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Scott

Average Wages And House Prices

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Hi fellow HPC'ers

Thought I'd start a new post on something I've already posted on "The Housing Market: It's 1991 All Over Again" post.

Basically Bobthe~ stated in that post that he'd like to see a graph of house prices compared to wages.

Well here it is from 1971 to 2007. It shows the growth of each from a starting point of 1971 and is based on the first quarter of each year thereafter.

Even I was shocked when I'd finished entering the figures and then got excel to plot the graph.

Yep, it really is different this time.

Does this graph mean that houses should have a drop of 50%?

Discuss. :D

Cheers

Scott

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Excellent Scott - shocking quite frankly. It's great when forum members can do these graphs for those of us that can't and is really appreciated. One graph I would like to see updated is this:

http://www.housepricecrash.co.uk/forum/ind...ost&id=2273

http://www.housepricecrash.co.uk/graphs-av...nings-ratio.php

Any chance of this one to see where we are now? ;)

Hi Catflap

If and when I get another couple of hours to spare I'll have a go, can't promise you when it will be though, if ever. Unless someone else is up for the challenge ;-)

It's interesting that my graph shows the two pretty much matching each other until around 2001 at which point they seperate constantly.

Cheers

Scott

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2001 - 9/11 - Greenscam opens the taps

Hmmmm!!! So do you think this proves house prices are ripe for a drop of 50% to bring them back in line?

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Hmmmm!!! So do you think this proves house prices are ripe for a drop of 50% to bring them back in line?

From your graph, it would appear that a corection was 'due' around 2001 but then events overtook (9/11, liquidity surge)

Events are overtaking again now - the torent of liquid credit that CB's began in 2001 is drying up of it's own devices, most important point this; CB's do not have the ability to start it again.

So 50% correction? has to be a posibilty IMO.

Didn't fall so far last time? but then they didn't have so far to fall.

thanks for the graph BTW!

Edited by Sonic the Hedge Fund

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Hmmmm!!! So do you think this proves house prices are ripe for a drop of 50% to bring them back in line?

This is an old chestnut if you go and read back the last two years threads on the 'Property, Markets and Trends' board at the motley fool.

Several economists have argued this back and forth there over a long period. It seems that theoretically there is no reason to believe that long term the ratio between house prices and incomes should be a constant (ie: shown by a straight trend line). While I can agree with this, I think that the graph speaks volumes.

Its clear that longer term, the two lines cannot continue to diverge, eventually affordability will constrain the growth of prices (unless of course its only speculative and BTL buyers fuelled by cheap money that constitute the market).

When the affordability constraint kicks in, the HPI line should at the very least more or less go parallel to the incomes line (ignoring BTL and speculation).

The question then becomes, will house prices drop so that the previous historic relationship of price to incomes holds once again, hence requiring a 50% drop... the jury is out on that one.

The 'bubble theorist' view is that growth in prices since around 2000 has been a bubble. Under that view, prices could possibly fall back or overshoot the 2000 level. This possibility was mentioned by Robert Shiller, author of Irrational Exhuberance and a US house price expert on the BBC radio 4 program about the credit crunch (theres a thread on it from Sunday)

Also, the report by David Miles tried to segment out the proportion of house price rises due to 'expectations of future price rises' as a means of measuring the bubble component of prices. According to his analysis, approximately 40% of the rise in prices since 1995 is due to this bubble component.

These views are strongly contested amongst economists. However, the figures are interesting because they provide a rational argument for drops of a very significant level if 'bear theory' turns out to be right. In fact, drops of 50-75% in price can be rationally justified... though the theories may prove incorrect.

Todays CML figures support the view that BTL is really what is holding everything up. Postings on this site suggest that many people including some bearishly inclined, feel that BTL if not at current price levels, is a better form of investment than almost any other. Therefore there is a long way to go yet before we see a BTL crash as many people believe that once prices fall it will be a good time to get into BTL at a safer price level because its 'the only game in town'

At the moment I'm unsure whether this argument would continue to be vaunted if a price slide began. We increasingly hear of 'gluts' of flats. If at some point we started to see price failure in areas with gluts this could change the rationale that property is a better investment than X,Y,Z. My feeling is that the herd will follow the herd down as it has done in the upper direction.

