Entries Tagged 'house-prices' ↓

House Price Earnings Ratio

This shows the ratio of house price to average earnings for first time buyers. Although first time buyers is only a segment of the market, the trends are indicative of wider trends in the ratio of house prices to earnings.

As expected, the ratio of London house price to earnings is higher than the UK average. This is despite London having higher wages than the UK average. The relative shortage of space for new houses, means house prices in London have been pushed up to over 7 times average earnings at the peak in 2007.

The long term average for house price to earnings ratio is 3.5.

In the last boom of the late 80s, the ratio got close to 5.0. This meant that 2007 set a new record for house price to earnings ratio.

Despite fall in the house price to earnings ratio it still remains above the long term average.

Is it possible for House Price to Earnings Ratios to Increase in the Long Term?

Long Term House Price to Earnings Ratio (FTB)

House price to earnings ratios could increase in the long term if:

• There was a period of stable and low interest rates, reducing the cost of mortgage interest payments.
• If parents increasingly give deposits to children to enable them to buy more expensive houses.
• If there is a continued shortage of housing due to restrictions on building new houses and continued growth in number of households.
• If banks are willing to lend mortgages with bigger income multiples or if banks / government encourage more – part rent / part buy schemes.

The Credit crunch of 2007-09 caused banks to abandon their previous reckless mortgage lending. 100% mortgages and mortgages 5 times incomes were quickly removed as banks ran out of funds to lend. There may seem little prospect of banks returning to this kind of lending, but, that’s probably what people thought in 1995 after last crash.

Problems of House Price to Earnings Ratio.

Just because the long term house price ratio could increase, doesn’t mean it will. If it does increase, it creates various problems:

• More difficult for young people to get on property ladder.
• Higher % of Income going towards cost of mortgages
• Re-distribution of income from young to old.
• Buying a house may depend on having generous parents.
• Increased pressure to take out risky mortgages several times income.

House Price statistics

One feature which makes it difficult to examine state of house prices is the difference between the asking price and the actual selling price. Data on asking prices can be misleading because in times of falling house prices asking prices can often lag behind the real selling price. Conversely in a period of rising house prices, houses may end up going for more than asking prices. This is a feature of gazumping – the phenomena of people offering a higher price at last moment before sale is completed.

This difference is of vital importance for people considering putting an offer on a house.

Hometrack found that in March 2009, on average, sellers were receiving 88.8 per cent of their asking price. Slightly higher than the all time low of 88.3% in Jan 2009. This is still a big discount. For a house on sale for £200,000 = £177,600.

The variance between asking and selling price can vary significantly between different regions of the economy.

In a period of rising house prices, this difference invariably narrows as people have to offer more. The difference between asking and selling prices often reflect the time lag between putting the house on the market and selling it.

Currently the average time on the property market is 11 weeks. So in a period of falling house prices, market prices are falling during the long wait. The longer you take to sell, the lower offers you will receive. This is why it is advised to always set a realistic asking price rather than try to remember past values.

For buyers, it is crucial to have an awareness of current selling prices and asking prices to help you make the right offer. It is worth finding out how much house prices actually go for. In the current climate, you could be saving yourself 10-15% on the asking price – a big saving!

Despite a slight improvement in house price statistics in January, the annual rate of house price inflation in the UK slumped to -16% for 2008-09. Source: BBC

The best forecasts for 2009, suggest falls of 5-10%. The worst forecasts suggest falls of 25% or more.

On the Negative side. Many factors are pushing house prices down

1. House prices fell for four years during last slump

2. Economic Recession The recession continues to worsen threatening more unemployment and therefore more home repossessions.

3. Lack of Funds for Mortgages. The Banking Sector is still fragile after more bad debts exposed from credit crunch. Lending conditions likely to remain tight.

4. House prices still expensive. House price to earnings still higher than long term averages

5. Lack of Confidence as falling prices and recession put people off.

• Why House prices are falling

Positive Aspects for House Prices

1. Government encouraging new lending from Northern Rock
2. Nationalised banks may have more stability for lending.
3. Low interest rates make mortgages relatively attractive to renting (if you can get mortgage that is)
4. Long term shortage of housing may come into play at some stage.

• Housing Market Statistics
• Historical house prices

Readers Question: I would like to know that what are the factors that effect the price of houses in UK and does government policies make any difference to it?

The most important factors for influencing house prices in the UK

Market sentiment. If people see house prices rising and they expect prices to continue rising, more people will buy a house. Also, when confidence in the market is high, lenders are more willing to lend mortgages with small deposits / large income multiples. At the moment(2009) confidence is very low, people see house prices falling so don’t want to buy and banks don’t want to lend mortgages without a big deposit.

