Wednesday, March 31, 2010

House Price vs Earnings ratio

NW House price index March report

House price vs Earnings ratio increases to average of x4 (1980-2010) because house prices have been sooooo inflated for sooooo long.

Posted by markj69 str05 @ 08:59 PM (2939 views)
Please complete the required fields.



38 thoughts on “House Price vs Earnings ratio

  • markj69 str05 says:

    Interesting graph on the NW March report – http://www.nationwide.co.uk/hpi/historical/Mar_2010.pdf. showing ‘long run average (1980-2010) of 4x salary. Actual recent history would indicate nearer 5.5x avg’ over the last 5-6 years. A very long time to be so high!

    HPC graph runs from 1953 to 06, and averages 3.5x, pretty consistent, and includes recent peaking just under 6x.
    ‘http://www.housepricecrash.co.uk/graphs-average-house-price-to-earnings-ratio.php’

    Peaks and troughs. Can’t wait for the inevitable!

    Reply
    Please complete the required fields.



  • The notion that there is natural house-price-to-earnings ratio, and that we will eventually return to that ratio is an utterly ridiculous idea.

    If the government starts building 100 000 council house per year again (as they did up until the 70s) the ratio might return to 3. If they relax immigration further it might rise to 6. If they introduce LVT, the ratio might fall to 2. It could go anywhere but there is no reason to suppose it will ‘return’ to the average of the last 40 years. Is petrol likely to return to its average price ? Or footballers’ wages ? Are we going to start eating more and spending almost a third of our income on food again ?

    I look at the chart and see a line sloping upwards to the right. This indicates that the HP to earnings ratio has been steadily increasing since Thatcher created the ‘property owing democracy’. This is what we KNOW to be true. As a nation we get wealthier year after year but we are no better off as more and more of our income is required to keep a roof over our head. The trend cannot continue forever but it is not inevitable that it will reverse either.

    Reply
    Please complete the required fields.



  • Had the peak, bring on the trough.

    Reply
    Please complete the required fields.



  • all markets go from extreme euphoria to extreme pessimism…which is why we are due a trough…this could take 20 years to play out

    examples

    1.gold and oil hits all time highs in 1980 then fell for 19 years..oil was $9 in 1999 and gold just over $200
    2.houseprices in japan are 70% less than they were in 1991..thats real prices…and still falling
    3.stockmarket are 20% less than they were in 1999 and fell in 2009 to 55% less

    This is why houseprices can fall for 10-20 years easily

    Reply
    Please complete the required fields.



  • If the supply side of housing is slightly constrained, the market will tend towards speculation and volatility.

    If the supply side is maintained at a slight excess, homes in all bar the most sought after locations will become sane, functional, consumer durables, that are worth their most when new, and then gradually depreciate, until they are eventually demolished and the site re-developed.

    The difference between the slightly constrained market that we have today, and one that has sufficient excess to be able to function in a sane and rational manner is not that great – a million houses is probably sufficient..

    ..but before people start screaming about concreting over the green belt, be aware that a million houses only require 0.2% of the undeveloped land in the UK, and that the MOD has more than enough disused military bases to site all of them.

    Getting young people building their own homes is a great way to tackle youth unemployment, and get the nation back on it’s feet..

    ..but until young people start voting again in any number, the political parties will remain fixated on pleasing the fat cat baby boomers and grey haired nimbies..

    Reply
    Please complete the required fields.



  • @lucky
    Agree with all that you said. I’m reading a great book at the moment that should be of interest to many people here – the Grip of Death (an etymological rendering of “mortgage”) by Michael Rowbotham, which gives interesting analysis to back this up. It’s a kind of long term systems dynamics look at the money system and its relationship to the housing market, mostly done in a UK context. Some startling facts – 2/3 of the money supply is created as mortgage debt. So when the housing market takes a dive, there is less money around. not only that but necessarily we can’t all pay our mortgages off. Why? because money is taken out of circulation when debt is paid down, so less is around for others to pay off their mortgages.
    Also, much of the housing stock has been paid for many times over but still is subject to mortgage finance. This only makes sense because the price of a house relects not cost and profit to the builders, but what people are prepared to borrow in the expectation that its price will rise, essentially speculation fuelled and exploited by the financiers.
    Finally, if you go back far enough, I think to the inter-war years, houses were a much lower multiple of average earnings and only took an average 8 years to pay off! It’s a general feature of mortgage based money supply, replicated across ‘developed’ western economies, that this period takes longer and longer as time goes on. In some countries, mortgage debt is inherited!
    Anyone got a squat handy?!