However I've been wrong about this for the last three years. The difference for me is now that a) we have a credit crunch B) the US market is tanking and probably cannot be rescued by IR cuts that we probably only have 12 months left at most in which to test out the 'bear theory'

Frankly if the property market rides out these factors over the next 18 months, I'll be spreading salsa on my panama hat and preparing to eat it for my lunch.

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This is an old chestnut if you go and read back the last two years threads on the 'Property, Markets and Trends' board at the motley fool.

Several economists have argued this back and forth there over a long period. It seems that theoretically there is no reason to believe that long term the ratio between house prices and incomes should be a constant (ie: shown by a straight trend line). While I can agree with this, I think that the graph speaks volumes.

Its clear that longer term, the two lines cannot continue to diverge, eventually affordability will constrain the growth of prices (unless of course its only speculative and BTL buyers fuelled by cheap money that constitute the market).

When the affordability constraint kicks in, the HPI line should at the very least more or less go parallel to the incomes line (ignoring BTL and speculation).

The question then becomes, will house prices drop so that the previous historic relationship of price to incomes holds once again, hence requiring a 50% drop... the jury is out on that one.

The 'bubble theorist' view is that growth in prices since around 2000 has been a bubble. Under that view, prices could possibly fall back or overshoot the 2000 level. This possibility was mentioned by Robert Shiller, author of Irrational Exhuberance and a US house price expert on the BBC radio 4 program about the credit crunch (theres a thread on it from Sunday)

Also, the report by David Miles tried to segment out the proportion of house price rises due to 'expectations of future price rises' as a means of measuring the bubble component of prices. According to his analysis, approximately 40% of the rise in prices since 1995 is due to this bubble component.

These views are strongly contested amongst economists. However, the figures are interesting because they provide a rational argument for drops of a very significant level if 'bear theory' turns out to be right. In fact, drops of 50-75% in price can be rationally justified... though the theories may prove incorrect.

Todays CML figures support the view that BTL is really what is holding everything up. Postings on this site suggest that many people including some bearishly inclined, feel that BTL if not at current price levels, is a better form of investment than almost any other. Therefore there is a long way to go yet before we see a BTL crash as many people believe that once prices fall it will be a good time to get into BTL at a safer price level because its 'the only game in town'

At the moment I'm unsure whether this argument would continue to be vaunted if a price slide began. We increasingly hear of 'gluts' of flats. If at some point we started to see price failure in areas with gluts this could change the rationale that property is a better investment than X,Y,Z. My feeling is that the herd will follow the herd down as it has done in the upper direction.

However I've been wrong about this for the last three years. The difference for me is now that a) we have a credit crunch B) the US market is tanking and probably cannot be rescued by IR cuts that we probably only have 12 months left at most in which to test out the 'bear theory'

Frankly if the property market rides out these factors over the next 18 months, I'll be spreading salsa on my panama hat and preparing to eat it for my lunch.

It's a classic bubble chart. The definition of a bubble market is one that has broken any relationship to economic fundamentals. I agree that BTL is the main driver. However, higher IR and the prospect of capital growth no better than a savings account may pop this one.

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I won't hold my breath then - or maybe I will ;)

Where did you get the info on average wages from 1971 to 2007? (1st quarter of each year). The moderators should pin these graphs somewhere if people find them useful or maybe there should be a graphs thread that can be bumped and added to from time to time, so we can find them easily. I might do this as I've done this with podcasts.

Wages info from http://measuringworth.com/ukcompare/

I had to put the start and end year for each year with only the average earnings box ticked.

Hence why it took me a couple of hours!!!!

BTW I'll add the graph to your post later today.

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Guest grumpy-old-man
Sorry, must have clicked the wrong button.

Should be there this time.

that's a great graph Scott. :)

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From your graph, it would appear that a corection was 'due' around 2001 but then events overtook (9/11, liquidity surge)

Events are overtaking again now - the torent of liquid credit that CB's began in 2001 is drying up of it's own devices, most important point this; CB's do not have the ability to start it again.

