Saturday, 4 April 2009

How do we get to three?

The house price to income ratio is coming down. At the end of last year, average house prices were 4.6 times average incomes, down from a peak of 5.9 during the autumn of 2007.

The FSA would like to limit mortgages to three times income. However, the market has a long way to go before this ratio is satisfied.

At the end of last year, average house prices were ₤158,437, with average incomes at ₤34,314. In order to get to a ratio of three, house prices would need to be ₤102,942, which is about 35 percent lower than where prices are now.

There is an alternative. Incomes could grow, with house prices remaining constant in nominal terms. What kind of pay rise would we need? Average earnings would need to rise to ₤52,812 - a rise of 54 percent. That could be easily sorted...if we suffered from a couple of years of double digit inflation.

When we begin to look at ratios such as debt-to-GDP, house prices to income, and mortgage affordability, we begin to see the diabolical attraction of inflation to New Labour and the Bank of England. Inflation is a stealth tax; it robs savers by rendering their liquid assets worthless in order to diminish debt levels.


JKA on Economics said...

We don't get to three. The long run ratio of house price to earnings is around 4 times. The FSA is a mortgage to earnings target don't forget the deposits. Some have cash!

electro-kevin said...
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electro-kevin said...
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electro-kevin said...

"The average salary figure is therefore £32,785.85. [2008]

Why is this figure higher than the national average figure that is usually trotted out as a result of polls in the mid £20k region?

Well, the most likely explanation would seem to be that those who used the internet to search for sites where they could check their salary and came across the site and then filled in their data in some way had an element of self-selection in it biasing the data towards those who earn slightly more than the perceived national average (e.g. office based workers wondering how their salary compared to the market average)."

I got this from I do not believe for one minute that the average worker earns at this level.

jdc said...

"Why is this figure higher than the national average figure that is usually trotted out as a result of polls in the mid £20k region?"

Because it's average full-time male earnings. The £20k includes women who earn less, and part-timers who earn less.

Anonymous said...

I am not so sure that inflation in the UK necessarily spills over into UK wages given that mainly the UK has import inflation. The most problematic of which is our dependence on food imports.
Fundamentally, the UK has the problem that we do not make goods that are desirable in comparison with the production of other countries. Until we do, fiddling around with the money supply will simply be reflected, as now, in a dramatically lower exchange rate.
That the US is in a similar bind shields us, but all things being equal, the US will come out of recession before we do, and the lack of desirable UK production will become apparent.
Our export market was selling our debt. That has gone now. For some crazy reason, when the media reports on exports they consider only manufacturing exports and so judge germany and other producers harshly. Our total exports have crashed though as our debt exports stopped. The government is still supporting what is left of the debt export industry but obviously that is a matter of time.
Irrespective of what happens to UK house prices in nominal terms, in foreign currencies they will continue to crash.

Anonymous said...

Electro-Kevin - the difference is probably down to mean vs median figures. Mean full time salaries in the Uk are early-mid £30k's, whilst median is mid-late £20k's.

Whilst the median gives a more realistic picture of what average people earn (as it's not skewed by the uneven distribution), the mean is probably more often used as the basis for house price multiples. I'm guessing house prices tend to be expressed as means rather than medians.

Anonymous said...

since their whole strategy is to prop up the house of cards with mountains of cash pasted to the girders, inflation seems to be their only course,

Sackerson said...

EK: there's also the alternative of the average household income; and some give separate figures for London and provincial averages.

Anonymous said...

You seem to mix up two things in the article. Average house price to income ratio, and average mortgage to income ratio. Whilst many people do mortgage to the hilt, people who have been on the ladder for years build up equity in their property and so could easily afford to buy property many times their income while mortgaging only a far smaller sum which may indeed not exceed the three times income multiple.