    Reply
    Please complete the required fields.



  • @uncle tom
    Looking at the Nationwide house price graph, I see a cycle around an upward trend. Can this be explained by the quantity of housing in relation to population? Probably not – that’s not cyclical in the same way, and the long term growth rate is way above the rate of population growth. The price increases, it seems to me, are mostly driven by multiple home ownership and speculation. I agree that people building their own homes is a great idea though.
    Re the 0.2% figure – I’m wary of figures like this because building more houses also requires more transport, energy and water infrastructure etc. I could lay thin wires all over your back garden and it might only take up 0.2% of your ‘undeveloped’ land, but it would make a hell of a mess!

    Reply
    Please complete the required fields.



  • Nickb,

    There has been a trend towards smaller households for many years – the ONS has some historical data on this..

    ..however, I would expect the trend to reverse slightly now, as fewer and fewer divorcees can now afford to set up home alone.

    For the 0.2% figure to be correct, you do have make some assumptions regarding housing density. I actually computed a figure of 0.16%, including roads, and then added 25% for civic amenities etc..

    Reply
    Please complete the required fields.



  • @Uncle,
    Households are getting smaller but also the existing housing stock is being subdivided by BTL ers, so it’s not clear what is happening to the overall quantity of dwellings! In Southampton casual inspection would lead me to conclude that nearly 1/2 of houses are now subdivided into flats in the areas I am familiar with.

    The 0.2% figure may or may not be correct, but what I’m saying is the amenity loss is probably way higher than this figure seems to suggest (the wires analogy).

    Nick

    Reply
    Please complete the required fields.



  • The subdivision and smaller quantities of newbuild also suggest that the extent of house price increase may be understated by the Nationwide graph… does anyone know if this is accounted for? ie what is the trend when you look at like for like (e.g. jsut detatched 3bed or weighted average by type) over time?
    Nick

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    @ UT, you’re on top form with the maths as ever: “before people start screaming about concreting over the green belt, be aware that a million houses only require 0.2% of the undeveloped land in the UK”

    Another way of looking at this is that existing residential areas (including a fair share of roads etc.) only cover 5% of the surface area of the UK (at least 85% of which is farmland, lakes, mountains, marshes etc), and that’s twenty five million homes – some nicely spaced out, some in ten storey blocks. So adding a million = 5%x1/25 = 0.2% of total surface area (which is another way of arriving at your figure).

    @ NickB, the only ratio that matters is price to earnings, which is much flatter over time.

    Reply
    Please complete the required fields.



  • Sorry,. that should read…

    The subdivision and smaller SIZE of newbuild also suggest that the extent of house price increase may be understated by the Nationwide graph… does anyone know if this is accounted for? ie what is the trend when you look at like for like (e.g. jsut detatched 3bed or weighted average by type) over time?
    Nick

    Reply
    Please complete the required fields.



  • Mark,
    would you be happy if I “only” covered 0.2% of the land area of you back garden with thin copper wire? No – the amenity loss is much greater than this figure would suggest. You’re not taking seriously the environmental degradation that such expansion would bring becuase of the associated infrastructure expansion. If the house price rises are driven by speculation it is not necessary to expand housing stock to an appreciable degree.

    Reply
    Please complete the required fields.



  • Nick,

    There was a great trend in the post-war years to break up large town houses into flats. Places like London and Southampton that saw a lot of housing stock lost to bombing had an urgent need to make best use of what remained.

    That trend has eased off considerably, but the number of such divisions is still counted by the stats people.

