all right all those predicting a crash, how about today's headline "houses to cost 10x salary"?

[RanToTheHills]

Discuss.
What do you reckon then?

Having followed some of the house price threads on here, was interested to see today's headline. It fits in wiht my view that although house prices are inflated, a a dire shortage of housing will continue to drive up prices in hte medium/long-term.

Could do wiht the reassurance as about to take on a huge mortgage!

iywym, but have to plan around something.

Steep rises in interest rates could be painful too.

It all worries me, I have just had a big pay rise and we were thinking of moving to be closer to dp mother who we look after at the weekend but the thought of increasing our mortagage does worry me.

x10 = it will never happen

either interst rates are going to bite the buy-to-let people, who will liquidate/sell

supply and demand, simple economic rule

or wages will inflate and houses will crash in real terms not nominal

maybe, could go either way.

Still, at least the debate has moved on from sweeping " playing hte innocent victim" remarks. Hmm, thanks for that again, expat. Most unnnecessary!

Layman - you think a crash won't happen. Or 10 x salary?

I can't see x10 happening as where will people get the money from.

Whatis the average in London now?

I must admit I'm a bit fuzzy on the whole house thing but I thought I read if first time buyers weren't first time buying things would crash. Therefore the 10X thing couldn't happen because people couldn't buy....?! Or am I an idiot?!?

I think prices will eventually come down, boom and bust and all that! Of course I have cemented my dubious economic credentials in the first paragraph so who am I to know!

Can't pretend to be an economic sage but had this debate at length with OH before buying current place. We came to the conclusion that provided we could reasonably make the repayments on the mortgage in the case of rising rates (which we have since had) it was worth going for the place we wanted. We still love it!

In an attempt to add something to the debate though I did read an article last year which put forward the argument that prices were unlikely to fall because so much of the money coming into the housing market is recycled as so many more pensioners own homes now, which then pass to children / grandchildren who immediately plough the money straight back into the housing market along with a sizeable chunk of their own hard earned cash.

The argument seemed to be that on this basis the prices would continue to rise until there was a significant outflow of cash from the housing market to equal the flow in from earned income. As I am not encouraging my parents to blow the value of their homes before I have a chance to inherit it I guess this may be some way off!

Some of the pro-crash lobby argue that the baby boomers due for retirement soon will sell to downsize and there will be a glut of top of the chain houses on the market and that will cause their prices to drop and so on down the chain.

But nobody really knows for sure. What I do think exists is awe and amazement at the totally extraordinary prices asked for very ordinary places. Everything is expensive.

that;s it. We're paying a stupid amount for an ordinary place, like so many other people.

I agree with Layman, the houseprice boom has been fuelled by buy-to-lets and (in London) by city bonuses. But so many flats are now being built that rents are staying low and landlords are struggling to cover their mortgages (no sympathy here) so maybe a lot of landlords will have to sell up quickly at more realistic prices. The housing market relies on a good supply of first time buyers so if these people could only hold off buying for a few years and share cheap flats with lots of friends or live with family etc, they could actually take control of the housing market. Unfortunately, they're persuaded by banks etc that if they don't get on the ladder NOW, they never will and banks are only to willing to offer new ways like buying with friends, family etc. It really pisses me off (and I'm not even affected by it) because again, it's the banks who benefit most.

So after all that rambling, I think house prices can't carry on rising forever more because eventually first time buyers will just not be able to afford houses and will just live with parents, sleep on the sofas of friends etc.

Sadly, most "business correspondents" have absolutely no knowledge of economics, indeed any sort of science does very badly, especially on the BBC.
Note that we don't get the standard "two views" on this, just horror stories. This is because journos are usually surprisingly badly paid, and so believe this like they believe in gravity. They see people who studied proper subjects at Uni buy homes, and feel that their "right" to buy has been violated.

House prices show very strong correlation with earnings, the term we never ever used in the media is "mean reversion", ie it bounces around a the average. We are currently at the highest it has been as a multiple of average earnings.

Do some very simple maths.
A homeowner typically pays around 40% of their earnings in tax (income, council tax, etc), and we can assume that ain't coming down.
Thus, even if they don't spend any money on food, travel, clothes or fuel, they have 60% of earnings to use on mortgages.
An mortgage rate of around 8% is 1/12 the capital borrowed.
At the least, in the long term you must at least keep up the interest, even if you never reduce the capital borrowed.
Thus the maximum debt you can possibly service is 12*0.6 = (about) 7 times what you earn. Even to get that far, I've had to make stupidly unrealistic assumptions.

Of course savings allow you to get past this a bit, but with million quid mortgages, very few people can hold that up for more tha a couple of weeks without being sucked dry.

If you are someone who has realistic prospects of a sharp increase in earnings, then you might borrow 5 or even 6 times earnings and get away with it. But at ten times there simply won't be people able to pay the mortgage, so they won't but the homes.

What the BBC and other media have simply failed to grsap is that prices are not set monopolistically. If you try and sell your house for more than people can afford, you won't sell it.

If you have 10

Oh DC, that really is bollocks about journalists. FGS why do you think everybody except you is so dim?

The economics correspondent I know has a first class degree in economics.

...and although I myself studied an Improper Subject and am therefore of course condemned to girlish pauperdom, I happen to co-own a house too. In which I work. As a journalist.

NFK - I'm of the opinion that we will never see x10

There will be a crash,wether it be reduced prices or pay rises will start to realistically match the prices - a crash in real terms.

I'd rather bet on nominal because in this global marketplace wage rises are going to take years imo.

I have an utterly useless degree, used to work in the media and am about to buy a house outright.

Second half of message got lost - journalists write about house price crashes because it's more sensational than 'house prices stable' or 'slow decline in price/earnings ratio'/ Not out of vindictive envy

layman - come to the southeast, the 10x thing is already happening. Most 3 bed semi's here (which we will decide is the 'average' comfortable house for the 'average' family) sell for around £325,000. So you need to earn £32,500 to afford it based on a 10x ratio. Yes, some people around here earn way more that, but I also know many (my dh included) who only just earns that amount.
Luckily for us we live in a two bed semi with large garden thus can extend - which is much cheaper than moving) but I know many people who are borrowing ridiculous amounts to buy a house.

Ditto hippo - couldn't get much round here for less than £450,000 with enough room to swing a cat....lots of friends buying at the moment and each house going to sealed bids - the world's gone mad!

Also whilst I waited at the bus stop and read someone elses newspaper they are talking about the "next generation" - not imminently and I think there are far too many other global considerations etc to take into account.

Also DomiCon - I don't quite understand your point - mortgages are based on pretax earnings..

Many buy-to-let are selling up - if you have a mortgage on b2l you can't just hike up rent when interest rates rise to many l/l are currently having to meet the shortfall.

Interest rates are only going one way at the moment.

there are too many people who can afford to buy to let and do, so most of the once average family houses (here anyway) and being brought as an investment. which is wrong.

too many large houses being built too in the region on £500,000+. sod the green belt build houses on them.

But Astra I think with another hike in interest rates we'll see more of these coming onto the market. A year ago I was looking at rental ppty and two family homes which were rental have come on market and sold