won't pay it.

People say (as they say in the HPI years as well). Why live in location A, when B is almost as nice and the houses are 300k cheaper. So while A is nicer than B, the premium has to be worth paying. We are still living in A, but are renting, so we get the benefit of the location without the cost of losing 100 - 250k.

And the thing about deflation is that once it starts it is very difficult to stop because why buy something today when it would be cheaper tomorrow? The thing that stops houses from collapsing to zero is that they have an intrinsic value, everyone needs somewhere to live and at some point increasing rental yields will make BTL a good prospect for people who have the cash.

[Guest d23]

You've wheeled this one out a fair few times so it's time to ask - against what kind of a trend in employment participation rates and salaries?

not sure about salaries but unemployment figures are below

1990 1664000.5

1991 2291000.9

1992 2778000.6

1993 2919000.2

1994 2636000.5

1995 2325000.6

[Bearfacts]

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?

But surely the average home owner has always had equity in their home ?! They may in theory have more equity now but I dont see how that negates the value of the av price to av income measure.