    Reply
    Please complete the required fields.



  • Uncle,
    OK, good to know, but does the graph incorporate this, or is the rate of like for like price increase higher?
    According to locals the character of the areas in question has changed considerably, and they do say that a lot of this is subdivision for buy to let. But it would be good to see some figures.
    Nick

    Reply
    Please complete the required fields.



  • Mark,
    I guess what you are saying is that real earnings were so much lower in the 20s and 30s so less people could afford to buy a house even if the real price was lower. But I disagree that the time duration of a mortgage is not relevant.
    Nick

    Reply
    Please complete the required fields.



  • Nickb,

    Six and half a dozen – on the one hand, there is much more living space created by home extensions than by property divisions, but then the average size of new property tends to be quite a lot smaller than the average size of the existing stock. Taken together, it suggests that the overall floor area of the average house is shrinking, but only by a very small degree each year.

    On the other hand, the quality of property, the standard of internal fixtures such as kitchens and bathrooms, is marching steadily forward.

    When I make my calculations, I work on the basis that the true value of residential property is broadly neutral.

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    NickB, you have completely lost me now: “Mark, would you be happy if I “only” covered 0.2% of the land area of your back garden with thin copper wire? No – the amenity loss is much greater than this figure would suggest. You’re not taking seriously the environmental degradation that such expansion would bring because of the associated infrastructure expansion. If the house price rises are driven by speculation it is not necessary to expand housing stock to an appreciable degree.”

    a) my back garden is huge, about 250 sq yds, so 0.2% of that is half a square yard. Feel free to nick half a square yard.
    b) I’m a tenant anyway, if I lost ‘amenity value’ I’d expect a few quid off the rent.

    What “environmental degradation”? We’ve covered 5% of surface area with housing and nothing terrible has happened. What makes you think the world would come to an end if we covered 5.2%? Or indeed 6%?

    What “infrastructure expansion”? That’s included in the 0.2%. If it’s the same number of people in the same country, why would we suddenly need more schools or hospitals or power stations?

    In any event, we need a several-pronged attack, more LVT and less income tax or VAT; more new construction of private and social housing; proper supervision of banks etc etc. That would lead to more efficient use of existing housing, so new construction would only be a release valve. Easy credit serves no purpose apart from inflating selling prices and to saddle people with debts.

    Reply
    Please complete the required fields.



  • Mark,
    I’m sorry you can’t see it. It’s simply this: if I spread copper wire totalling 0.2% of the area of your garden evenly over the whole surface area, you would not be happy because I’ve divided up the connected areas with unsightly wire that you keep tripping up on etc. people also make the 0,2% argument in relation to more road building – just as thin wires would chop up and despoil your garden so roads divide up the countryside and damage the wildlife.
    What infrastructure expansion – well if you bothered to read my previous post you would see – electricity, gas, water and road infrastucture. Even if it’s included in the 0.2% that doesn’t cover the point about the amenity loss being of a different order because of the spatial interconnectedness of the environment.
    About enviornmental degradation, on the contrary. We have reduced our impact on the environment because we have the greenbelt, so it is utterly illogical to say “look, development doesn’t damage the countryside after all, so let’s do away with the greenbelt”.
    Finally, the environmental degradation that the greenbelt minimises has still occurred and takes several measurable forms: just one example, there is the marked decline in all of our native bird species, and now bees, linked amongst other things to habitat loss that is direcly linked to increased development. Another is the reduced acreage of farmland. you may have noticed that food security issues are increasingly surfacing in the media. The less farmland we retain the more dependent we are on imported foodstuffs, at a time when supplies are increasingly vulnerable for a number of reasons, oil depletion and climate change included.

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    NickB: “I’m sorry you can’t see it. It’s simply this: if I spread copper wire totalling 0.2% of the area of your garden evenly over the whole surface area, you would not be happy because I’ve divided up the connected areas with unsightly wire that you keep tripping up on etc. people also make the 0,2% argument in relation to more road building – just as thin wires would chop up and despoil your garden so roads divide up the countryside and damage the wildlife.”

