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Hang On - Do The Numbers Add Up?


ezekiel
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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.

This is a pointless discussion. Just stop using the word average. use measure of central tendency instead and make it clear which one you are referring to. Anything else is just an imprecise load of rubbish, whether or not you can find some dictionary definition of average that agrees with your point of view.

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yes I know 'average' usually is assumed to mean 'mean'. But it doesn't change the fact that in correct usage median and modal are still averages.

illustrates my point exactly-using the above definition, saying the average house price is 130k or whatever, means nothing as no-one knows which "average" you are referring to.

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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.

Thats why there will be a 60%+ correction.

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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

I think the Uk average is still quite a bit higher than that. look, the nutters are not on this site, they are out there in sheeple land. Here in Edinburgh people have got it into their heads that a "family home" right on one of the most congested roads in the city is worth six hundred thousand pounds, I`ll say that again, SIX HUNDRED THOUSAND POUNDS, wotcha chav that can`t be fookin` right, it is fookin right, the UK is populated by property porn influenced NUTTERS, taking 12.5% off those kind of prices is like pissing in the ocean, no one will notice. The stats are ********, look at the reality around you, people have been using LIAR [email protected] for all they are worth, the "average" of 200k would have got you flat in Edinburgh up until the de-railment. If a single person earns 20k a year they are going to maybe get a mortgage for 60k? depending on their credit reference, and depending how deep in the doo doo the banks end up, all bets are off, nothing is guaranteed.

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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).

Ok - not sure what you are referring to - but the ONS median wage is about 25k. Its easy to find. No idea wtf your 18k is.

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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!

Don't buy this argument I'm afraid, but this thread has raised some important points.

But firstly - the supply and demand piece has been discussed ad nauseum over the last few years. Yes there is demand (but even this can be confusing - I have a demand for an Aston Martin), but the changes in society have been gradual ones. It is lazy analysis to put this forward as an explanation for the bubble. Yes, more people are living in smaller families/alone, yes immigration has been an issue, and yes we are not building enough houses (although the magnitude of this is open to significant debate - there are a lot of empty houses in this country). But these are gradual issues already factored into the growing mean, along with increased disposable income. They are not what got us to the highs of 07. They will not prop the market up.

And as for a 35% drop, then a 10% increase, then stability? Really? First of all, what do you mean by stability? 0% increases (real drops), inflation increases (0% real), 10%, 15? There has never been stability in house prices.

But you are right that panic is in the market. What happens next depends on how long it takes.

Currently, I'd say that the general public (including the poster I'm responding too) has not had their perception of housing change. It's all down to "market instability". Politicians talk of a "return to normal lending levels (6x and 125%?)", and most paper pundits don't address the root cause of the credit crunch - people can't afford to pay their debts.

If there is a quick drop and banks are bailed to return to their old practices, johnny normal will pile in, and create another bubble (with no bailout next time - guaranteed depression). The problem is:

- People still judge "affordability" by the 1st months payment, not lifetime payment. This is wildly inappropriate in a low inflation world. Particularly if you want to trade up. And it means people stay stretched, and vulnerable, for longer.

- People still see property as their pension.

- People still think of a family home in Edinburgh "normally priced" at 600k.

This needs to change.

P.s. your diesel analogy is wrong I'm afraid. At least in most of Europe.

EDIT for typos

Edited by bear_or_bull
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I think there is something else people need to consider.

Unless your actually buying or selling right now or in the very near future the whole house price issue means very little to you.

I work with blokes that are 10 years plus into their mortgages,have wife and kids and are happy where they live. They never mention the housing market because it's of no interest to them. They just think by the time they retire and maybe want to downsize in another 10 years time it will all be OK.

My point is that their houses are not for sale.

If you drive along many roads of say 100 houses only 2 or maybe 3 will have a board outside. Some roads don't have any for sale. Until that 'For Sale' is in the garden that house is still at top whack 2007 prices as far as the owners are concerned.

People selling now know they are going to take a hit but most are sitting it out.

Like I've said already this week.

Bricker Mortis.

My boss is a big BTL fan who has 15 flats and small houses. I was speaking to him this week and hinted about things not being as good for him. He laughed and said since he started taking on DHSS single mothers he can't rent property fast enough. He's enjoying talk of a crash and is waiting to swoop on more.

Brand new Mercedes £60,000 this week makes it difficult to argue with him as well.

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House prices are due a massive correction. The lending multiples / lack of deposits of the last few years is finished.

Banks will be severely rationing lending, large deposits (absolute minimum will be 10%) will be required, earnings multiples will come down (adjusted for any outstanding debts) and type of employment will also play a factor.

It is amazing how lax the lending has become in the UK. The bank I work for insists on a minimum 30% deposit and this appears to be standard in Hong Kong. This just doesn't compare to what the same banks has previously been offering in the UK.

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The historical household only had one full time worker. Now most households have 2 and will borrow on joint income. Or am I wrong?

