Thursday, April 06, 2006

House prices

Chris Dillow is pondering the price of houses. He assumes, correctly I think, that "an average house, unlike say a Ferrari, is the sort of thing which a reasonable person might strongly want." His conclusion is that one would need to earn £50,000 a year or so to afford a house; however, I think that his calculations are out.
* Here are the numbers. According to HBOS, the average house price is £175,215. Assuming a loan of 90% of the price at 3.11 times income (the averages for first-time buyers according to the CML) this means you need an income of £50,700 to buy it. This neat tool shows that such an income would put a single person in the top 3% of earners. 

The trick is that most first-time buyers, certainly outside of London, will not spend anywhere near £175,000. Most people will go for a slightly smaller home than they might like, in order to get in the property ladder in the first place.

He also uses the average mortgage borrowing rate of 3.11 times income, whereas 4 or 4.5 times income is not terribly difficult to obtain at present, and is easily affordable. For instance, the capital/interest repayments on my mortgage of £64,000 costs £380 per month.

The most expensive flat bought by a first-time buyer that I know, and let's face it, Edinburgh is not cheap, was £116,000. To buy this at 4 times salary mortgage would mean that you would have to earn £29,000 (with capital/interest repayments of about £680 per month at 5%), a salary which is by no means impossible. Far more so, out in the sticks here, than the £50,000 that Chris quotes.

The tool that he used to calculate where that fits in, would put a single person on £29,000, with £1200 a year Council Tax, in the top 5% of earners. However, there is a caveat.
Each bar corresponds to an income band of about £6, and to maintain a reasonable scale, it has been necessary to truncate the distribution at incomes above around £671 per week. Around 3%, or 1.6 million individuals, have incomes higher than this, after adjusting for the size and composition of their households.

Now, I could be reading that wrong, but that seems to imply that the above person would actually be in the top 8% of earners (in a household of one person).

The real problem, of course, is that getting a 100% mortgage is tricky (and you'd almost certainly need a guarantor): Chris is quoting a 90% mortgage. So, on £116,000 property, then you would need to put down £11,600, which is quite a large sum of capital. Which is why I oppose Inheritance Tax: because capital enables social mobility.

Thanks to Gordon's retrospective Trust Fund raid, people will now find it even harder to obtain the capital to buy property. Do you see?

6 comments:

Richard Brown said...

Does that website not work on post-tax income?

chris said...

The reason why houses cost a lot is very simple, supply and demand. There is a lot of demand for owning a house, but the supply has been artificially constrained by planning regulations. Small supply with a high demand means high prices. If prices are to fall either demand must fall (unlikely) or supply must increase, which means looser planning regulations.

Devil's Kitchen said...

Chris,

I don't think it is that simple, really. When I looked for a flat, I looked for one of the older tenement blocks. Now, that may be a personal preference, but I suspect that it's one that is shared by many. Apart from anything else, they are better built with better sound-proofing than the modern builds.

And people spending tens of thousands are going to wait till they really find something that they want. Thus, older flats in Edinburgh sell for ludicrous sums (my flat has almost doubled in value over 5.5 years with only the addition of central heating), whereas many new builds stand almost empty.

What I mean is that there's personal preference factor to take into account here.

DK

Panlane said...

Actually I found the reverse, there being massive interest in new-builds in my area hence the erection of them. People like modern houses because they feel, however erroneously, that they will not require any work and have no problems.

The issue with housing prices is in my view a supply and demand issue that has been further driven up by property market speculation. In keeping with DK's comments, I bought a house in the North for £80k a couple of years ago and it's easily managed by first-time buyers on small-to-moderate incomes such as myself. No sensible person starts where they hope to end up. You start low and aspire.

neil craig said...

I agree with Chris. A century ago a car, not a Ferrari just a car, cost at least as much as a house. Now houses cost more than 10 times as much. Now part of this is that cars are now a developed technology & part of it is that they have stopped making land (though we can build higher than ever before) but the overwhelming bulk of the change is that regulations that stop people building & when they do stop them using modern technology. The latter point is proven by the enthusiasm of people for century old houses. Car technology has improved to the extent that nobody would dream of using a century old car.

Anonymous said...

"Which is why I oppose Inheritance Tax: because capital enables social mobility."

This (unlike the rest of the post) is total arse. You're talking about sums in the region of £10-20k to fund a housing deposit, and nobody outside of the Revolutionary Communist Party is suggesting that there should be a 100% tax on all inherited income.

The status quo, where you can leave enough money for 28 people to pay deposits on houses before tax even cuts in, works just fine for this kind of social mobility, while also transferring money from rich people who have houses worth more than £280,000 to the majority who don't.

The legitimate arguments against inheritance tax centre on fairness and incentives. Trying to make a counterfactual point about social mobility is cute, but obviously rubbish.

PDF

The very model of a modern scientific man

Your humble Devil was thoroughly amused by Neil Ferguson's fall from grace, and is very pleased to have found the time to outline Fergus...