### Tuesday, May 05, 2015

#### House unaffordable to those who cannot do maths

##### This is Money: First-time buyers need to earn Â£41k - or Â£77k in London - leaving homes unaffordable in every region of the UK

"To buy this property with a mortgage at 4.5 times salary, a purchaser would need to earn Â£40,533."

"The current media annual wage for first-time buyers across the UK is just over half that figure, at Â£22,044."

Well DUH, there are not enough properties for every individual to live alone, and both partners can get a mortgage on equal terms so, OBVIOUSLY, this value is SUSTAINABLE given that most first time buyers are COUPLES, with most singles relying on shared ownership or tiny studios, but what is wrong with that?

It is this level of economic and mathematical illiteracy that keeps first time buyers away from property, handing houses to BTL investors on a platter along with the future of our youth.

Add Comment

### 15 Comments

## Add comment

- If you do not have an admin password leave the password field blank.
- If you would like to request a password allowing you to add comments and blog news articles without needing each one approved manually, send an e-mail to the webmaster.
- 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

## 1. libertas said...

For London, clearly, the average wage is about £34k. Again, this is sustainable.

And most people cannot do simple multiplication, because if wages rise 3%, this actually increases borrowing facilities by at least 3.5x that level, because buyers can leverage their wages by an average of 3.5x salary on a mortgage.

Thus, a 3% pay rise allows for 10.5% rise in house prices, SUSTAINABLY.

The 2008 correction blew out the exuberance, and now, if wages start rising, prices will start rising. But more to the point, as immigration is massively increasing our population, overcrowding is booming, meaning that many couples have to buy studios to start out, and so yes, that will also drive up prices in the LONG TERM, with fluctuations around the trend.

If interest rates go up, it will be a function of higher wages, and does not necessarily mean that prices will fall. Remember, prices rose to around todays levels in 2008, with interest rates at around 5%.

## 2. Tpsman said...

For ease of calculation, let's assume you are earning £30000, and the salary multiplier for mortgage is 3 times.

£30000 salary would allow up to £90000 mortgage.

A 10% increase on salary would result in £33000 salary.

£33000 salary would allow up to £99000 mortgage.

£99000 is a 10% increase on £90000.

## 3. cornishman said...

libertas said...

"Thus, a 3% pay rise allows for 10.5% rise in house prices"

No it doesn't. A 3% rise in pay allows a 3% rise in prices ASSUMING that interest rates don't rise.

libertas, it's you who isn't doing the maths correctly. I took the time to show you how you were wrong a while back. No point repeating it, since you obviously didn't manage to grasp the basic maths.

Shame, really, since your other post does make a good case for Enfield.

## 4. letthemfall said...

A party political broadcast on behalf of the LSIP - the Libertas Self-Interest Party

## 5. mister ed said...

Cornishman,

Actually, Libertarius is right.

Just do the maths.

If two people have a joint income of £80,000, they can buy a decent semi on the outskirts of London for £350,000. With a 10% deposit, they have to take out a mortgage of £315,000 at approx 4x multiple of income.

If wages rise at 3.5% and house prices rise at 10%, as Libby says, you get the following:

After 10 years, the buyers’ joint salaries are about £112,000.

The semi is now priced at £960,000

So the new buyer simply takes out a mortgage at around 7.5x multiple of income

After 20 years, the buyers’ joint salaries are about £160,000.

The semi is now priced at about £2,200,000

So the new buyer simply takes out a mortgage at around 14x multiple of income

As house prices rise faster than wages, the banks simply lend at greater multiples of income, and that’s the way it works. The banks make more money on the interest payments too, so everybody wins.

Simple when you work it out on paper.

## 6. cornishman said...

House price £100,000. Wage £25,000. House price is 4x income.

Wage goes up 10% to £27,500. 4x that is £110,000.

New £110,000 house price is 10% more than £100,000.

Wages and house price have gone up 10%.

## 7. nickb said...

@1

No libby, it has precious little to do with immigration. Housing stock also increased, enough to compensate. See my post on the Greens article.

N

## 8. cornishman said...

mister ed, your worked example actually proves that libertas' assertion is wrong. He believes that house prices can rise faster than wage growth (forever) and still only be 3.5x income. "Thus, a 3% pay rise allows for 10.5% rise in house prices, SUSTAINABLY."

Your example shows that not to be the case.

"As house prices rise faster than wages, the banks simply lend at greater multiples of income, and that’s the way it works"

I agree with you that that is the way it's 'working' at the moment, but it certainly isn't 'sustainable'.

## 9. mister ed said...

Cornishman,

I know. The example just shows how daft Libertusk's maths actually is.

Maybe it's something they put in the water in Enfield.

## 10. libertas said...

Wage 25,000. House 4x salary: 100,000

Wage rises 10% to 27,500. House 4x salary = 110,000

Yes, I did indeed get a bit confused about this. The house price rises about 4x the salary rise with similar multiples with wages alone.

However, what in reality happens, which I missed, is that deposits are vastly multiplied for second time buyers. Say that the individual who's house rose 10k sells and re-sells, well, their 10k deposit has DOUBLED to £20k. If this 10% wage increase took 5yrs, during that period they have paid off 1/5 of the mortgage, which is about 18k. With this in mind their deposit has almost QUADRUPLED to 38k.

As a result, they can now afford a house priced at £148k. This equates to a potential price increase of 48% over the period, or, 9.6% per year. In fact, this shows that prices can rise faster than 4x the rate of increase of wages, if that were the average multiple. This naturally causes prices to overshoot the purchase ability of first time buyers, creating cyclical booms and busts, but an overall rising trend.

But the trend will, as stated originally, albeit via a different calculation, will oscilate around an equation that is:

Average wage increase x average mortgage multiple = average house price inflation.

Of course, immigration and overcrowding impact.

Therefore the only real way of influencing the cycle is limiting multiples, but given that equity levels are more of a powerful factor, this will not majorly affect the cycle. However, the measures put in place by BOE probably mean that the next secular bear market will unlikely be in housing. No cycle is the same due to feedback such as this.

## 11. mister ed said...

Er, you can only have second time buyers with deposits if you have first time buyers. And if house prices increase at a much faster rate than wages, you don't have first time buyers.

## 12. nickb said...

2nd Er: when someone trades up they are not buying the same kind of house. They can buy a more expensive house even if prices overall are static or falling.

## 13. cornishman said...

mister ed - sorry the irony went completely over my head!

## 14. nickb said...

So Libby, if you pause and reflect I'm sure you will now see the case for getting out now and selling to rent.

N

## 15. cornishman said...

nickb, I see in the comments section below the This Is Money article, libertas has used his old HPC name, planning4acrash:

"planning4acrash, London, United Kingdom, a day ago

"To buy this property with a mortgage at 4.5 times salary, a purchaser would need to earn £40,533." "The current media annual wage for first-time buyers across the UK is just over half that figure, at £22,044." Well DUH, there are not enough properties for every individual to live alone, and both partners can get a mortgage on equal terms so, OBVIOUSLY, this value is SUSTAINABLE given that most first time buyers are COUPLES, with most singles relying on shared ownership or tiny studios, but what is wrong with that?

So maybe he is considering selling to rent!