House price/earnings ratio and reality

macaque_2

According to this website (http://www.worldsalaries.org/employment-income.shtml), the UK was the third highest paid in a group of 26 countries in 2005. The average disposable income in the UK was $26,312 which was 3.2 times higher than Poland and 6 times higher than China.

If the UK earnings/house price ratio were to be restored to long term affordability levels by means of wage inflation, this would take us to the top of the global earnings league by a country mile.

In the 1970's when emerging markets were still in their infancy, successive governments used wage inflation to unravel debt mountains. If the UK tried this today, the wealth creating sector of the UK economy (already badly battered) would simply decamp to other parts of Europe, Eastern Europe and the Far East. The result would be unemployment of biblical proportions.

The UK is desperately looking for a free lunch but its not there. The only way out of our current difficulties lies with investment in industry, hard work and moderate salaries. And, for obvious reasons, it will have to be the numerator rather than the demoninator in the house price/incomes equation that has to give way.

Linton

macaque wrote: »

.....
If the UK earnings/house price ratio were to be restored to long term affordability levels by means of wage inflation, this would take us to the top of the global earnings league by a country mile.
.....

It would be helpful if you could come up with some numbers to justify this assertion. To save time I suggest you do take into account:

1) House-buying households will tend to have 2 incomes. This is rather different to the situation 40 years ago.

2) The average house buyer has, and always has had, a higher income than the average member of the total population.

macaque_2

Linton wrote: »

It would be helpful if you could come up with some numbers to justify this assertion. To save time I suggest you do take into account:

1) House-buying households will tend to have 2 incomes. This is rather different to the situation 40 years ago.

2) The average house buyer has, and always has had, a higher income than the average member of the total population.

I'm not sure what assertion you want justified but if it's earnings multiples, we are somewhere between 50-70% (depending on how you calculate risk) above historically safe ratios. Even with interest rates at less than 1%, bad debts are proving to be a chronic and growing problem with the current lending ratios.

Two income households, have been common since the 2nd world war. For obvious reasons however (divorce, job loss, sickness, children etc) calculating affordability ratios on the basis of two incomes does not reflect a safe bet as a lending criteria.

In terms of average income, I would go further than your comment. This does not just apply to the total population but also to the working population (inevitable in a housing bubble). This is why first time buyers have become so rare (I believe the average first time buyer is now over 37).


The crunch issue today is not whether home owners can afford to meet their mortagage payments (although that is proving a problem for many even at 0.5% base rates). The biggest issues are:

1. Who will buy property at current prices when home ownders want to trade up or trade down?
2. Will 2 million home owners will walk away from their debts if house prices fall by 15%. And if they do, what happens to the property market then?

Make no mistake, it is a very delicate situation. We have to get back to affodable lending ratios but the economy will have to pick it's way through a mine field to get there.

ash28

macaque wrote: »

I'm not sure what assertion you want justified but if it's earnings multiples, we are somewhere between 50-70% (depending on how you calculate risk) above historically safe ratios. Even with interest rates at less than 1%, bad debts are proving to be a chronic and growing problem with the current lending ratios.

Two income households, have been common since the 2nd world war. For obvious reasons however (divorce, job loss, sickness, children etc) calculating affordability ratios on the basis of two incomes does not reflect a safe bet as a lending criteria.

In terms of average income, I would go further than your comment. This does not just apply to the total population but also to the working population (inevitable in a housing bubble). This is why first time buyers have become so rare (I believe the average first time buyer is now over 37).



The crunch issue today is not whether home owners can afford to meet their mortagage payments (although that is proving a problem for many even at 0.5% base rates). The biggest issues are:

1. Who will buy property at current prices when home ownders want to trade up or trade down?
2. Will 2 million home owners will walk away from their debts if house prices fall by 15%. And if they do, what happens to the property market then?

Make no mistake, it is a very delicate situation. We have to get back to affodable lending ratios but the economy will have to pick it's way through a mine field to get there.

2 income households may have been common since the second world war but 3 x joint income being used for a mortgage was not.

The link between base rates and mortgage rates doesn't seem to exist now, except for those lucky enough to have been on a base rate tracker at the start of the "crunch". I don't know any lender offering 0.5%. I don't know anyone on that rate, but I do know that a number of people are.

Trading up or trading down is usually discretionary unless you have to move because of your job or can't afford your mortgage repayments - though if you are in arrears you usually need your lenders permission to sell.

2 million home owners can't walk away from their debts if house prices fall by 15% - they will owe and be pursued for the balance of their mortgage. They can walk away from their house but not their mortgage or any outstanding balance after a house is sold by the lender. 15% negative equity is probably the lesser of evils.

House prices falling or negative equity has nothing to do with being able to pay your mortgage - interest rates rising, job loss and family breakdown will, but not falling prices in themselves. Most people will pay their mortgage if they are in negative equity, if you have a repayment mortgage the loss in equity will be eroded anyway and fairly quickly if you are able to make small over payments.

The loss in equity on the average house price of say, £165k would be around £25k if prices fell 15% - not enough to stop paying your mortgage for or to lose your house over I would have thought and if your 2 million home owners walked away, yes it would have an impact on house prices but they would still need somewhere to live - so what would happen to the rental market?

Would we see a big return of BTL, maybe from people like us who have a bit of money and who could afford to buy a couple of cheap properties and rent them out to some of those 2 million home owners who will be looking for somewhere to live?

People here do not have the option of the "strategic default" that seems to be happening in the US - well they do of course, but in the end they will have to pay what they owe or emigrate, or hope the lender will write off the debt.

