Hang On - Do The Numbers Add Up?

[ezekiel]

Hi

I was checking the numbers this morning (after talking to a colleague last night) and suddenly I'm not so sure of such a big drop in prices. I was working on prices dropping to 2004 levels at least but now I'm wondering if I've not missed anything.

So, please check my working:

Average salary (according to National Statistics) - £24k apx

Three and a half times joint average incomes should be £168k

Assuming a 10% deposit then an average house for an average couple should cost £168*10/9 = £186k.

According to land registry the average house is £183k or something in that area. So that means house prices are just about right now. So that's can't be right.

So starting again:

3 times joint = £144k

+10% deposit = £160k

So house prices need to drop by 12.5% to get to what Mr & Mrs Average can afford.

I've assumed a classic conservative model here (three and a half times joint with a 10% deposit) as being the mean that we'll return to (sure there will be some overshoot but its roughly the long term average isn't it?).

But.......

I think houses have much further to go than this. So what have I missed?

I realise you could use the median salary (which I think is about £18k), this gets you to a much larger margin (34% drop - now that's more like what I think will happen). Can anyone who really understand statistics comment on whether the median is the more valid number to use? Or shed any light on this way of looking at the numbers? I mean, we know that the lenders have been providing silly mortgage income multiples, but someone needing 6x income would need to be on the minimum wage and looking to buy a mansion wouldn't they (OK - I exaggerate a little)?

Or maybe the Land Registry average price is not accurate - anyone know a reason why?

Any nutters fellow posters who want to talk about govt. manipulation of statistics or other conspiracy theories then please don't, I've had a long day and would like to be able to repeat reasonable arguments to sensible people.

Ta

[Y-QUERK]

3.5 times joint?

[Sinking Feeling]

The historical model for mortgages is 3.5x single earnings, not joint. Rework and open a bottle of wine!

[0q0]

I thought it was 3 to 3 1/2 x SINGLE salary, or 2 to 2 1/2 times joint.

[Sledgehead]

when you've figured it out, you might wanna look at why people are refusing to buy banking shares, given their massive div yields.

[renterbob]

Hi

So starting again:

3 times joint = £144k

+10% deposit = £160k

So house prices need to drop by 12.5% to get to what Mr & Mrs Average can afford.

I've assumed a classic conservative model here (three and a half times joint with a 10% deposit) as being the mean that we'll return to (sure there will be some overshoot but its roughly the long term average isn't it?).

Any nutters fellow posters who want to talk about govt. manipulation of statistics or other conspiracy theories then please don't, I've had a long day and would like to be able to repeat reasonable arguments to sensible people.

Ta

Excellent!

I've thought about your excellent logic here and you are correct, fine sir.

I particulalrly enoyed your interpretation of the classic consevative model.

[renterbob]

I thought it was 3 to 3 1/2 x SINGLE salary, or 2 to 2 1/2 times joint.

no no no no no.

The OP is correct and we should support him.

[Sibley]

I thought it was 3 1/2 times the highest earner plus 1x lowest.

If you was on £25k and your partner on £15k You'd be able to get a £90k mortgage. With 10% deposit that's £100k property.

Even with a 30% drop overall in the housing market that's still a lot of FTB's who will never get on the ladder unless the banks ease lending criteria.

[Y-QUERK]

I'll join him if he's smokin' a joint.

[ralphmalph]

I have been thinking about this 3.5x one persons salary and if the banks do do this I bet Harriet Harperson would accuse them of being sexist and insist that the banks take both salaries into the eqaustion because otherwise they are discriminating against one sex or the other. Nu Liebour will do anything to try to get the house market rising.

[ezekiel]

Is 2.5 times joint normal???? I thought that was reserved for chavs.

I'm sure the wife and I got better than that about 8 years ago (before things went really nuts). Maybe I'm wrong. Maybe I'm a chav - damn.

OK then, 2.5 times joint does make a big difference, on either average salary.

[CFarmer]

...

I realise you could use the median salary (which I think is about £18k), this gets you to a much larger margin (34% drop - now that's more like what I think will happen). Can anyone who really understand statistics comment on whether the median is the more valid number to use?

FYI

median wage was around 24k in 2007 (http://www.statistics.gov.uk/CCI/nugget.asp?ID=285&Pos=2&ColRank=1&Rank=294)

and median for females was c. 20k in 2007 (I've assumed weekly wage x 52 gives you the annual wage!)

I think the mean earnings for a full time male employee is in the region of 33k currently

[ezekiel]

The historical model for mortgages is 3.5x single earnings, not joint. Rework and open a bottle of wine!

What - another one?

[frozen_out]

This is what got us in the mess in the first place.

What happens when said couple have a child and childcare blows a £1000pm hole in their budget?

What happens if one partner loses their job?

Lending has been based on this criteria and guarantees repos and misery for tens of thousands.

[bob monkhouse]

no no no no no.

The OP is correct and we should support him.

[steve99]

Is 2.5 times joint normal???? I thought that was reserved for chavs.

I'm sure the wife and I got better than that about 8 years ago (before things went really nuts). Maybe I'm wrong. Maybe I'm a chav - damn.

OK then, 2.5 times joint does make a big difference, on either average salary.

