House Prices, Interest Rates and Affordability

ukcarper

bodgerx wrote: »

Office of National Statistics has average salary figures. They put 2009 full-time mean at about £27K. Average house in the UK according to the land registry was about £160K. That's almost a x5.9 income multiple.

Going back to 1979, average salary was about £7K, average house at the end of 1979 was 22K (www.homemortgage.co.uk). Income multiple: x3.14.

Only trouble with that is that average salary in uk in 1979 was only £4680 so therefore
4.6x

ukcarper

bodgerx wrote: »

Yes, but they still heavily suggest affordability is much reduced.

Since 1998

I wouldn’t argue that house prices are not the most expensive they have been and are indeed a lot more expensive than 1998. There have been good and bad times to buy houses since the 1960s so comparing the cheapest to most expensive does not give a true picture.

silvercar

After any period of HPI people are living in homes they couldn't now afford to buy. But they have no intention of moving, so aren't effected unless they need to remortgage and have high LTV or unexpectedly need to move.
So we have a lag effect where the salary to HP ratio is high, caused be previous HPI.

marc-h_2

HAMISH_MCTAVISH wrote: »

And interest rates were many times higher than today, so the real cost of buying was higher, even though the price of the house was lower.....

The only measure that matters is percentage of income spent on mortgage payments. Which is currently well below the long term average.

Hardly anyone seems to accept this. It doesn't matter if it isn't a sensible thing to do, it is a fact that this is what is happening. While interest rates are low people will get the biggest mortgage they are able to repay. This will set the level of house prices at every point in the market. The lowest earners who are in a position to buy a home will set the cheapest houses prices and the highest earners will set the cost of the most expensive homes. The salary multiple has no baring on it, right or wrong it doesn't matter as that is what is happening.

If house prices fall by 50% and interest rates stay the same (as the 10 year average not the last year) I could afford one of the most expensive homes in my area. So where are the rich people round here going to live? It just won't happen the prices will stay "high".

Every time I see a salary to house price ratio mentioned it infuriates me. This will never be a true reflection of whether house prices are low or high. If a mortgage will cost me 1/3 of my monthly income why would I care if it was 4/5/6/7/26x my Salary?

silvercar

Hardly anyone seems to accept this. It doesn't matter if it isn't a sensible thing to do, it is a fact that this is what is happening. While interest rates are low people will get the biggest mortgage they are able to repay. This will set the level of house prices at every point in the market. The lowest earners who are in a position to buy a home will set the cheapest houses prices and the highest earners will set the cost of the most expensive homes. The salary multiple has no baring on it, right or wrong it doesn't matter as that is what is happening.

The danger being that they can't afford the mortgage when interest rates rise.

If house prices fall by 50% and interest rates stay the same (as the 10 year average not the last year) I could afford one of the most expensive homes in my area. So where are the rich people round here going to live? It just won't happen the prices will stay "high".

There must be a level where people decide they have their optimium house in terms of size, style, area and spend their disposable income on other things. When people pay off their mortgage, they don't move up the ladder, they are just content that they can live rent and mortgage free.

marc-h_2

silvercar wrote: »

The danger being that they can't afford the mortgage when interest rates rise.

Yes it is a huge danger but not one that a lot of people will consider until it happens to them. They just make sure the mortgage is affordable at the current time.

silvercar wrote: »

There must be a level where people decide they have their optimium house in terms of size, style, area and spend their disposable income on other things. When people pay off their mortgage, they don't move up the ladder, they are just content that they can live rent and mortgage free.

Some people may think like that but many more would love the chance to have a much nicer house, especially while they are young.

bodgerx

ukcarper wrote: »

Only trouble with that is that average salary in uk in 1979 was only £4680 so therefore
4.6x

Mine's the ONS figure - what's yours?

ukcarper

bodgerx wrote: »

Mine's the ONS figure - what's yours?

Can you give me link to that I've cross referenced mine to the only two sources I can find

http://news.bbc.co.uk/1/hi/business/593477.stm

http://www.tuc.org.uk/welfare/tuc-16902-f0.cfm

ukcarper

Here is another link which seems to confirm my figure
http://www.theyworkforyou.com/wrans/?id=2007-06-04d.140556.h

HAMISH_MCTAVISH

In 1967, members of my family earned and paid the following......

GPO phone engineer (same as a BT phone engineer today) £1000 a year.

Teacher £720 a year.

3 bed semi-detached house £3900

Note, an "average" house was 3.9 times an above average wage at the time for the area, closer to 5 times a teachers wage, and mortgage interest rates were in double digits.

By 1977, the neighbouring semi detached was £11,000, mortgage rates were 15%, and they bought it and knocked the whole thing into one house.

Compare those figures to today.......

At same point in career, BT engineer would earn around 30K. Teacher around 25K. Same size 3 bed house in same town would sell for around 175K. But with mortgage rates at 5%, not 15%.

It's nonsense to say affordability is much worse today than it was then, in much, if not most, of the country.