Interest Rates. The cost of mortgage interest payments depends on the interest rate set by the Bank of England. If interest rates are increased, the cost of mortgage repayments rises; this discourages people from buying and it may force people to sell. In 1992 interest rates were over 12% and this caused a large fall in demand for housing and house prices fell. However, at the moment (2009) interest rates have been cut very low (1.5%) but demand is still falling. It is cheap to pay a mortgage, but, this is outweighed by the fact mortgage availability is low and confidence is low.

Economic Growth / Unemployment. Strong economic growth and falling unemployment increases disposable income meaning people can spend more on buying a house. It also increases confidence in buying a house. When the economy goes into recession (falling GDP and rising unemployment) many are put off buying a house so house prices are likely to fall.

Mortgage Availability. At the height of the housing boom 2003-2007, banks were liberal in giving mortgages. We saw self-certification mortgages, interest only, 100% mortgages, mortgages 5 times salary. This increased the number of people able to buy. After the credit crunch, the availability of mortgages fell sharply because banks didn’t / couldn’t lend any more. This caused a fall in demand and prices. This factor has shown to be very important.

Supply. A shortage of supply is liable to cause rising house prices, especially in the long term. Due to long term shortages of supply, some predict UK house prices will rise in the long term quite significantly. In the US, they currently have a surplus of housing supply so a rebound in the property market is unlikely. (long term factors affecting price)

Demographic Factors. A rising population will cause rising demand for housing in the long term. As well as population it is important to consider the number of households. e.g. an increase in the number of divorces and single people increases demand for housing more than rise in population

Speculation. When prices are rising, people may buy houses as an investment property. e.g. many foreigners bought houses in the boom years. There was also a rise in buy to let housing.

Ratio of House prices to income. In theory, house prices should reflect a ratio of house prices to income in the long term. However, in the short term house prices can often rise much faster than income because of the factors mentioned above.

House prices continue to fall amidst sluggish property sales. The dynamics of the market mean that falling house prices create a powerful negative momentum for both the economy and housing market.

Lenders don’t want to lend With falling house prices.

When prices are rising, mortgage loans of 95% value make sense. However, when prices are falling they don’t make any sense. Householders buying on 95% mortgages will soon face negative equity. With home repossessions rising, banks could be left with high debts and losses. Therefore, despite government pleas to offer more mortgages, banks are understandably trying to protect their battered balance sheets and requiring large deposits.

The number of mortgages requiring more than 25% deposit has risen from 54% to 60%. Therefore, although property prices are falling, the deposit required has been rising – hence the improvement in affordability is illusory for a nation that has a very low saving ratio.

People Don’t Want To buy.

When house prices are falling at 15%, and most economists predict further falls of 15-20% where is the incentive to buy? People are choosing the common sense approach to rent rather than buying. This is causing a further fall in demand. When house prices rise, speculative demand increase. When prices fall, demand evaporates. House prices are now in their 3rd year of decline in the US.

House Prices and Economy.

The current recession shows the importance of housing to the wider economy. There are other factors at work, but, falling house prices is definitely having a significant negative effect on consumer wealth and consumer confidence. This is causing the fall in consumer spending which is leading to retail giants going bust and rising unemployment. But, as unemployment rises, repossession rates will rise and people will be nervous to buy. Therefore, the recession causes further declines in house prices.

Bank Balance Sheets

In the credit boom years of 2001-2007, banks were highly leveraged, they lent a high % of their deposits. – especially former building societies like Northern Rock and Bradford & Bingley. This means they are reluctant to lend. But, falling house prices will worsen the financial state of the major banks meaning lending conditions could get worse before they get better.

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The housing market is facing acute short term difficulties. In particular:

• Drop of mortgage lending (there has been 45% fall since this time last year) has caused a big fall in demand for housing. It means that potential homeowners, especially first time buyers are finding it very difficult to get a mortgage. If this freezing of the mortgage market continues, house prices are liable to fall quite significantly.
• A good question is how long will the mortgage crisis last? The Bank of England has attempted to inject liquidity by offering £50bn of government securities; they even promise up to £100bn. However, there are signs that this is not creating extra finance as hoped. Most banks have still not passed on the lower rates. There are also fears that the full extent of the subprime losses have not been accounted for. Therefore, some feel the situation will get worse before it gets better. Nevertheless, over time, lending in the mortgage markets is likely to improve (even if it doesn’t get back to 2006-07 standards). It is in the banks interest to resolve the shortage of mortgage funding. There is demand for mortgages and they should be profitable for banks if they can sort out the issue of raising finance.

Long Term Interest rates.