8 years ago wasnt recession time nor banking panic. If the banks smell major price drops (ie on ther repossesion sales) or unemployment they will cut back to 2.5 + 1 or thereabouts.

[Concrete Jungle]

I thought it was 3 1/2 times the highest earner plus 1x lowest.

If you was on £25k and your partner on £15k You'd be able to get a £90k mortgage. With 10% deposit that's £100k property.

Even with a 30% drop overall in the housing market that's still a lot of FTB's who will never get on the ladder unless the banks ease lending criteria. homes return to a sensible multiple of average income

[0q0]

I know many of you won't like this, but I think loans and mortgages should only be given to those who...

1. have been in the same employment beyond the probationary period (usually 6 months or a year)

2. can provide payslips which are directly verifiable by computer or phone call as genuine and not lasered

3. have passed a home economics test at an adult education centre run properly not by tutors who give you the answers on a nod and wink, that proves people have a full grasp of outgoings/income, APRs, compound interest, inflation rates, costs of property maintenance, utilities and other expenses

4. provide copies of all issued credit cards' statements going back 2 years proving a steady or decreasing balance rather than one that is increasing in debt (decreasing by minimum 5% per month, not 5p)

A bit nanny state-ish I hear you cry. Yes it is, but better that than out on the street repo'ed, or debts and bubbles, and ultimately you and me the taxpayers paying for this circus.

[BrickandMortar]

The key issue in relation to house price has got to be monthly affordabilty. With so many forms of unsecured debt around (credit card, hire purchase, loans), reverting to the saying 3.5x main salary + 1/2 of partner's is almost irrelevant these days.

Remember the reason why lenders abandoned this idea in the early 00s is just because they realized it was too rigid form of acertaining how much should be lent, considering having a credit card debt (or other unsecured form of debt) was more frequent than back in the early 90s

If I am debt free but earning 18k, I am better off than someone on 25k with 12k loan to repay - So finding a credible basis to formulate what house prices should be is not a so clear cut exercise, but they have to go down, that for sure.

[OnlyMe]

The key issue in relation to house price has got to be monthly affordabilty. With so many forms of unsecured debt around (credit card, hire purchase, loans), reverting to the saying 3.5x main salary + 1/2 of partner's is almost irrelevant these days.

Remember the reason why lenders abandoned this idea in the early 00s is just because they realized it was too rigid form of acertaining how much should be lent, considering having a credit card debt (or other unsecured form of debt) was more frequent than back in the early 90s

If I am debt free but earning 18k, I am better off than someone on 25k with 12k loan to repay - So finding a credible basis to formulate what house prices should be is not a so clear cut exercise, but they have to go down, that for sure.

Too right it isn't, historical comparisons have got to be made in view of these as well:

No tax breaks for ownership - no Miras, insurance rebates

Wages falling behind inflation - net earnings falling relatively or outright

Reducing or no company pension schemes.

That 3.5x gross earnings capacity more like 2.5 or 3 equivalent and still dropping.

Next shoe to drop will be the average wage - that has been spruced up by big bonuses from the city.

The ratios, and the outright buying power - restricted borrowing - people are going to look back on the last few years and shake their head and woner how anybody in their right mind could ever have justified the pricing.

[the primitive]

Is 2.5 times joint normal???? I thought that was reserved for chavs.

I'm sure the wife and I got better than that about 8 years ago (before things went really nuts). Maybe I'm wrong. Maybe I'm a chav - damn.

OK then, 2.5 times joint does make a big difference, on either average salary.

Nah it's 2.5x joint mate.

And just because the average salary is £x, that absolutely does not mean that the average 2 salary household earns double that! Think about it...

Your OP in fact assumes houses would be 7x the average salary. Not a chance

Where are the posters with the killer charts in their sigs when you need them?

[19 year mortgage 8itch]

Too right it isn't, historical comparisons have got to be made in view of these as well:

No tax breaks for ownership - no Miras, insurance rebates

Wages falling behind inflation - net earnings falling relatively or outright

Reducing or no company pension schemes.

You forgot student loans

[redwing]

I know many of you won't like this, but I think loans and mortgages should only be given to those who...

3. have passed a home economics test at an adult education centre run properly not by tutors who give you the answers on a nod and wink, that proves people have a full grasp of outgoings/income, APRs, compound interest, inflation rates, costs of property maintenance, utilities and other expenses

I know it was a long time ago, but when I was at school home economics was girls baking cakes while us boys did woodwork.

But I like your idea, nonetheless.

[the end is a bit nigher]

6 times joint plus 3 times any children up to the age of 35 still living at home seems reasonable?

[eric pebble]

By the way -- "Average" salaries may be c "£24k" -- but MEDIAN salaries are nearer - what - £15-18k? ............. The "average" is TOTALLY skewed by Liar Loan Salesmen's "salaries" -- [legalized daylight robbery....][banksters].......

http://news.bbc.co.uk/1/hi/magazine/7581120.stm

And to MOST people -- You have to somehow "find" 10 x salary to stick a basic roof over your head...................... [or even 12 x]

SO -- How have people been doing it? .......................

You guessed it!!!!!..............

Why? ..............................

LIAR LOANS OF COURSE!!!!!!!!!!!!!!!!

Edited September 24, 2008 by eric pebble