A housing puzzle

In my day job, I point out that a single person must be in the top 3% of earners if s/he is to afford the average house. My gut instinct is that this is not a desirable state of affairs.

But I try not to think with my gut. Here are some attempts to rationalize this instinct. They start from the premise that an average house, unlike say a Ferrari, is the sort of thing which a reasonable person might strongly want.

1. It’s welfare-inegalitarian. For most people, houses are only affordable if you are in a meaningful relationship. People with such relationships, or the illusion thereof, are happier than others. In giving these greater opportunities for home-ownership, we are giving more to the better off.

2. Home-ownership, as Thatcher realized, is a material stake in society. Should this be confined to a rich minority?

3. Adverse incentives. For many people, the way to afford a house is not to work hard - £50,000 is out of reach for many hard workers – but to get a partner. Efforts to do this, however, require one to work less hard – to do less overtime, to wake up later in the mornings.

Also, if you don’t own a house, it’s even harder to convert income into welfare; there’s a limit to how many books you can read or CDs you can listen to. This too limits one’s desire to earn more.

4. There’s something undesirable about being a tenant – about handing money over to a landlord, and being dependent upon his whims. It’s unmanly.

This raises two questions. Are my instincts right? If so, what should be done? A few months ago, I’d have said: “nothing, prices will fall and the market will solve the problem.” But this looks less likely now.

* 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. 

Comments

[dsquared]

Chris, CML first time buyers don't buy the Halifax average house. They buy the average first time buyer house. HBOS calculate this too for their sample and the average FTB house was £128,422 for Q1 06. This is somewhat higher than the number you can back out of the CML figures (advance / percent advance) which is £110,997. First time buyers have always bought starter homes, so it's not news that they can't on average afford average homes.

The CML actually gives the income of the average buyer and it's £32,217. That's the tenth percentile, assuming I worked out the tax, NI and council tax correctly.

[Quinn]

One thing about the housing market is that because house prices have risen so much there are loads of people with massive amounts of equity in their property. This means that there are plenty of people, like me, who can afford to pay a ridiculous amount for a house, well out of my price bracket as judged by income, purely due the the equity I have. For as long as people with daft amounts of equity buy and sell houses amongst each other then I think it could be a while yet before prices fall to levels that many first time buyers can afford. Ceterus paribus, of course.

[chris]

D2 - of course the average first-time buyer doesn't buy the average house, because they can't afford it. And even the 10th percentile of earnings is a big ask, isn't it?
Most people can only afford the average house if they already have a house. But this looks a lot like a Ponzi scheme, doesn't it?

[chris y]

This is entirely anecdotal, but everybody I know of my parents' (grew up pre-war) generation blames the introduction of MIRAS for the destruction of the unfurnished rental sector. Two generations ago, many people did not aspire to property ownership. They rented on long leases from landlords who generally left them alone, and used they capital elsewhere.

Mortgage interest relief (say the old folks) may have been a genuinely well intentioned attempt to democratise property ownership, but its success in killing off the unfurnished flat had three principal effects: firstly, it led to property price inflation which has never been brought under control; secondly, it tied people's savings into bricks and mortar almost by default; and thirdly it meant that the labour force became less flexible because people couldn't just give up their flat in Manchester and take another one in Bristol without going through all the expensive hoops of conveyancing etc.

This is a universal perception among my acquaintance, and I'd love to know if there's any basis in fact for it.

[Luis Enrique]

Doesn't this all enforce the divisions between the haves and have-nots?

If your parents own their home then you can just wait for them to kick the bucket and (say £175k house, 3 offsring) hey presto £50k+ deposit towards a place of your own. And on it goes.

Depending on how many children people have and how much property wealth is inherited, is the system self-sustaining?

[Andrew]

And yet the rates of property ownership in this country are exceptionally high - certainly not confined to the top 3% of earners.

Whether this state of affairs will continue as first time buyers are steadily priced further out of the market is arguable, of course.

