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Debate House Prices
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House prices and affordability
HAMISH_MCTAVISH
Posts: 28,592 Forumite
House prices "doubling in 10 years" is a nice sound bite, but of course it's not remotely representative of whether or not houses became unaffordable.
Because people's wages also increased during that time, costs of living fell, and the cost of servicing mortgage debt decreased as well.
Not to mention of course that house prices move in cycles, and comparing a trough to a peak is, well, a bit misleading.
There is nothing to say that house prices at the absolute bottom of a cyclical trough (as they were in the mid 90's) are the "right price" for houses. Just as the same argument can be made for prices at peak.
So we have a situation where prices in 2007 are arguably too expensive, and prices in 1997 are arguably way too cheap.
But too cheap or too expensive in comparison to what?
The house price to single salary ratio is deeply flawed as it does not take into account changes to household income, dual earners, lower interest rates, falling costs of living, changes to after tax income, etc.
And as the "long term" average for this was skewed through being set over the three decades of the highest rates in the BOE's 300+ year history, and at a time when women typically worked and earned less than today, it's essentially of no relevance.
But even this measure suggests that houses are not particularly over priced today.
According to Halifax, the long term average for house prices is 4.0 times male, mean, average salary. Whereas the average house price today is around 4.5 times male, mean, full time salary. Now given the structural change to the interest rate environment and increasing prevalence of dual income households, this should tell anyone with a bit of common sense that house prices aren't really overvalued at all.
As surely even the most vocal housing bear should be able to realise that what is affordable to a single wage earner with a non-earning spouse and two kids, paying higher taxes, higher essential costs of living, and 15% interest rates in 1990, will be radically different to what is affordable to a Dual Income couple today, paying 5% interest, and with lower taxes and lower essential costs of living.
Of course, you could also use the percentage of after tax income required to service a mortgage. Perhaps a fairer measure, as it takes into account wage inflation, taxation changes, etc.
And on this measure, a mortgage for a new purchaser today would require just 29% of after tax income, versus the long term average of 37%, and versus 68% in 1990. So again, on this measure it is clear that housing is certainly more affordable today than the long term average, and massively more affordable than it was 2 decades ago. (indeed, even in 2007 with higher rates and prices, affordability on this measure remained massively better than it was in 1990)
But even those measures really miss the point, which is this.
There is no reason house prices should stay at a particular level, or ratio of affordability. Indeed, house prices have done exactly what you'd expect in an open and free market. Increased dramatically as a response to the critical shortage of housing that we have in this country.
Now don't get me wrong, if you remove 70% of mortgage funding from a market, prices will crash no matter how much of a shortage exists.
But the difference between house prices inflated by a speculative bubble, and house prices inflated by a genuine supply and demand imbalance can only be seen AFTER you remove the funding.
So when here in the UK we removed 70% of funding, prices fell by 20%, and promptly recovered half those losses to sit at just 10% below peak where thy sat for the last 5 years. (Nationwide)
Before rising rapidly today now some semblance of normal mortgage lending has returned.
Whereas in Ireland, prices fell by 50%, and in the USA by 40%. And all that despite the fact that all three countries responded with ultra-low interest rates, liquidity support, bank bailouts, help for homeowners, etc.
And the reason why the three markets responded so differently is clear.
Housing vacancy rates:
Ireland = 17%
USA = 13%
UK = 3%
And so there we sat in the UK, with endemic mortgage rationing but stable prices just a bit below peak for 5 years. Whilst rents soared to new record highs instead.
While other countries with ZIRP saw their house prices fall off a cliff thanks to a surplus, prices here weathered the storm with barely a meaningful discount in sight in most areas, thanks to a shortage.
In the last few years, we've added 400,000+ people per year, formed around 250,000 new households per year, and built just over 100,000 houses per year.
Meaning the crash and credit crunch have made the shortage even worse than it was.
And even in the boom years, we never once, not even for a single year, built enough houses to keep up with population growth and household formation changes.
It should therefore come as no surprise that prices remained high and are rising again today.... after all when you only build for example 30% of the houses you need, only the top earning 30% of households need to be able to afford them. That's how markets ration goods in short supply. Through price.
Now look, I understand why so many posters are desperate to believe prices only rose because of "lax lending".....
Because the reality, that we are short a million houses already, and need another 3 million built in the next 10 years just to keep up with growth and keep prices at today's levels, is a staggeringly hard concept to grasp if lower prices are what you want to see.