So 50% correction? has to be a posibilty IMO.

Didn't fall so far last time? but then they didn't have so far to fall.

thanks for the graph BTW!

This was my belief in early 2001 when I thought property was overpriced. My colleague bought a flat for 60K believing my logic was flawed.

By 2003 I realised prices were not falling so I bought a flat around the corner from my friend for 100K which is now valued at 140K.

I think we are in unchartered territory so chartist mentality does not work.

Five interest rate rises have made no difference as the average house price has now risen to 218K as investors have more financial firepower than first time buyers and looks set to continue unless BTL slows down which does not look like anytime soon according to the latest reports.

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Guest grumpy-old-man
This was my belief in early 2001 when I thought property was overpriced. My colleague bought a flat for 60K believing my logic was flawed.

By 2003 I realised prices were not falling so I bought a flat around the corner from my friend for 100K which is now valued at 140K.

I think we are in unchartered territory so chartist mentality does not work.

Five interest rate rises have made no difference as the average house price has now risen to 218K as investors have more financial firepower than first time buyers and looks set to continue unless BTL slows down which does not look like anytime soon according to the latest reports.

no misfit, they have a lot more debt, that's all. ;)

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that's a great graph Scott. :)

OK, I did the work, but the credit should really go to Bobthe~ for asking for the graph on the other post.

I personally love accurate graphs as they show more than anything else how far from historic economic models we are. Economic models that have been going on for all of time (well, since we were able to make or grow things that others wanted)! But it's OK, it's different this time. Yeah right!!!!!

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I'm not so sure. Remind me what the X axis is measuring because it certainly isn't average house prices. Even I'd buy one for £4,000.

It's not measuring the house price at any given year. What it is showing is for every £100 that a house was worth in 1971 and then the growth thereafter. It's the best way to show the growth for wages and houses!

House prices in 1971 were £4,700. And now just over £181,000 (according to Nationwide, not me).

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It's a classic bubble chart. The definition of a bubble market is one that has broken any relationship to economic fundamentals. I agree that BTL is the main driver. However, higher IR and the prospect of capital growth no better than a savings account may pop this one.

BTL at the bottom end, however the original driver as always and still is at the top. Free money via city bonuses, incomming billion/millionairs from every country on earth (as encouraged by every british government for 30+ years) every pop, film, sports star in the world has a property in London which in turn removed the highest tier of property from wage earners (even high wages), this of course pushes the next layer of very highly paid workers down to the next level and so on. Every bubble in property has started and been sustained this way. These very same people are the ones who have aided and abeted the pricing out of normal human beings in many areas of the country via their second/third homes they are all entitled to. It is this group of people who have caused the speculative frenzy far more than BTL who have just jumped on board the price rise bandwagon, cause lets face it, current rents cover only half the cost of finance on the average BTL property so why otherwise would they buy. I strongly suspect that the bubble will be pricked from both ends, the poorest holders at the bottom not being able to refinance followed by the reduction in free money at the top.

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BTL at the bottom end, however the original driver as always and still is at the top. Free money via city bonuses, incomming billion/millionairs from every country on earth (as encouraged by every british government for 30+ years) every pop, film, sports star in the world has a property in London which in turn removed the highest tier of property from wage earners (even high wages), this of course pushes the next layer of very highly paid workers down to the next level and so on. Every bubble in property has started and been sustained this way. These very same people are the ones who have aided and abeted the pricing out of normal human beings in many areas of the country via their second/third homes they are all entitled to. It is this group of people who have caused the speculative frenzy far more than BTL who have just jumped on board the price rise bandwagon, cause lets face it, current rents cover only half the cost of finance on the average BTL property so why otherwise would they buy. I strongly suspect that the bubble will be pricked from both ends, the poorest holders at the bottom not being able to refinance followed by the reduction in free money at the top.

That's a good point. With all this talk of responsible consumption and the impact you as the consumer has on the environment, does that not apply to property?

It's a resource, right?

