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Affordability Index


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  • 3 weeks later...
Roger, what is the base, ie the 0%, for the 'deviation' figure? Other than that 1981 and 2000 are as close to zero as any of these figures.

Affordability index is the ratio of house prices to disposable income expressed as a percentage. The deviation is the difference of the actual deviation from the average deviation (411%). It is a watered down version of the chi-squared test.

For 1960, divide the house price of £2,301 by the annual disposable income of £808 to give 2.85 or 285%. Subtract the average of 411% to give -126%.

I hope this is a bit clearer.

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  • 3 weeks later...

I haven't really posted much on here before and I know if its read the following is likely to get howls of laughter but I would put it to you anyway.

The statistics at the front end of this post make interesting reading... most notable for me was the quadrupling of tax proportionately taken... not including VAT and other discretionary taxes I assume.

Anyway, there is a premise that one can measure overvaluation in housing by a measure against earnings either through disposable incomes or through earnings per se. I have seen a number of these charts all going back to the 60's or 70's and all showing huge increases which of course are at their highest today.

I am not at all convinced that one can lay such a huge amount of force behind these statisics as is happening and I'll tell you why. Firstly the earning profile of families and indeed the way people live their lives is very different these days. For instance there are many more dual income homes I believe (but these type of statistics only ever count income once) , secondly there is much more state support of lower earnings than there was say in the 60's which is not I think picked up in either the earnings stats or the disposable income stats, thirdly the make up of social housing is very different now, fourthly the overall population vs overall household number are also different, fifthly people buy property differently with people buying together when not part of the same family, and finally I would also bring into doubt some of the house price statistics from previous years as very many more houses were not on any registry then that is true of today. The figures from earlier years were I believe skewed downward from their true mean level by exclusion of a large proportion of more expensive homes. In short life has moved on, society has changed, the make up of the stats has changed and I am not sure that therefore that as much weight in terms of prediction can be put behind these numbers.

I also feel that whilst a slowdown or correction in house prices was well overdue and probably should have emerged in 2005, that the situation would be very greatly different if the financing issues were not so prevalent. I think its impossible to argue that the slide in prices is not going to made more severe than it would have been if the financing issues had not come on so strongly in the last three months. If that is the case and its difficult I think to argue against then one comes to the conclusion that easing the financing issues will go a long way towards slowing any reduction in prices.

In essence what this means I think is that more weight should be put behind an analysis of affordability in the case of housing finance rather than say disposable income vs absolute pricing or incomes vs absolute pricing. Lets also rememebr that while the disposable income chart is fascinating it does not make a calculation for interest rates... if I recall average rates certainly from say 1970 to 1992 were running at around 9% or 10%.... extrapolate that out and any gap in perceived affordability I suspect would be greatly narrowed.

Pre the fiancing issues fully emerging this qtr, affordability was better than it is now even with some house price reductions having happened recently.

If the or indeed when the dust settles and mortgage availablility becomes better and cheaper than today vs the BOE base then I can see any reductions in the housing market ending quite rapidly.

I know it won't amuse many here to know that I do believe the biggest driver of house prices is not Absolute costvs disposable income or incomes vs cost, but actually a mixture of confidence and funding availability and affordability. Funding pressures can only ease (they may get worse first but in the end they will get better, theres no logic for them not to) and its the timing of when those finance pressures ease which will decide if the 30% or 40% falls most on here seem to want will come through.

Here is a scenario to think about:

If we get back to more normailsed financing by the end of the year... and by that I would say LIBOR at say 50 basis points above the BOE rate then I think I could see maybe a 10% slip this year, perhaps 3% next year, and then stagnation for a year ( bear in mind this is pretty severe as actual cash prices pre infaltion adjustment only slipped by 13% in 1989-1992) That scenaio would efectively equate to 13% absolute fall in terms of cash prices, inflation adjusted would be something like 20%. In the meantime the precious price/earnings ratio would have moved from about 7 (when judged on single income households) to about 6... or if you look at it against dual income households then from 3.5 to 3.

Bear in mind also the afforability measures I believe are the truest comparrisson and the effect that mortgage funding at say 5% vs an average of say 11% between 1972 and 1992 and that makes the picture much more rosy when coupled with a fall in absolute prices of say 13%.

If the powers that be find some way of easing the LIBOR pressure more quickly then we could see half that fall followed by a period of stagnation of say two to three years this would equate inflation adjusted to around 14% or about 7% in real terms. There is a huge pent up demand for houses ( I see it every day in my business) which I know many don't understand but there we are, it is there, although granted it cannot execute against its desire becasue of the current financing issues. if the financing issues were not there there are plenty of people rightly or wrongly who would be happy to buy a house now at the current price level.

So to summarise I do feel whilst useful historically earnings vs cost or disposable vs cost are not usefull measure in assessing where prices are now... there needs to be a wider measure of affordability which no one has come with yet for the historical years. if there were a measure for affordability I do belive it would show that whilst high things are not as out of kilter with history as people feel.

Equally the financing issues I believe will be the biggest driver to define where this market goes. if its resolved quickly then I think any falls will be limited, although we may still go through a period of stagnation thereafter.

And finally whatever people feel, I can tell you from experience that there is strong demand out there for houses at the current pricing level. You may feel these people are bonkers but there we are the demand is there I believe to support prices at roughly this level once the financing issues are resolved.... but I have to say I don't see the financing issues disappearing this side of christmas so falls this year would seem to be inevitable, caused largely by forced sales repossessions creating sellers and buyers not being able to take up the slack due to the non-availability of suitable finance.

So there we are , chortle away at your leisure, we may yet see what everyone seems to want here which is amssive falls, but I think theres plenty of evidence to suggest that may not happen.

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