Gaps between selling and asking prices

TDS_2

That's all fine, but prices have to drop a long way to get to 2 or 2.5 x average incomes...

Kez100

I know. They should drop. That's why we are in this mess.

IveSeenTheLight

TDS wrote: »

That's all fine, but prices have to drop a long way to get to 2 or 2.5 x average incomes...

The OP said 2 or 2.5 x joint incomes, not 2 or 2.5 average income
Would this mean 4 or 5 times single earnings?
I've for a while starting thinking that in todays world, 4.5 times is realistic affordability.

A person earning £25,000 would then be able to get a mortgage of £112,500 and need £11,250 towards a deposit for 10%. This would allow for a house at £123,750.
The monthly repayments at 6% would be £733. Take home net would roughly be £1,458, so roughly 50% of take home pay. A touch high you may say, bu in context of today world of joint incomes, 25% of net take home would be very affordable.
Checking this against historical affordability http://www.hbosplc.com/economy/includes/25_07_08Affordability.xls its very reasonable
**NOTE** I'm not aware if hbos affordability figures are net or gross.

ginvzt

Just- average family doesn't consist of two people paid average salaries... Does it now? One will have a higher wage, while probably mum will be part time taking care of kids.

Incisor

IveSeenTheLight wrote: »

The OP said 2 or 2.5 x joint incomes, not 2 or 2.5 average income
Would this mean 4 or 5 times single earnings?
I've for a while starting thinking that in todays world, 4.5 times is realistic affordability.

It really depends upon expected interest rates. 2.5 times is about right with rates at 15%, but for sustained lower rates, higher multipliers are sustainable

Kez100

Will low rates be sustainable though? Having lived through high rates (and suffered NE at the hands of the last crash) I am always waiting for their return and think people should be prepared should they return.

Incisor

Kez100 wrote: »

Will low rates be sustainable though? Having lived through high rates (and suffered NE at the hands of the last crash) I am always waiting for their return and think people should be prepared should they return.

As I remember it, high rates were the way out of inflation. My guess is that despite lip service to low inflation, govts are going to allow inflation to eat away at excess value in the housing market and minimise the extent of any negative equity crisis, allowing salaries to rise. Once housing values are brought down to a sensible multiplier on salaries, of course, there will be a raging inflation problem, which will be brought down by high interest rates in the old style. For the time being, I think that govts will let markets set rates, which will be high in recent terms but not for anyone used to the old style.

Realy

Incisor wrote: »

As I remember it, high rates were the way out of inflation. .

Double edged sword, balancing inflation with economic growth. They do not have just one purpose.

Kez100

Incisor wrote: »

As I remember it, high rates were the way out of inflation. My guess is that despite lip service to low inflation, govts are going to allow inflation to eat away at excess value in the housing market and minimise the extent of any negative equity crisis, allowing salaries to rise. Once housing values are brought down to a sensible multiplier on salaries, of course, there will be a raging inflation problem, which will be brought down by high interest rates in the old style. For the time being, I think that govts will let markets set rates, which will be high in recent terms but not for anyone used to the old style.

That's a really interesting thought. I can follow your logic.

Is the present inflation actually controllable though? Will high interest rates stop us paying stupid money for our home energy, travel fuel and food? I suppose we can all cut back somewhat and I'm sure I'm not the only one at posting surrounded by insulation packs ready to put in the loft when we get a day of rain andf having bought a tiny car, but there is still a limit to how much we can cut back, isn't there?

Incisor

Kez100 wrote: »

... Is the present inflation actually controllable though?

Let's face it, it has already happened - look at the price of houses. So in that sense it is almost totally uncontrollable. The aspect which is controllable results from the fact that it has not fed through to the rest of the economy. So the government can measure it out into the price of every day goods, little by little. I think they will let the dust settle for 9-15 months with the markets setting interest rates probably highish, which will tend to be inflation limiting.

Once the shakeout has happened and we know how bad things are, we may see industry cool off as confidence ebbs and capital becomes hard to access. At this stage unemployment will begin to rise. Government will then start borrowing and fund public works such as hospitals and schools and possibly some railway electrification and even a new North South line. Formal targets will remain for inflation, but the BoE will know who their masters are and reduce interest rates to support Government borrowing - with the result that there will be some public sector wage unrest as inflation rises.

This will suit government fine, but the knack is to inject about 10-15% inflation into the economy [which with 20% to 25% drop in house prices takes about 35% out of housing] while maintaining enough control to stop it off at the 'right' point. The inflation I imagine will happen over 27 to 33 months and be stopped off in its tracks by a sharp rise in interest rates.

Will high interest rates stop us paying stupid money for our home energy, travel fuel and food? I suppose we can all cut back somewhat and I'm sure I'm not the only one at posting surrounded by insulation packs ready to put in the loft when we get a day of rain andf having bought a tiny car, but there is still a limit to how much we can cut back, isn't there?

In the short term, it may cause some pain, but the objective will be to destroy the excess value in the housing market but minimize negative equity. To this end salaries must rise to mop up the excess value.

[Negative equity will still be a big issue for 4-8 years for those unfortunate enough to have become ftb's in the last 18-24 months and those foolish enough to venture out as ftb currently, particularly those buying flats or being sucked in by shared equity].

[nb I'm only a bloke who posts on the internet]