    In the ordinary course of events, and barring the NIMBYs, most housing would be built in and around existing urban areas. Imagine a town and surrounding suburbs as a circle with a radius of five miles and a surface area of 79 sq miles. If it increased in surface area by 1/25, that’s a surface area of 82 square miles and an increase in radius from 5 to 5.11 miles, i.e. all of 200 yards further out in every direction. That keeps ‘roads cutting up the countryside’ to a bare minimum, I think.

    And as it happens ‘bio-diversity’ of bees and so on is much higher in people’s back gardens and allotments and parks than it is on agricultural land

    If your logic is correct, then the reverse must also be true – we as a nation would be happier and more prosperous if we tore up 1/25 of our roads and demolished 1/25 of our housing.

    As to ‘food security’ that’s just being silly. Remember that modern agriculture is very capital intensive and not very labour intensive (only about 300,000 people work on farms, or 0.5% of the population. We could easily produce twice as much food if twice as many people worked in agriculture (compare what’s growing on an allotment with what’s growing on a farm). In any event, why is there a magic cut off – we’re OK as long as farms cover 85% of the UK but doomed to starve if they only cover 84.8%, or indeed 84% or 83%?

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    Oops tag not closed.

    Reply
    Please complete the required fields.



  • Mark,
    No, I’m afraid it’s not silly. The amount of surplus foodstock has effectively shrunk to nothing, which is why government is suddenly funding research on food security. The modern agricultural system is largely oil-based too, and peak oil is either already here or coming soon. I’m not saying we’re doomed to starve but that we make the situation worse by losing agricultural land.

    your second paragraph is an argument for the greenbelt – I agree, the greenbelt minimises the damage, but the magic 0.2% figure is still misleading. people understandably resist expansion of existing areas partly because of increased pressure on existing public goods and services – so you get so-called “eco-towns” springing up as new developments, and the instrastructure associated with that.

    I think your comment on bees and back gardens is pretty naive – according to beekeepers urban bees are far less resilient and more prone to varroah mite than rural ones are. Also, a major impact on birds are dogs and cats that people bring with them into the areas that border on the rural zones. If you want to see the effects of continuous urban expansion on wildlife take a trip to Holland – there is virtually none left outiside of designated nature reserves, and even there it’s nothing like we have here.

    My logic says minimise new build – it doesn’t follow from that that we should destroy existing stock. However, I;d like to know how much existing stock is empty because of speculation (keep it empty for the option to sell quick), multiple home ownership and the increased trend towards single living. The last of which must be related to using the home as a financial asset rather than a place to live. ‘Shelter’ used to make a big deal out of the quantity of housing that was kept empty in cities, particularly London, if I remember correctly. Perhaps if all this is taken into account then under a more sensible system (land value tax, and a money system that was not based on mortgage debt) we could indeed afford to return some land to the environment or agricultural use.

    Reply
    Please complete the required fields.



  • “””
    Preliminary figures show that the number of loans taken out for house purchases failed to recover from January’s large dip (chart 1), suggesting that weakness in house sales at the start of the year may have been due to more than just the snowy weather. With greater than usual political and economic
    “””

    Reply
    Please complete the required fields.



  • oops closed.

    Reply
    Please complete the required fields.



  • WTF did I do… closed now?

    Reply
    Please complete the required fields.



  • I personally think that if we lessened up on the planning restrictions related to new builds within the green belt, that would release the pressure supporting current house prices. Those house prices would drop leading to redevelopment of those ‘brown-field’ sites in an economical way. This in turn would result in less development or even desire to develop within the green belt.

    The planning restrictions within london surrounds, is effectively the establishment of a cartel or a case of ‘cornering the market’. Sure, not one group is enforcing the ‘cartel’ but in effect the result is the same. The escape to this situation is to release an ‘uncontrolled’ supply of land to free market forces.

