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Hang On - Do The Numbers Add Up?


ezekiel
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Wage distribution is not a normal bell curve, most of the distribution is over in the first quartile.

I think I'm actually in the top 10% of earners in this country using the proper wage distribution charts, but I still can't afford an average house on 3x salary.

quite, but then the same goes for property. nationally, house prices start at around £60k, curve upwards with loads and loads around £200k, then tail off. however the curve doesn't stop at £340k, it carries on going till £3m, a massive 10 times higher than it would be with normal curving.

if you're taking median for earnings, take median for house prices as well.

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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.

There is such thing as household earnings – the ONS supply figures.

Average household earnings are only £32k.

Even at 3.5x (risky for use with joint income calculations, should be 3x max) average household earnings plus 10% deposit would mean the average house price would need to drop to £125k never mind the undershoot factor. That's over 30% but it will be more than that.

Next time you start a thread do some better research. Must try harder 1/10.

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Did not someone post a graph only the other week that showed house prices as 46% overvalued relative to long term trend versus average income?

Also as 60% overvalued relative to (flat) trend of houseprice versus GDP?

Is there some way of finding posts prior to your last 5 posts on this site? -If so I could probably find these graphs.

As to income distribution, although there has been historically a link between the mean income and house price, I've got the feeling this will be breaking down. I think it will be screwed up by the shape of the distribution changing (arithmetic mean schewed upward by a few high earners) and also the benefits system.

In 2006/7, MEAN income was around 24k, the MEDIAN was about 18k, but the peak in the distribution occurs between just £12 to £16k.

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Come to think of it, it has been easier to get a mortgage than rent for a long time. :angry:

This man speaks the truth. Bloody hassle arranging a rent these days.

I've never had someone try and let me a flat when I've popped into the bank. Just a few months ago HSBC tried to tempt my g/f in saying they can give us 4x salary no problems, she just went in to change her address!

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Did not someone post a graph only the other week that showed house prices as 46% overvalued relative to long term trend versus average income?

In 2006/7, MEAN income was around 24k, the MEDIAN was about 18k, but the peak in the distribution occurs between just £12 to £16k.

Other way around - Median is what the ONS + CML supplies - ie 50% of people earn below 24k and 50% of ftb purchases are less than 116k in 2007.

The stats I showed in http://www.housepricecrash.co.uk/forum/ind...ost&id=8387 demonstrate that in 2007 the interest as a % of net income (after tax) is 42% for a national median salary but only 29% for a cml ftb. This is up from 26% and 24% in 1997.

ie: in 1997 an average ftb purchase interest was 26% of after taxes takehome pay - in 2007 it was 42%.

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And if 'more people are choosing to remain single', then that means prices will have to drop to 3.5x a single person's income. This argument is just as silly as it's always been... people simultaneously claim that prices are high because couples have two incomes and that prices are high because people are living alone; it's absurd.

Where in the UK is this mythical shortage of housing? Everywhere I lived in the last few years had a glut of unsold new build flats and houses at hugely inflated prices.

Which is another good reason why no-one should be paying 6x their income for a crappy house.

Calm down!

From a personal point of view I have no interest or concern just how far a property price crash will go. My wife and I made a conscious decision to move to a slightly cheaper (albeit substantially larger etc..) property exactly four years when a work moved meant relocation from Sussex to the Midlands. I expected a sharp correction and it suits me if property prices fall by 45% or more (more affordable to move to something larger) - Unfortunately they won't! Many so called analysts predictions citing meltdown are nothing more than short term market sentiment and make no reference to underlying fundamentals - twelve months ago many of these same characters were spouting the market is strong and predicting some small price growth in 2008!

Whether you like it or not relative demand has increased and will continue to increase until more housing stock is built. This will maintain the average house price/ mean income ratio at a level higher than previous historical norms - basic market forces. Panic may drive property prices down 35% in the short term but a modest but prompt 10% recovery is probable shortly after beyond which things should stabilise.

Diesel is 10p a litre or whatever more to buy at the forecourts than petrol - why? Not because it is any more to produce than petrol but simply that increases in production of diesel motor fuel have not matched the increased sale of diesel passenger vehicles in Europe and the market has driven the price upwards. Supply and demand. There is a strong possibility that market price will fall below that of petrol in the next 24 months as production is geared more towards diesel. There are still plenty of forecourts with full tanks of diesel (empty houses). Housing is like any commodity and price is driven by supply and demand.

Have you thought about taking a long term spread betting position on UK property prices - your confidence in the scale of the fall could be put to positive effect!

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uh-oh, there's gonna be trouble! Someone's mentioned the 'supply and demand' argument, oh no, and the one about the need for more houses to be built! :o

Those newbies - all their posts should be filtered for un-HPC talk until they have made at least 100 posts. ;)

Q

I believed a strong correction was due several years ago and acted accordingly! I follow the broad HPC sentiment but extremism always has two sides!

Thought - Far Eastern Money buying up land and property in the UK! - It WILL Happen .................

Edited by topcarrera
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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

yeah, 3.5 joint... of course in the past it was single, but in the past only one person worked! Today both sexes work, unless you expect the UK to roll back to a single breadwinner you should assume joint income....

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median is an average.

'average' can be mean median or modal

no it's not. using average to refer to median or mode is confused and fuzzy thinking which leads

people to draw misleading conclusions. witness this thread.

I understand you are referring to different summary statistics of the distribution, but calling them all "average" is just plain wrong.

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no it's not. using average to refer to median or mode is confused and fuzzy thinking which leads

people to draw misleading conclusions. witness this thread.

I understand you are referring to different summary statistics of the distribution, but calling them all "average" is just plain wrong.