I admire the notion that banks should not lend more than three times income, but while I think this will put a brake on the irrational exuberance we have just come through, in practice people will find other ways to get their hands on more. Unsecured loans, loans from parents, loans from the Solicitor General or any other millionaire of acquaintance. Best leave things to the market and not bother with targets. Though I suppose now banks know they will not be allowed to fail, they can have no limit to their greed and stupidity from now on.

Anonymous said...

There is a very serious problem with juicing British salaries to wipe out debt: the British are so, so not worth it. Look at the productivity charts: they say it all. Declining manufacturing the same. Britain does not have anything on offer that is worth paying people on average £52,000 a year. Sorry. I mean, think about it, some twit with a Jamie Oliver warble, bad manners, out of shape and bloated, no hair: and you think that will wow the world? Puhlease!

QG said...

"the diabolical attraction of inflation to New Labour and the Bank of England."

Congratulations Alice, you've just cracked the code (well, OK you knew ages ago.) The most terrible thing about this is that the house price gamblers were right! Yes I'll say that again: THEY WERE RIGHT!!!

As long as we have a tax system that rewards speculating on house prices, those engaged in truly productive, wealth enhancing activities will come second.

Those are the rules (for now.) That's life.

dearieme said...

It is not possible to have a long-run average of 4 while having excursions only on the upside. If the long-run average is to remain at 4 we are going to have to spend some time below 4.

electro-kevin said...
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electro-kevin said...

JDC - I know relatively few male workers in the £35k salary region.

I think other commenters are right here when they say that the figure for average salaries does not mean the same thing as the effective salaries when it comes to demand for average housing.

Average salaries have been calculated by including top end earners whose yearly pay exceeds £80k - some go waaaay above this. The mean salary is what counts and vast swathes of our populations' earnings hover around this figure.

The salary of the vast majority of people seeking to buy the average house ?

£25k I'd guess.

powerman said...
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powerman said...

I live in the south, outside London.

Everybody I know under the age of about 35 who owns a home either earns 40k+ (if single), or more than 70k a year as a couple, or had help from an inheritance.

powerman said...

Printing money only devalues the pound to export markets if the trade partners central banks don't do the same (which it looks like many are).

The main way in this scenario I can envisage wage inflation being kicked off as a means of deflating household debt ratios would be to channel the new money into public sector salaries.

electro-kevin said...

That confuses me, Powerman.

If inflation mitigates mortgage debt then how does that help ailing banks ?

powerman said...

Well, the root of the credit problem is that the populace the bankers lend to have reached the limits of the debt that they can service with their incomes and started defaulting on mortgages and other loans.

A cheap, stupid way of fixing this is to artificially make their incomes larger relative to their debts. Then they can start making their payments again.

electro-kevin said...

And what is the average price of a house in the area where your friends earn £40k+ ? I'd wager it's higher than the national average.

I think the point that Alice is making is that the lending limit must stay at a disciplined 3x salary and for the average salary to be £52k - and this is simply to stop house prices falling ! (Should x3 become 'the law')

Doesn't it just show what a farce it all is !

powerman said...

Yes, average house prices around here (Oxfordshire) are higher.

I don't really disagree with Alice's point at all. I'm just pointing out that our economy's central planners might well try and reach that ratio with inflation of incomes rather than deflation of nominal asset prices. The temptation to do the former is great in a debt-based monetary system, especially when other economies seem to have broadly agreed to devalue their own currencies at the same time.

Anonymous said...

I don't know a single person who bought their home with their money (and I am 42!). All used mommy and daddy's money as a deposit. None saved it, earned it. I have saved close to £40,000 but still can't afford anything in London (despite living in a ghetto).

Anonymous said...

Britain does not have anything on offer that is worth paying people on average £52,000 a year.

Depends .... on the devaluation of the GBP, does it not?

Which is probably Gordon the Browns only, real plan

CityUnslicker said...

anon 15.38 - i bought my own flat aged 23 wth my own savings and have carried on ever since. many people I know did; they are all mainly accountants and lawyers though.