    Another problem with the current situation is that any company who is in the business of contructing new houses needs to hold a stock of housing or land while development takes place. Which company would choose to hold that stock in the current climate; when house prices are ‘tentative’ to say the least? The way out of this is for those companies to perhaps offer futures on housing stock and let someone else take the risk, but who has that kind of money or is insane enough to take on the investment? The obvious answer to that is mortgage holders.

    Another point is that is should be cheaper to redevelop brown-field sites as the infrastructure is already in place. In theory anyway.

    Reply
    Please complete the required fields.



  • Mark Wadsworth says:

    NickB: “The modern agricultural system is largely oil-based too”

    That’s what I meant by ‘capital intensive, i.e. tractors. And why is it based on tractors, oil etc? Because it is, at present, cheaper using tractors and oil than using human labour per unit of food. But oil-based production produces less food per unit of land than human labour, that’s a simple fact. So if oil becomes more expensive, in relative terms human labour becomes cheaper and it all sorts itself out. Land is a limited resource, human labour is not (or not as long as we have six million unemployed).

    ” people understandably resist expansion of existing areas partly because of increased pressure on existing public goods and services “

    I can only assume you are deliberately winding me up with this old myth.

    It is PEOPLE who use public goods and services and not HOUSES. If it’s the same number of people spread over a slightly larger surface area, why is there any need for more hospitals or schools etc? OK, it might be better to have more smaller ones than fewer larger ones, but it’s still the same number of nurses and teachers required. And don’t forget that nurses and teachers have to live somewhere too – how about we just reserve 10% of new builds for teachers and nurses to move to an area (or whatever the fraction is)? But we wouldn’t have to, would we, left to their own devices, the teachers and nurses move to a) where the jobs are, i.e. where the people are and b) where houses are cheaper.

    So that’s another mythical problem that doesn’t exist and even if it did, allowing the average town to expand by 200 yards in every direction would help solve it rather than make it worse.

    I agree with you on LVT and vacant properties, of course.

    Reply
    Please complete the required fields.



  • I don’t know why you’re on about copper wire, nickb. Why would anyone think evenly distributing new homes over the landmass would be a sensible idea? If anything, greenbelt is a problem because it encourages ad-hoc housing development, with its consequent greater energy usage, greater infrastructure costs, and more expensive housing irrespective of its effect on the price of land.

    Reply
    Please complete the required fields.



  • @Millaise
    re cooper wire analogy: without greenbelt that is what you would get – housing and roads everywhere. Look at Holland and other countries that do not have the kinds of restrictions we do. One town grows into another. Or Ireland, where houses just spring up all over the place. How exactly does greenbelt (ie restricting development to borders of existing conurbations) encourage ad-hoc development? What do you mean by ad-hoc?
    My point is only that the often-trotted-out 0.2% argument is fallacious; it’s not an exhaustive treatment of the whole subjet 😉

    @Mark
    During ww2, when we had a much less mechanised farming system we were not actually self-sufficient, even though we were using every square inch of the (cleared) land. This suggests to me that if we went back to largely less capital intensive agrivulture with less agricultural land (lost to housing, roads etc.) and larger population we would be in trouble. Maybe we could come close at the cost of the remaining non-cultivated countryside, but then there goes the wildlife. The picture is masked by the huge extent to which we currently rely on food imports, thus eating our land cake and having it.

    Not winding you up at all. It’s not purely a function of the number of people in the population but also where they are living and the progress of history. For example, if many people move from living in a dense conurbation served by one big school to several villages, they will need additional small schools built, or they will be driving more. Much of the opposition to new build housing, if you read the local press, is in fact because the new infrastructure is not put in. There is then more traffic on the roads in these areas and pressure on school places, not to mention water infrastructure and so on. Now, this may distrribute away from traffic in other areas, but to the extent that the infrastructure DOES expand to meet the new localised need it does not contract elsewhere!

    Reply
    Please complete the required fields.



  • @ chilli
    it could only “release pressure” if people actually built on the greenbelt, no? Anyway, so far as i can see your argument assumes that it is shortage of housing for accommodation purposes that is driving the high prices. Again, so far as i can see, this is not the case – there is a significant element of essentially speculative demand and second homes, the speculative element of which (asset price bubble) explaines the observed housing cycle. Housing stock doesn’t explain this cycle.