Linton

macaque wrote: »

I'm not sure what assertion you want justified but if it's earnings multiples, we are somewhere between 50-70% (depending on how you calculate risk) above historically safe ratios. Even with interest rates at less than 1%, bad debts are proving to be a chronic and growing problem with the current lending ratios.
I believe the two assertions above need justification if your argument is to be believed.

Two income households, have been common since the 2nd world war.
I would suggest that two income households 60 years ago arose from economic and social pressures on the poorest people. These people werent generally in the house buying market. In nice middle class households, wives didnt normally work except in "pin-money" jobs. The social pressures were on such wives to stay at home and look after the children, which they mostly did. And because of previous discrimination they, in general, did not have the skills/education to take the better paid jobs.

For obvious reasons however (divorce, job loss, sickness, children etc) calculating affordability ratios on the basis of two incomes does not reflect a safe bet as a lending criteria.

Whether it's a long term safe lending criterion or not, it doesnt in practice make much difference. House buying is a competitive process, those households with two incomes will mostly be able to outbid single buyers and so make housing unaffordable to them. Lending is also a competitive process, so competition will ensure that the lenders will "colonise" the market for 2 income households willing and able to pay the higher mortgage costs.

In terms of average income, I would go further than your comment. This does not just apply to the total population but also to the working population (inevitable in a housing bubble). This is why first time buyers have become so rare (I believe the average first time buyer is now over 37).

Possibly linked to the delay in marriage.

The crunch issue today is not whether home owners can afford to meet their mortagage payments (although that is proving a problem for many even at 0.5% base rates).

An assertion that requires evidence.

The biggest issues are:

1. Who will buy property at current prices when home ownders want to trade up or trade down?
2. Will 2 million home owners will walk away from their debts if house prices fall by 15%. And if they do, what happens to the property market then?

More assumptions. Trading up or down is an personal option, if people arent happy with current prices they wont sell.

Why will 2M home owners want to "walk away" from their debts? Most home owners bought their houses many years ago and are well into positive equity. Even if you get into negative equity, as long as you can afford the interest payments why should you want to leave your home?

Sure a housing crash is conceivable, but only in the context of an national/international catastrophic economic failure. In such circumstances why would the wannabe FTBers be immune from the effects and so find houses affordable?

Make no mistake, it is a very delicate situation. We have to get back to affodable lending ratios but the economy will have to pick it's way through a mine field to get there.

Noone seriously claims that the current situation is desirable. What I am claiming is that it is an inevitable consequence of the build rate of new houses, the strong desire for most people to buy a house rather than rent, and a market economy.

This final sentance is added because the system wont let me post a reply entirely in quotes.

smeagold

It seems we have almost a 2 tier system with those that own houses can happily swap them amongst each other well out of range of first time buyers and young people. and plus they can continue to buy lower priced homes for 'buy to let' keeping the young people off the housing ladder permanently.

The boomers can continue to 'live the life' and the young can just struggle, who cares about them just so long as they contnue to fund our pensions and health costs through taxation.

macaque_2

Linton wrote: »

This final sentance is added because the system wont let me post a reply entirely in quotes.

Good grief Linton, you really tested the 'quotes box' to destruction.

We can debate lending ratios till the cows come home and people will always say that it is different now. Even if you create a lending rule it will work for some and not others. But all of this misses the point.

The last two property down turns have caused serious casualties. In the 1990's it was the borrowers and in 2008 it was the lenders. This represents clear evidence that prevailing lending ratios are far too high. The safe lending limit has to take account of interest rate variations, unemployment and income growth.

The lending ratio that has proved most effective has been 3.5X the first income and a 1X the second income. Some borrowers at the moment are more than 200% above this number and if interest rates went up, there would be an epidemic of defaults.

The point of the OP was that lower lending ratios are essential (except for borrowers want to put up large deposits). This means that wages have to go up or house pricess down. Given that the UK is near the top of the global earnings league, higher wages don't look realistic.

brit1234

I think interest rates at 0.5% says it all. If rates have to lowered that low then we know the system is clearly overvalued and very sick.

Linton

macaque wrote: »

......

The last two property down turns have caused serious casualties. In the 1990's it was the borrowers and in 2008 it was the lenders. This represents clear evidence that prevailing lending ratios are far too high. The safe lending limit has to take account of interest rate variations, unemployment and income growth.

I dont see much evidence of serious casualties arising from lending to the residential housng market.

I dont remeber what happened in the 1990s but AIUI the lenders that got into trouble in 2008 were either those that based their capital management on an inadequate model (NR, B&B) or those that invested heavily in the commercial property market (Halifax).

The commercial market is totally different to the residential one - frequent excess supply, reliance on short term lets rather than long term mortgages, very highly dependent on the wider economy.

Linton

brit1234 wrote: »

I think interest rates at 0.5% says it all. If rates have to lowered that low then we know the system is clearly overvalued and very sick.

The commercial economy is very sick since the access to wholesale credit disappeared overnight when Lehman's failed. This is why the bankrate was reduced. Any effect on residential property prices is a side-show.

brit1234

Linton wrote: »

The commercial economy is very sick since the access to wholesale credit disappeared overnight when Lehman's failed. This is why the bankrate was reduced. Any effect on residential property prices is a side-show.

I think you are rewriting history, residential property prices is the main event not the side show.

The whole crisis was caused by irresponsible lending, too low interest rates and mass fraud through out the western world hence international housing bubbles. Securisation was rampant here as well if you didn't know.

Also you should check your time lines and I think your find the run on Northern Rock was well before Leman brothers