[OneEyedMan]

Do we have a median versus mean problem?
If the mean is much larger than the median, than this might not be a problem. Why?
If there has been larger inflation on the high end (Larger places or in say the London Area) versus the low end (smaller, older, or say in Northern England) then most people could afford a house, just not the mean house. I presume the benefits of home ownership accrue not from owning the mean house, but mostly from owning any one at all.

[Curious]

Your instincts are right.

The market can stay irrational longer than we care to imagine. But in this specific case, my understanding is that first time buyers are not driving the market. It is those already within the property wagon that can afford to take risks that are driving it.

It is an unhealthy equilibrium, one that has defied "the fundamentals", but in so far as I wouldn't call it sustainable, I wouldn't bet my money that the current equilibrium will not be sustained for sometime. Maybe this is the new relationship? If demand were not driving up the inflation (demand-pull), then the prices would fall. So perhaps, we just have to accept that the market has sorted it out and this is the outcome (market clearance).

[dsquared]

[And even the 10th percentile of earnings is a big ask, isn't it?]

But the average first time buyer isn't a single person either; that £175k house you're looking at is a three bed, which is a bloody big house for a single person. And 3.11x income is the average mortgage gearing, but you're talking about what's affordable, not what people do actually pay. You can easily get 4.5x income mortgages. I agree that houses are getting more expensive, but this calculation is really semi-detached (ha ha I made a joke).

[Andrew Duffin]

I suspect that the price of houses will remain unfeasibly high as long as the supply remains artificially restricted, that is to say, as long as the current planning system remains in force.

What state meddling has wrought, the absence of state meddling might well undo.

Of course, there are very powerful vested interests in the current status being maintained - for instance, everyone who owns a house...

[dearieme]

chris y: I can remember my father (born 1910) suggesting that the end of Schedule A income tax was "good for us but probably bad for the country". It was a tax that owner-occupiers paid on the imputed rent for their property i.e. the rent that they would have received had they let it out. How d'ye fancy that?

[Jonathan]

You ask what can be done? How about a harder monetary policy (preferably hard currency but that is too much of a leap for most).
Most press pundits conclude the housing boom is a result of various local factors (planning restrictions, immigrations etc) but it has been a global phenomenon meaning we should look for a more global cause, such as ready availability of credit/funny money maybe?

It is interesting to observe that in countries with more responsible monetary policy (like Switzerland) property prices are more reasonable.
http://www.swissinfo.org/sen/swissinfo.html?siteSect=107&sid=5303644.
Contrast with http://news.goldseek.com/RickAckerman/1142006400.php where fundamental economic problems are considered to be fixed by juggling interest rates around a few hundred basis points.

If you made it this far, read this for a hard money view of global property boom
http://www.sprott.com/pdf/marketsataglance/03-2006.pdf

[chris]

Dearie,

Since I have a quarter of a million pound brick albatross round my neck, I don't much fancy a return to schedule "A" at all. However, assuming that you're asserting that it was a disincentive to investment in property, then I'd suggest your father (who was only two years older than mine) probably had it exactly right.

The position we are in now is that most people have the bulk of their capital tied up in an investment they can only liquidate at considerable risk, because there is no realistic housing option between short term furnished lets at the whim of the landlord and buying. I would think that it was generally unhealthy to the economy for housing to play such a central role in private investment at the expense of other sectors.

On balance disincentives to housebuying - additional taxation, low ROI, as was the case in the 50s - would lead to more labour market flexibility, more investment flexibility and less problem in housing lower paid workers, provided a well developed rental system exists. Government intervention to incentivise housebuying has destroyed the rental sector by offering tax privileges and high ROI to owners, but this has come at the cost of decreasing flexibility in both labour and investment and in the long term (i.e. now) of a serious housing crisis for the low paid.

[dearieme]

chris, I agree entirely. But I haven't a clue how one could dismantle the present madness without doing terrible and arbitrary damage.

[Alex]

Exactly. I'm tempted to cry BRRRRRING IT ON! with regard to a housing market correction, but you can't ignore that there would be a shitload of trouble and pain.