In fact, any rational person would have to concede that we haven't a hope in hell of meeting those targets.
Therefore any rational person would have to also concede we haven't a hope in hell of seeing cheaper housing costs over the medium to long term.
Because people's wages also increased during that time, costs of living fell, and the cost of servicing mortgage debt decreased as well.
Not to mention of course that house prices move in cycles, and comparing a trough to a peak is, well, a bit misleading.
There is nothing to say that house prices at the absolute bottom of a cyclical trough (as they were in the mid 90's) are the "right price" for houses. Just as the same argument can be made for prices at peak.
So we have a situation where prices in 2007 are arguably too expensive, and prices in 1997 are arguably way too cheap.
But too cheap or too expensive in comparison to what?
The house price to single salary ratio is deeply flawed as it does not take into account changes to household income, dual earners, lower interest rates, falling costs of living, changes to after tax income, etc.
And as the "long term" average for this was skewed through being set over the three decades of the highest rates in the BOE's 300+ year history, and at a time when women typically worked and earned less than today, it's essentially of no relevance.
But even this measure suggests that houses are not particularly over priced today.
According to Halifax, the long term average for house prices is 4.0 times male, mean, average salary. Whereas the average house price today is around 4.5 times male, mean, full time salary. Now given the structural change to the interest rate environment and increasing prevalence of dual income households, this should tell anyone with a bit of common sense that house prices aren't really overvalued at all.
As surely even the most vocal housing bear should be able to realise that what is affordable to a single wage earner with a non-earning spouse and two kids, paying higher taxes, higher essential costs of living, and 15% interest rates in 1990, will be radically different to what is affordable to a Dual Income couple today, paying 5% interest, and with lower taxes and lower essential costs of living.
Of course, you could also use the percentage of after tax income required to service a mortgage. Perhaps a fairer measure, as it takes into account wage inflation, taxation changes, etc.
And on this measure, a mortgage for a new purchaser today would require just 29% of after tax income, versus the long term average of 37%, and versus 68% in 1990. So again, on this measure it is clear that housing is certainly more affordable today than the long term average, and massively more affordable than it was 2 decades ago. (indeed, even in 2007 with higher rates and prices, affordability on this measure remained massively better than it was in 1990)
But even those measures really miss the point, which is this.
There is no reason house prices should stay at a particular level, or ratio of affordability. Indeed, house prices have done exactly what you'd expect in an open and free market. Increased dramatically as a response to the critical shortage of housing that we have in this country.
Now don't get me wrong, if you remove 70% of mortgage funding from a market, prices will crash no matter how much of a shortage exists.
But the difference between house prices inflated by a speculative bubble, and house prices inflated by a genuine supply and demand imbalance can only be seen AFTER you remove the funding.
So when here in the UK we removed 70% of funding, prices fell by 20%, and promptly recovered half those losses to sit at just 10% below peak where thy sat for the last 5 years. (Nationwide)
Before rising rapidly today now some semblance of normal mortgage lending has returned.
Whereas in Ireland, prices fell by 50%, and in the USA by 40%. And all that despite the fact that all three countries responded with ultra-low interest rates, liquidity support, bank bailouts, help for homeowners, etc.
And the reason why the three markets responded so differently is clear.
Housing vacancy rates:
Ireland = 17%
USA = 13%
UK = 3%
And so there we sat in the UK, with endemic mortgage rationing but stable prices just a bit below peak for 5 years. Whilst rents soared to new record highs instead.
While other countries with ZIRP saw their house prices fall off a cliff thanks to a surplus, prices here weathered the storm with barely a meaningful discount in sight in most areas, thanks to a shortage.
In the last few years, we've added 400,000+ people per year, formed around 250,000 new households per year, and built just over 100,000 houses per year.
Meaning the crash and credit crunch have made the shortage even worse than it was.
And even in the boom years, we never once, not even for a single year, built enough houses to keep up with population growth and household formation changes.
It should therefore come as no surprise that prices remained high and are rising again today.... after all when you only build for example 30% of the houses you need, only the top earning 30% of households need to be able to afford them. That's how markets ration goods in short supply. Through price.
Now look, I understand why so many posters are desperate to believe prices only rose because of "lax lending".....
Because the reality, that we are short a million houses already, and need another 3 million built in the next 10 years just to keep up with growth and keep prices at today's levels, is a staggeringly hard concept to grasp if lower prices are what you want to see.
In fact, any rational person would have to concede that we haven't a hope in hell of meeting those targets.