50 / 50 - there are more working couples than there used to be but certainly not most - you also have to note that if families are struggling to pay mortgages with 2 incomes, there isn't really anywhere else to go other than send the kids out to work

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when i had my first house/mortgage back in 1986. Everybody i knew saved for the biggest deposit they possible could. After all the banks were lending you the money not giving it to you. You had to go for a formal interview to get the loan, pay off any car loans etc.

Our views then we believed that the mortgage payment should be no more than 1 weeks take home pay for the highest earner.

That was the general advice passed on to me by the older people at work. And i used that as a rule when i borrowed.

So maybe when house prices drop to that level i will class them as affordable.......

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I think there is something else people need to consider.

Unless your actually buying or selling right now or in the very near future the whole house price issue means very little to you.

I work with blokes that are 10 years plus into their mortgages,have wife and kids and are happy where they live. They never mention the housing market because it's of no interest to them. They just think by the time they retire and maybe want to downsize in another 10 years time it will all be OK.

My point is that their houses are not for sale.

If you drive along many roads of say 100 houses only 2 or maybe 3 will have a board outside. Some roads don't have any for sale. Until that 'For Sale' is in the garden that house is still at top whack 2007 prices as far as the owners are concerned.

People selling now know they are going to take a hit but most are sitting it out.

Like I've said already this week.

Bricker Mortis.

My boss is a big BTL fan who has 15 flats and small houses. I was speaking to him this week and hinted about things not being as good for him. He laughed and said since he started taking on DHSS single mothers he can't rent property fast enough. He's enjoying talk of a crash and is waiting to swoop on more.

Brand new Mercedes £60,000 this week makes it difficult to argue with him as well.

Good post Sibley..

I live in south London and there's not a lot of decent, resonably priced property for sale around here..

The properties that are for sale are still way over-priced...

eg

www.rightmove.co.uk/viewdetails-19030033.rsp?pa_n=4&tr_t=buy&mam_disp=true

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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!

Taking you`re first two paragraphs, as the market crashes how can someone with a large chunk of negative equity, who can`t sell their house, and is struggling to make their increased mortgage payments benefit from something larger being more affordable? The STR`s will, not anyone who didn`t get out in time though? Secondly, if relative demand has increased, why are new build developments being mothballed up and down the country? and what happens when the last of the Eastern Europeans goes home?

Edited by dances with sheeple
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Don't buy this argument I'm afraid, but this thread has raised some important points.

But firstly - the supply and demand piece has been discussed ad nauseum over the last few years. Yes there is demand (but even this can be confusing - I have a demand for an Aston Martin), but the changes in society have been gradual ones. It is lazy analysis to put this forward as an explanation for the bubble. Yes, more people are living in smaller families/alone, yes immigration has been an issue, and yes we are not building enough houses (although the magnitude of this is open to significant debate - there are a lot of empty houses in this country). But these are gradual issues already factored into the growing mean, along with increased disposable income. They are not what got us to the highs of 07. They will not prop the market up.

And as for a 35% drop, then a 10% increase, then stability? Really? First of all, what do you mean by stability? 0% increases (real drops), inflation increases (0% real), 10%, 15? There has never been stability in house prices.

But you are right that panic is in the market. What happens next depends on how long it takes.

Currently, I'd say that the general public (including the poster I'm responding too) has not had their perception of housing change. It's all down to "market instability". Politicians talk of a "return to normal lending levels (6x and 125%?)", and most paper pundits don't address the root cause of the credit crunch - people can't afford to pay their debts.

If there is a quick drop and banks are bailed to return to their old practices, johnny normal will pile in, and create another bubble (with no bailout next time - guaranteed depression). The problem is:

- People still judge "affordability" by the 1st months payment, not lifetime payment. This is wildly inappropriate in a low inflation world. Particularly if you want to trade up. And it means people stay stretched, and vulnerable, for longer.

- People still see property as their pension.

- People still think of a family home in Edinburgh "normally priced" at 600k.

This needs to change.

P.s. your diesel analogy is wrong I'm afraid. At least in most of Europe.

EDIT for typos

They are being bailed to keep the financial system alive, surely the anger in America over Paulson`s plan tells us that there will be no return to the old ways in our lifetime.

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They are being bailed to keep the financial system alive, surely the anger in America over Paulson`s plan tells us that there will be no return to the old ways in our lifetime.

there is a big difference between popping 700bn dollars into the system, and a bail out.

A bail out would mean replacing the WEALTH lost with spare wealth.

the banks saythey have created Wealth. They have not. they have created assets that get their value from debt created on debt supported by assets created on debt.

there is not enough WEALTH in the world to cover the Wealth the banks say they have created. even their wealth is illusory.

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I think there is something else people need to consider.

Unless your actually buying or selling right now or in the very near future the whole house price issue means very little to you.