As house prices slow, the economy will also slow. This should enable cuts in interest rates. This is complicated by a rise in cost push inflation. However, these cost push factors (such as rising oil, food and energy prices) are liable to be short term. It is unlikely that commodities such as food will continue to rise at their present rate. Oil prices may remain high over $100 a barrel, but to maintain the present annual increase in prices, would be very unlikely. In the medium term it is unlikely that we will see a significant rise in interest rates; it is more likely that interest rates will be slightly lower than the current 5% rate. Therefore, borrowing for a mortgage will remain relatively attractive compared to renting. The long term affordability of mortgage payments is below historical peaks in 1991. As a % of disposable income it is not unreasonable to predict that demand for mortgages will remain strong amongst the UK population.

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Falling house prices certainly create no shortage of newspaper headlines. Although some of these headlines can sound unnecessarily apocalyptic, falling house prices are not quite the end of the world. In fact falling house prices can be of benefit to some people.

Who Benefits from Falling House prices?

First time buyers. At the moment the ratio of house prices to incomes are very high, close to 5 times salary. Falling house prices will enable increased affordability. Also rising salaries and pricing can mean that real house prices will fall than more than nominal. If you are a first time buyer then waiting for a while can enable prices to become more affordable.

People wanting to buy bigger Houses. If your house price is falling in value, then it will also be cheaper to buy other houses. If you are wanting to trade up to a more expensive house, this will actually make it cheaper.
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I wrote a lengthy summary of the main factors that affect house prices here.

In the UK, the supply of housing is fairly inelastic; this means it is unresponsive to changing prices. The number of houses being built is relatively low, therefore, supply increases only slowly. This means that changes in demand for houses will be influential in determining house prices. A small rise in demand will cause a significant rise in price. But, also a small fall in demand will cause a significant fall in prices. (It is a myth that areas with shortage of supply cannot see falls in prices)

What Determines Demand for Housing?

Traditional factors.

1. Incomes. Economic growth and rising incomes means people can afford bigger mortgages so demand for housing rises.
2. Interest Rates.  Higher interest rates increase cost of mortgage repayments, reducing demand for buying.
3. Number of Households. Rising population leads to increased demand. Also, the number of households can increase faster than the population. For example, recent years have seen an increase in the % of single people households. Social factors such as rising divorce rates can influence demand for housing Continue reading →

Last March, saw house prices fall in UK by some of their biggest % levels for many years. April and March are traditionally a good time of the year for selling a house, but, the credit crisis has changed the nature of the housing market and prices look set to fall by 10-15%.

Of all the reasons mentioned here – House prices set to fall I think the most important reason is the drying up of the mortgage market and the credit crisis. The Bank has promised to inject money into mortgage sector. But, even £50 billion may be insufficient in a mortgage sector worth over £1.19 billion or 85% of total GDP.

The council of mortgage lenders notes that mortgage approvals are down 40% and this is causing a shortgage of first time buyers. In recent years, first time buyers have been able to overcome rising house price to incomes ratios by using mortgage products which enable big mortgage to income ratios. But, these products and mortgages with low deposit ratios have been withdrawn or made more expensive. Therefore there is a significant fall in the number of buyers.

For house prices to fall to their long term average of house price to income ratios, even bigger falls may be expected. However, on the positive side, base rates are set to fall (even if banks don’t pass these on to consumers). Falling house prices are unlikely to increase the cost of homeownership; therefore, for most people who buy a house to live in, there should be no panic to sell.

Furthermore there is still a fundamental shortage of supply in the UK, which may mean that long term house price to incomes ratios continue to be higher than in previous decades.

Alot depends on how deep the credit crisis continues to be for the UK and whether the Bank can do much to unfreeze the credit markets.

Related essays

• Overvalued Housing Markets 
• I wrote an essay on a comparison between the UK and French economy 

Unfortunately, when it comes to measuring house price statistics there are a bewildering array of different statistics and measures. Surprisingly, given the importance of house prices, the government do not have an authoritative overall statistic. To get an overall impression of the housing market, we need to look at a variety of different statistical measures. The variance in house price inflation shows the limitations of house price statistics.

Different House Price Statistics

Asking House Price. The asking house price index measures the average asking price of more than 700,000 homes across the UK. It excludes houses over £2million and houses under £20,000. The benefit of using the asking price or listing price, is that it gives a guide to the future of the housing market. The disadvantage is that selling prices can often differ from the asking price quite significantly. Asking house price index

Nationwide House Price Index. The nationwide Building society has kept data for house prices since 1958. It gives the longest historical set of data. The Nationwide accounts for 12% of the Housing Market. Also has a house price index calculator Nationwide House price index

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