Therefore any rational person would have to also concede we haven't a hope in hell of seeing cheaper housing costs over the medium to long term.
“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”
0
Comments
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It's a shame you need to make your point by stating everyone who questions your opinion is irrational.0
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Most of the HPI deniers will find it very difficult to get their heads around this.HAMISH_MCTAVISH wrote: »It should therefore come as no surprise that prices remained high and are rising again today.... after all when you only build for example 30% of the houses you need, only the top earning 30% of households need to be able to afford them. That's how markets ration goods in short supply. Through price.
Now look, I understand why so many posters are desperate to believe prices only rose because of "lax lending".....
Because the reality, that we are short a million houses already, and need another 3 million built in the next 10 years just to keep up with growth and keep prices at today's levels, is a staggeringly hard concept to grasp if lower prices are what you want to see.0 -
i didn't read any of the OP - don't suppose there are any new points in it?FACT.0
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HAMISH_MCTAVISH wrote: »
The house price to single salary ratio is deeply flawed as it does not take into account changes to household income, dual earners, lower interest rates, falling costs of living, changes to after tax income, etc.
This is the part I find difficult to grasp. Apart from actual mortgages being very cheap by historical standards, there certainly doesn't seem to be falling costs of living at the moment.0 -
HAMISH_MCTAVISH wrote: ».......
In fact, any rational person would have to concede that we haven't a hope in hell of meeting those targets.
Therefore any rational person would have to also concede we haven't a hope in hell of seeing cheaper housing costs over the medium to long term.
Of course your argument is (if not new) spot on. You've mentioned most of the key drivers and dispelled most of the myths.
At the end of the day, I couldn't agree more about the rationality aspect. Nitpick we may. But to disagree with the thrust is to claim with a loud voice "I am not capable of rational thought. I cannot see the obvious staring me in the face. I prefer to argue on an emotional level, which flies in the face of fundamental facts."
Those of us paying a mortgage for 40 years, and monitoring our house equity have all "been there before." We have seen periods of time when half the net household income went to the Building Society. No. We didn't like it one bit. Those wanting to get onto the housing ladder at the time didn't like it either. But I don't recall anything like the whinging, newspaper articles, irrational doom & gloom predictions about house prices, or much sympathy from anyone else.
We just got on and bought our houses.0 -
shortchanged wrote: »This is the part I find difficult to grasp. Apart from actual mortgages being very cheap by historical standards, there certainly doesn't seem to be falling costs of living at the moment.
It might have gone into reverse now but looking at measuring worth website it shows that £1 in 1990 would be = to £1.64 in 2007 using RPI but using earnings it would be £2.10.0 -
shortchanged wrote: »This is the part I find difficult to grasp. Apart from actual mortgages being very cheap by historical standards, there certainly doesn't seem to be falling costs of living at the moment.
Although they are not falling at the moment, I think you will find that he means 'real' falls, which is the long term trend - as measured by wage inflation rising faster than price inflation over any 'reasonable' period in modern history.
To choose an exceptional post crash period as an example of 'the way things are' is not a valid argument.the_flying_pig wrote: »i didn't read any of the OP - don't suppose there are any new points in it?
If you ask nicely, maybe your mum will read it to you....0 -
shortchanged wrote: »This is the part I find difficult to grasp. .
We know.
But wages have risen faster than general inflation since the bad old days of high interest rates.
We have significantly more disposable income now than we did a few decades ago, despite houses being more expensive.“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth, persistent, persuasive, and unrealistic.
Belief in myths allows the comfort of opinion without the discomfort of thought.”
-- President John F. Kennedy”0 -
HAMISH_MCTAVISH wrote: »
We have significantly more disposable income now than we did a few decades ago, despite houses being more expensive.
http://news.sky.com/story/1095972/british-families-feeling-spare-cash-strain
Maybe Hamish, but household income in the UK is still being squeezed and this at a time when mortgage rates are at an all time low.0 -
HAMISH_MCTAVISH wrote: »We know.
But wages have risen faster than general inflation since the bad old days of high interest rates.
We have significantly more disposable income now than we did a few decades ago, despite houses being more expensive.
Past performance isn't necessarily true of the future."If you act like an illiterate man, your learning will never stop... Being uneducated, you have no fear of the future.".....
"big business is parasitic, like a mosquito, whereas I prefer the lighter touch, like that of a butterfly. "A butterfly can suck honey from the flower without damaging it," "Arunachalam Muruganantham0
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