I'm afraid it is you who are mistaken. Using average as synonymous with mean is wrong, they may be the same in common usage but it is incorrect.

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underlying fundamentals

ha ha ha.

I guess we are seeing those strong 'underlying fundamentals' right now after bank after bank collapse.

The demand argument is pointless now - the credit has been turned off.

And anyway I don't think there is a shortage of housing - there was a shortage of cheap housing - but this won't be a problem in a years time.

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<<Other way around - Median is what the ONS + CML supplies - ie 50% of people earn below 24k and 50% of ftb purchases are less than 116k in 2007.>>

SO are you telling me that the graph I referred to earlier, average house price versus average income, was in fact versus MEDIAN income?

Anyway, from the income distribution plot I can see straight away that the arithmetic MEAN income is way above the MEDIAN income, and no way do 50% of the population earn more than £24k. On that graph the mean (24k) is the arithmetic mean, not the median (18k), you can see that at a glance. That means 50% of people earn less than £18k p.a. and 50% earn more than that. At least in 2006/7 this was the case for the whole population (not exclusively FTBs).

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Calm down!

From a personal point of view I have no interest or concern just how far a property price crash will go. My wife and I made a conscious decision to move to a slightly cheaper (albeit substantially larger etc..) property exactly four years when a work moved meant relocation from Sussex to the Midlands. I expected a sharp correction and it suits me if property prices fall by 45% or more (more affordable to move to something larger) - Unfortunately they won't! Many so called analysts predictions citing meltdown are nothing more than short term market sentiment and make no reference to underlying fundamentals - twelve months ago many of these same characters were spouting the market is strong and predicting some small price growth in 2008!

Whether you like it or not relative demand has increased and will continue to increase until more housing stock is built. This will maintain the average house price/ mean income ratio at a level higher than previous historical norms - basic market forces. Panic may drive property prices down 35% in the short term but a modest but prompt 10% recovery is probable shortly after beyond which things should stabilise.

Diesel is 10p a litre or whatever more to buy at the forecourts than petrol - why? Not because it is any more to produce than petrol but simply that increases in production of diesel motor fuel have not matched the increased sale of diesel passenger vehicles in Europe and the market has driven the price upwards. Supply and demand. There is a strong possibility that market price will fall below that of petrol in the next 24 months as production is geared more towards diesel. There are still plenty of forecourts with full tanks of diesel (empty houses). Housing is like any commodity and price is driven by supply and demand.

Have you thought about taking a long term spread betting position on UK property prices - your confidence in the scale of the fall could be put to positive effect!

Aah, poor old topcarrera,

Firstly, welcome to this site. I'm sure what you find within these pages will be enlightening for you.

I just wanted to point to one particular quote in your post - the one I've highlighted.

Have a look back through the archives on this site. you will find that the fact that many "analysts" have been bullish for years, and are only now realisuing the error of their ways (or 'jumping on the hpc bandwagon'), is a little irksome to many on here, who have been warning of such dire consequences for years.

Looking at the HPI curves, you'll see that many on this site actually called it right all those years ago (2003/4/whenever) as house prices, even then, were unsustainable. The fact that they have increased so long, and to such dizzying heights, only means the fall will be that much greater. Hence the slight panic in the markets at the moment.

Don't worry - it will all be over by Xmas - and by that I don't mean things will be back to the optimism of the early naughties...

Anyone who thinks this is a blip really needs their head examining, and anyone who thinks the falls will be less than 40/50% I don't think is using logic and reasoning to come to that conclusion.

Edited to remove excess i's and o's...

Edited by Lepista
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I believed a strong correction was due several years ago and acted accordingly! I follow the broad HPC sentiment but extremism always has two sides!

Thought - Far Eastern Money buying up land and property in the UK! - It WILL Happen .................

why, is there anything special about british land? Is it more fertile, are there valuable minerals? Buying something just because it is or is likey to become expensive is simple speculation and bubble generation.

OH and sound fundamentals :lol::lol::lol::lol: breath :lol::lol::lol::lol:

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When I did statistics at sixth form there were three types of average. Mean, median and mode.

When I first bought a house (16 years ago), the norm was either:

3.5 times individual or

2.5 times highest salary plus the lowest salary.

They insisted on:

a 5% deposit

6 months in your current job

an affordability check of your planned outgoings, e.g. Food bills, utilities, loans etc.

You had to prove you could afford the re-payments even if interest rates went up.

I.e. If your outgoings were too high then they wouldn't lend.

I remember sitting in the building society going through all this with my bank statements as part of the application.

So when we return to a normal situation, those with student or other loans and/or credit card debt had better revise their lending expectations downwards.

Edited by ader
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When I did statistics at sixth form there were three types of average. Mean, median and mode.

When I first bought a house (16 years ago), the norm was either:

3.5 times individual or

2.5 times highest salary plus the lowest salary.

They insisted on:

a 5% deposit

6 months in your current job

an affordability check of your planned outgoings, e.g. Food bills, utilities, loans etc.

You had to prove you could afford the re-payments even if interest rates went up.

I.e. If your outgoings were too high then they wouldn't lend.

I remember sitting in the building society going through all this with my bank statements as part of the application.

So when we return to a normal situation, those with student or other loans and/or credit card debt had better revise their lending expectations downwards.

If this recession causes banks to go back beyond the current era, ie; 1980ish - Today, then we may be looking at the 70's and before, in which case you can expect 10% or more deposit (Im guessing 20%), 2 years saving at the one bank before they will lend and the full ability to pay with only one wage (in case you do kids) and a loan of 2.5x one salary + 1x the other. This may sound far fetched but was very real not so long ago.

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