House Prices 10 x Earnings Now.

Generali

cells wrote: »

people are cutting their cloth to fit what they can afford,

a couple on £50k wage each will get you a £500k home which is maybe an ok 2 bed flat in z2

a couple on £31k wage each in 2000 (equivalent to £50k now) would get an ok 4 bed terrace in z2

this is how prices are staying 'affordable' people are effectively moving down a step for each 5 years of HPI. Problem is once the couple earning £50k each who can buy a 2 bed flat can only get a 1 bed flat what is the next step down to allow 'affordability' to continue?

In the long term prices can't rise faster than incomes otherwise, as you say, nobody can afford to buy.

If we take the couple on £100,000 buying a £500,000 place and increase wages and inflate their incomes by the general level of income growth (2.9%) and inflate house prices by 7.5% per year (price increase in Merton, definitely Zone 4):

In year 1, incomes have risen by £2,900, house has risen by £37,500. Okay, no iPhone for you guys and you might have to forgo the skiing holiday.

Skip forward a decade to year 11. Their incomes have risen to £136,952.23 but the house has gone up to £1,107,804.46 Might have to wait for a rich maiden aunt to die and leave us quarter of a house in Harrow.

Go forward another 20 years and our protagonists' kids are a decade out of uni and looking to buy. Their income is now the best part of £250,000 as incomes have kept rising at 2.9%. That 2 bedder in Wimbledon is now selling for £4,705,788.41 or 19.4x their income!

By the time that couple have kids in perhaps 69 years from the start of the story, the house is now 102x their income. In a hundred years, 3 generations for the middle class these days, the 2 bed flat in Wimbledon costs almost 400 times two professional incomes.

The thing is, this must be unsustainable and if something is unsustainable it will, by definition, stop. Your guess is as good as mine what will make that happen but it will definitely come to an end.

cells

Generali wrote: »

In the long term prices can't rise faster than incomes otherwise, as you say, nobody can afford to buy.

If we take the couple on £100,000 buying a £500,000 place and increase wages and inflate their incomes by the general level of income growth (2.9%) and inflate house prices by 7.5% per year (price increase in Merton, definitely Zone 4):

In year 1, incomes have risen by £2,900, house has risen by £37,500. Okay, no iPhone for you guys and you might have to forgo the skiing holiday.

Skip forward a decade to year 11. Their incomes have risen to £136,952.23 but the house has gone up to £1,107,804.46 Might have to wait for a rich maiden aunt to die and leave us quarter of a house in Harrow.

Go forward another 20 years and our protagonists' kids are a decade out of uni and looking to buy. Their income is now the best part of £250,000 as incomes have kept rising at 2.9%. That 2 bedder in Wimbledon is now selling for £4,705,788.41 or 19.4x their income!

By the time that couple have kids in perhaps 69 years from the start of the story, the house is now 102x their income. In a hundred years, 3 generations for the middle class these days, the 2 bed flat in Wimbledon costs almost 400 times two professional incomes.

The thing is, this must be unsustainable and if something is unsustainable it will, by definition, stop. Your guess is as good as mine what will make that happen but it will definitely come to an end.

I agree with you but I think both of us in 1995 would have said its extremely unlikely that London house prices could go up 8.8% compound a year for 20 years in fact I think both of us would have said the notion of it was silly. However that is exactly what happened

I understand London from 1995-now went through a very rare event of long term population decline followed by population boom so I don't think it likely to repeat the 8.8% compound growth over the next 20 years. However I do expect it to outpace wages by 2-4% a year for the next 20 years which mean a house in real terms is still going to get 50-100% more expensive


beyond that I think the exponential function is going to say no.....unless the cure to old age is found in which case....:eek:

Generali

cells wrote: »

I agree with you but I think both of us in 1995 would have said its extremely unlikely that London house prices could go up 8.8% compound a year for 20 years in fact I think both of us would have said the notion of it was silly. However that is exactly what happened

I understand London from 1995-now went through a very rare event of long term population decline followed by population boom so I don't think it likely to repeat the 8.8% compound growth over the next 20 years. However I do expect it to outpace wages by 2-4% a year for the next 20 years which mean a house in real terms is still going to get 50-100% more expensive


beyond that I think the exponential function is going to say no.....unless the cure to old age is found in which case....:eek:

I agree but clearly that can't last in the very long term and I think that it wouldn't be unfair to say that for most of that time, London houses have been coming back to a reasonable value plus some froth on top of that before and after the GFC.

In the end, compound interest kills the argument that the current situation can be sustained. It's just a matter of when.

michaels

I guess we can also factor in that the average house is probably 'bought' over a 30 year finance period and that 30 year interest rates have fallen reducing the actual cost of purchase. However again this is something where there is a lower bound to rates and however low rates go only the interest part of capital plus interest is affected.

Thrugelmir

Generali wrote: »

The thing is, this must be unsustainable and if something is unsustainable it will, by definition, stop. Your guess is as good as mine what will make that happen but it will definitely come to an end.

Are incomes rising at 2.9% across the board? Or are the figures skewed by the increases the lower paid are receiving.

CLAPTON

Generali wrote: »

I agree but clearly that can't last in the very long term and I think that it wouldn't be unfair to say that for most of that time, London houses have been coming back to a reasonable value plus some froth on top of that before and after the GFC.

In the end, compound interest kills the argument that the current situation can be sustained. It's just a matter of when.

in the long term we are all dead


but in slightly shorter timescales, price ris3es can be sustained if the people per house in increased.


with the increase in London's population landlords can pack more in per house and so can afford higher prices


there is potential for this to continue for many more years
with increase in gdp a greater proportion of income can be devoted to 'rent/mortgage' which will also sustain higher prices

mwpt

cells wrote: »

I agree with you but I think both of us in 1995 would have said its extremely unlikely that London house prices could go up 8.8% compound a year for 20 years in fact I think both of us would have said the notion of it was silly. However that is exactly what happened

Interest rates dropped over that timeframe. I would sorely love to see a graph showing monthly mortgage payments vs monthly rents over that term. They'd be much more closely linked than the rents vs asset price graph.

But still, someone should be along shortly to re-explain supply/demand to me.

Generali

Thrugelmir wrote: »

Are incomes rising at 2.9% across the board? Or are the figures skewed by the increases the lower paid are receiving.

I don't know. I understand that the data are available from the ONS.

As the public sector is only getting low rises I would imagine that flattens rates at the low and the near top end (maybe the 8 & 9th decile).

Are the minimum wage increases significant thus far?

martinsurrey

Sibley wrote: »

Thing is. Not actually true. People should cut their cloth like we did. Nothing wrong with one bedroom flat to start off with.

average age of first time buyer in 1960 was 23

average now is 31-35

a 1 bed flat might be fine if you're a 20 year old, but try that with a family in your 30's...

cells

martinsurrey wrote: »

average age of first time buyer in 1960 was 23

average now is 31-35

a 1 bed flat might be fine if you're a 20 year old, but try that with a family in your 30's...

there is simply going to be no choice if build rates do not go up substantially.
people will need to accept smaller and smaller homes or be forced out of London which is what has happened over the last 15-20 years. People who could afford a 3/4 bed terrace can now only get a 2 bed flat