This is just more evidence of the power elite patronizing us.

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whilst this shows very clearly how house prices have increased more than salaries, it does not include impact of IR or equity and that will distort the amount of any crash.

I know people will knock me for talking about equity saying it is illusion, but the fact is, if anyone has sold their house after owning it for a few years then they will have a healthy deposit to put on the next one. This is not illusion, this is fact. This will reduce the amount of mortgage they need, and consequently distort the house prices to earnings figure.

I would really like to see mortgage costs to salaries, as this will give a better indication of where we are and where things could go.

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Sorry, must have clicked the wrong button.

Should be there this time.

Scott,

That's great thanks very much.

It is a shocking sight as others have said.

Most shocking because 89 looks like nothing, although that could be the effect of inflation and/or the scaling of the graph to fit today's values in.

The period from 1971 to the mid 90s had a lot higher IRs than after that point, but even so, that doesn't look to me like a supply problem due to a shortage of properties.

So, affordability makes it look worse than it is and how much does the so called shortage of properties contribute? Not much since the demand side was fuelled by cheap credit that has gone poof, and IRs seem to be going up without the BoE.

So we should expect the figures to go back to trend some time soon, since there is obviously an influx of people and wealth, not all of which will disappear.

So could we pick a figure above trend to give an idea of how much it will fall to, bearing in mind an over-reaction is the norm in a crash?

I am sure there are lots of other factors that mean it won't go quite back to trend. An average salary where the gap between rich and poor has grown is less of a useful figure in the stats, for instance, but then at the top end salary is meaningless because the buyer probably won't get a mortgage.

What about median salary? I am no stats guy, but IIRC that would be the salary that divides the population equally.

As for what you said starsign, I think we need evidence that this has changed over the last 40 years. People always had equity in their houses.

As for mortgage costs to salaries, that is, as you say, another part of the picture and would probably give an idea of the "speculative element" in HPI.

Great stuff I think, sorry about the jumbled up thinking, this is a bit of a brain dump.

Edited by bobthe~

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I may be entirely wrong, but the late 80s boom was very regional, so whilst not everywhere shot up in value, not everywhere collapsed afterwards, hence the small national percentage correction. "It's different this time" in terms of national figures because the boom is truely national. 50% nationally strikes me as a perfectly reasonable correction.

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At the risk of sounding like I think things are different this time, they might just be a bit different and hence we might not expect to revert exactly to the historical mean...

The UK housing market boom has been part of a global increase in asset prices. This has been caused by: 1) the savings glut in Asian economies driving down global interest rates and 2) globalisation which has created a big increase in the pool of labour but a much more limited pool of capital.

So global asset prices have gone up much faster than wages, as would be expected.

The difference from previous booms, is that whereas previous HP booms had to be financed by domestic credit markets, that is effectively no longer the case. A borrower here is effectively being heavily subsidised by excessive savings in Japan and China, whatever Merv does to the base rate. So it's possible that prices can continue to outstrip wages in one country (by being paid for by savers in another country).

Basically, previous relationships between prices and wages made sense when borrowers were effectively constrained by the cost of credit in their own country. And that is no longer the case.

Does this make any sense? My head hurts. :blink:

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Scott - Bob, this is brilliant, thanks, as if this isn't enough :P what I really need is to know what I should be paying for a house.

Can you explain how to work out what houses should be worth now?

i;e, 4 bed houses where I want to live are about 400 - 430k, they were originally sold 15 years ago for 120 - 130k, how do I work out what they should be valued at now pretty pleeze and thank you.

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It's not measuring the house price at any given year. What it is showing is for every £100 that a house was worth in 1971 and then the growth thereafter. It's the best way to show the growth for wages and houses!

House prices in 1971 were £4,700. And now just over £181,000 (according to Nationwide, not me).

Sounds about right, to me. We bought our first house in 1971 (3-bed terrace on south coast near Brighton) for £5000 or thereabouts. Our joint income at the time was £2500, i.e. £1000 for me, £1500 for husband. Which meant that the mortgage remained affordable (under 4 X husband's salary) on his income alone.

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