House Price Inflation/Income/Old Age

Generali

92203 wrote: »

Like many of the people I spoke to at work, I was astounded to see that the housing market seems to be making a recovery, and that yearly HPI is at 9%.

What I'm having trouble comprehending is how prices can continue going up at such a rate, especially bearing in mind that incomes are not rising in line with this. I work for a major PLC who have frozen pay for the last two years, and intend doing so this year too.

House prices can't rise faster than wages indefinitely as if they do, at some point people just run out of money to buy them.

This can be shown using a compound interest calculation which is pretty simple.

Price in y years time = price today x (1 + annual increase in houses)^y

Similarly for wages input:

Wage in z years time = wage today x (1 + annual increase in wages)^z

The annual increase in houses or wages figure should be the percentage change divided by 100 so an increase of 9% would be 0.09 in the above calculation.

Try playing around with it. Real wages (ie inflation adjusted) in the UK have increased by an average of 2.3% over the past 50 years I think. Real house prices by 2.39%*. Try putting in 6% instead for the house price for example (roughly the real rise in prices for the past year) and after a certain period a person's gross wage wouldn't cover the mortgage interest on a house.

Generali

If we start, for example with a modest 1 bed flat in a very modest part of Brixton:

http://www.findaproperty.com/displayprop.aspx?edid=00&salerent=0&pid=5103829

on for £130,000 so say we can get it for £125,000 with a bit of tenacity.

Now we take a first time buyer, she's the Head of Finance for Lambeth council on £60,000 a year:

http://www.jobsgopublic.com/jobs/head-of-finance-fin104/

She puts down £20,000 deposit (4 months gross wages) so takes a mortgage of £105,000 at 5.5%. She pays £481.25 in interest each month and grosses £5,000.

Now we apply 6% compound interest to the flat and 2.3% compound interest to our FTB's wage. After 62 years:

- The flat is selling for £4,633,121.18**
- The wage for that job has risen to £245,969.83pa*** or £20,476.67pm
- The deposit is now £81,906.67**** (4 months gross income)
- The mortgage is now £4,551,214.15*****
- The monthly mortgage payments at 5.5% are £20,859.73******

So after 62 years, the mortgage interest on a grotty flat in a violent part of London is greater than the gross income of the Head of Finance of the local council!

If you use different assumptions you end up with a different point at which house prices are unsustainable however MSE, who presumably have no axe to grind regarding asset pricing, described nominal annualised HPI of 9% as "House Prices Creep Up".

If something cannot be sustained then one day it will stop.






*According to Wake up to Money a few weeks back. No link sorry.
**=125,000*1.06^62
***=60,000*1.023^62
****=245,969.83/4
*****=£4,633,121.18-£81,906.67
******=£4,551,214.15/12

ukcarper

To be honest Generali as someone who is not a bear or bull I don’t think you need such a long and complicated post explain that because it’s obvious.

I do accept some of Hamishes arguments regarding supply and demand but one thing that puzzles me is that over the last 40 years mortgages have been based on salary multiplies. Lets say that only the top 50% can afford to buy and the criteria is 3 x joint salary. Therefore 3 x the salary of the lowest paid of that 50% plus a deposit would be the price of a FTBs property. Now if the criteria changes to 4x salary surely that figure would go up to 4x that salary plus deposit, therefore the change in lending criteria has obviously caused property prices to increase or have I missed something.

MRSTITTLEMOUSE

ukcarper wrote: »

To be fair I think most youngsters do what we did and get on with it. I have 3 kids all in their thirties all are buying their own houses without any help from me. Most of their friends are doing the same and this is in the Southeast.

My own kids are that age too and have managed to buy along with most of their friends,some in their early 20s.
Some just recently.
So how come so many moan on this board about doing the same thing.

LydiaJ

ukcarper wrote: »

So whats your point what am I supposed to do

You're not supposed to do anything about his post. He's contrasting your attitude to others on here who aren't so reasonable. Read his post in a sarcastic tone of voice and you'll realise that he's on your side.

Generali

ukcarper wrote: »

To be honest Generali as someone who is not a bear or bull I don’t think you need such a long and complicated post explain that because it’s obvious.

I do accept some of Hamishes arguments regarding supply and demand but one thing that puzzles me is that over the last 40 years mortgages have been based on salary multiplies. Lets say that only the top 50% can afford to buy and the criteria is 3 x joint salary. Therefore 3 x the salary of the lowest paid of that 50% plus a deposit would be the price of a FTBs property. Now if the criteria changes to 4x salary surely that figure would go up to 4x that salary plus deposit, therefore the change in lending criteria has obviously caused property prices to increase or have I missed something.

Sorry, I hoped it was a simple post. There is something quite pleasing about the laths of compound interest for me. Perhaps I should get out more.

ukcarper

LydiaJ wrote: »

You're not supposed to do anything about his post. He's contrasting your attitude to others on here who aren't so reasonable. Read his post in a sarcastic tone of voice and you'll realise that he's on your side.

Thanks I must be feeling a bit sensitive this morning

Linton

ukcarper wrote: »

To be honest Generali as someone who is not a bear or bull I don’t think you need such a long and complicated post explain that because it’s obvious.

I do accept some of Hamishes arguments regarding supply and demand but one thing that puzzles me is that over the last 40 years mortgages have been based on salary multiplies. Lets say that only the top 50% can afford to buy and the criteria is 3 x joint salary. Therefore 3 x the salary of the lowest paid of that 50% plus a deposit would be the price of a FTBs property. Now if the criteria changes to 4x salary surely that figure would go up to 4x that salary plus deposit, therefore the change in lending criteria has obviously caused property prices to increase or have I missed something.

Seems right to me - I cant see what you are puzzled about.

Surely in a situation of limited supply the price of a starter home will always rise to the point where the people who really want one and are prepared to make sacrifices in other areas can just afford it.

In the past 40 years perhaps the major cause of house price inflation has been the increasing number of wives working. 40 years ago many wives didnt work (or only worked for pin money). Now wives are full members of the work force households have a greater real income and can therefore pay more for their starter home - the prices rise to match, and from a housing point of view no-one is any better off. In fact single earner households are worse off.

Another factor is interest rates. A further one the decline in multi generation homes. 40 years ago 3 generation homes were common, now the oldies live on their own and the children also want their own home as soon as they start earning.

The sad and paradoxical thing is that what any government does, apart from increasing the supply or persuading people to share, will only make things worse.

I dont think leaving things to the "market" will help either. If houses start to become more affordable people who previously could just afford a starter home will want something better. Builders get more profit from more expensive homes and so will increase the numbers of those. So we will get inflation in the size and quality of starter homes, rather than an increase in number.

Bring back council housing?

ukcarper

It seems right to me but some people seem to argue that the relaxing of lending criteria hasnt had the effect of pushing prices up. The wife thing is a good example there was a time when a wives income was not taken into account fully. So do more wives work because they have to or were thier earning taken into account fully because more wives were working.

Linton

Relaxing the lending criteria must have had some effect in leading some people to believe they could afford to buy. Whether they actually could of course depends on the interest rate.

The history of working wives I find very interesting in that it seems to be a good example where everyone behaves rationally in their self interest in response to market forces and yet the end-result can be counter productive. A counter example in arguments with the free-market enthusiasts.

Wives presumably took paid work because technology enabled them to do so (washing machines etc) and families believed that it would increase their wealth. Expectations and prices then rise to the point where two earners become essential and no-one is any happier. Arguably people are less happy because of the increased stress on the family.

From this point of view, market forces then come in and the lenders realise they can safely increase the amounts lent and so relax the lending criteria.