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    NickB, what on earth does WW2 have to do with it? We were pretty busy with more important things like not being invaded, a large part of the population was involved in that, not growing food.

    That said, do you not remember the “Victory Gardens” after the war, when there was a short lived trend to letting new houses have bigger gardens so that everybody had their own allotment? Have you been down allotments recently, it is absolutely staggering what you can grow on a small area, it’s just very labour intensive.

    And how come the Netherlands (which is slightly more densely populated than the UK) exports food to us? It’s because they have greenhouses and stuff and get on with it. And this is all hypotheticals, apart from some terrible global famine (in which case we are all doomed anyway – whether or not yer average town expands by 200 yards in each direction) there’s nothing to worry about ‘food security’, what we should be doing in the medium term is exporting a bit more*, then we can afford to import more as well.

    * Not forgetting that people’s commute distances in larger urban areas are shorter and hence use less oil and also give people a potentially longer working day.

    Reply
    Please complete the required fields.



  • You don’t need to build on the greenbelt – surplus MoD land has to be favourite, as the proceeds go back to the treasury, and not some fat cat farmer.

    Brownfield land is not cheaper to develop, thanks to all the environmental cleanup rules that are now in place. Whilst the principal of cleaning up dirty land is laudable, the standards required deem a very large proportion of ordinary gardens to be in need of de-contamination, if someone wants to re-develop the site; which can prove very expensive.

    – A little common-sense throttling back is needed on that score..

    Reply
    Please complete the required fields.



  • Mark,
    Sorry but global food supply is a rather more complex business that you make out, and the indications are not at all encouraging. e.g. persistent failure in recent years of the australian bread basket, food riots in Mexico, common famine in the third world. We’re shielded from all this because we can afford to import at others’ expense. NL imports food to us – sure, where do I say otherwise? I bet you as much as you like that they import a massive chunk of their own food supply though. The point about ww2 is that we were farming all the agricultural land with a labour intensive system, which you assert will make everything hunky dory despite the fact we’ll have less of it. Yes it’s all hypotheticals, but surely it’s wise to be able to fall back on domestic production if necessary!
    Nick

    Reply
    Please complete the required fields.



  • Nick,

    How MoD land is being farmed..?

    Yes food security is important, and the lack of emergency stockpiles in this country is a crisis waiting to happen..

    ..but it’s not material to this discussion.

    Reply
    Please complete the required fields.



  • Doh..

    Should have said ‘how much mod land is being farmed?’

    Reply
    Please complete the required fields.



  • Uncle Tom,
    It’s material to the discussion when people start advocating building over agricultural land in the belief this will lower house prices, if these are actually largely driven by cheap money counterfeited by the banksters and speculation!
    Is MOD land suitable for farming? What about contamination? Don’t we actually need to keep some MOD land? how much is available? I’ve never really thought about this – interested to hear your views.
    Nick

    Reply
    Please complete the required fields.



  • mark wadsworth says:

    “when people start advocating building over agricultural land”

    Oh dear. Isn’t that what we’ve been doing for the last few millenia? And so far we’ve covered 5% of it with houses. How terrible.

    No wonder food is so ridiculously expensive in this country while houses are so cheap…

    Reply
    Please complete the required fields.



  • Nickb,

    The MoD holds enough land to build about 7 million houses.

    The nature of warfare has evolved from pitched battles to tactical strikes over the last few decades, so the MoD has little need now for big firing ranges. Many smaller installations are on former WWII aerodromes, and encompass far more land than the installation needs.

    Reply
    Please complete the required fields.



Add a comment

  • Your email address is required so we can verify that the comment is genuine. It will not be posted anywhere on the site, will be stored confidentially by us and never given out to any third party.
  • Please note that any viewpoints published here as comments are user´s views and not the views of HousePriceCrash.co.uk.
  • Please adhere to the Guidelines

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes:

<a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>