I work with blokes that are 10 years plus into their mortgages,have wife and kids and are happy where they live. They never mention the housing market because it's of no interest to them. They just think by the time they retire and maybe want to downsize in another 10 years time it will all be OK.

My point is that their houses are not for sale.

If you drive along many roads of say 100 houses only 2 or maybe 3 will have a board outside. Some roads don't have any for sale. Until that 'For Sale' is in the garden that house is still at top whack 2007 prices as far as the owners are concerned.

People selling now know they are going to take a hit but most are sitting it out.

Like I've said already this week.

Bricker Mortis.

My boss is a big BTL fan who has 15 flats and small houses. I was speaking to him this week and hinted about things not being as good for him. He laughed and said since he started taking on DHSS single mothers he can't rent property fast enough. He's enjoying talk of a crash and is waiting to swoop on more.

Brand new Mercedes £60,000 this week makes it difficult to argue with him as well.

Those blokes you work with, the ones with 10 years mortgage. They're probably happy partly due to the wealth affect. That is, they feel rich because they believe their house is worth x, and will make a nice retirement nest egg. Thing is, their houses aren't for sale, but their feeling of wealth will be set by the marginal sales. And some people always have to move, and in a recession more people will have to move.

And the one other way that high house prices affect you, even if you're not planning on selling for another 10 years, is the social change that is going on around you. Do you want to live in a society in which wealth and status is inherited? Do you want a new aristocracy? Do you want a return to pseudo-Dickensian landlords and renters? Do you want an economy that is based around fabricated wealth (transfer rather than creation)? Or do you want a meritocratic society? A british dream? An economy that improves productivity, exhibits innovation, and actually works for the good? The house market affects all of this? Those people have children, right?

Brickor Mortis it is, for now. Not forever. And prices need to adjust, a lot...

Your boss, unfortunately, is not one of my favourite people. BTL is not the most honourable thing one can do for a living. But hey, maybe we can go back to only giving the vote to those with land...

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RichB wrote:

<<Ok - not sure what you are referring to - but the ONS median wage is about 25k. Its easy to find. No idea wtf your 18k is.>>

There was a thread sometime back that linked to a BBC page on the meaning of statistics or something similar. Now I cannot find it. It would be around 09-September because I saved a file of the graph on that page on that date. I cannot find a way of pasting in the graph here.

Anyway, the MEDIAN income in 2006/7 was £377 per week, or £19.7k p.a.

the MEAN was £463 per week or £24k p.a.

The peak of the distribution appears to be about £275 per week or about £14k p.a.

RichB can you provide a link to back up your assertion?

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No one seems to be considering the deflationary effects of a large depression. Wages drop; jobs are lost. Add in "no finance", which is looking more and more feasible, and houses are toast.

(I believe that in the only bubble of comparable scale (relative to the affected economy) - the South Sea Bubble - 98% of peak value was lost at the bottom.)

At last , after reading many of the posts, somebody seems to have, in my opinion, got it right. The banks been too free and easy at lending money has done more than push up the cost of housing. Over the years, it has also over inflated peoples wages, from the very top to the very bottom. Now the housing market and economy in general are on the way down, wages will have to follow the same path weather we like it or not. On the basis of that perhaps we could finish up with a minimum wage of £2 per hour and perhaps a good wage could be double that. I think this would make a great difference when working out a house price basing it on 3x salary or similar.

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RichB wrote:

<<Ok - not sure what you are referring to - but the ONS median wage is about 25k. Its easy to find. No idea wtf your 18k is.>>

There was a thread sometime back that linked to a BBC page on the meaning of statistics or something similar. Now I cannot find it. It would be around 09-September because I saved a file of the graph on that page on that date. I cannot find a way of pasting in the graph here.

Anyway, the MEDIAN income in 2006/7 was £377 per week, or £19.7k p.a.

the MEAN was £463 per week or £24k p.a.

The peak of the distribution appears to be about £275 per week or about £14k p.a.

RichB can you provide a link to back up your assertion?

http://www.statistics.gov.uk/articles/nojo...erns_Of_Pay.pdf

First para gives the answer, but figure 7 and its para give some additional info.

Edited by RichB
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I think there is something else people need to consider.

Unless your actually buying or selling right now or in the very near future the whole house price issue means very little to you.

I work with blokes that are 10 years plus into their mortgages,have wife and kids and are happy where they live. They never mention the housing market because it's of no interest to them. They just think by the time they retire and maybe want to downsize in another 10 years time it will all be OK.

My point is that their houses are not for sale.

If you drive along many roads of say 100 houses only 2 or maybe 3 will have a board outside. Some roads don't have any for sale. Until that 'For Sale' is in the garden that house is still at top whack 2007 prices as far as the owners are concerned.

And what happens when ordinary bloke gets made redundent in a few months? I hear what you're saying, and say to a friend of mine that the paper value of his house is immaterial as long as he can afford to pay the mortgage and stay in work. But a lot of ordinary people who didn't think about house prices are in for a shock as th credit crunch bites.

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