Buy To Let Blog
Not our comments but Buy To Let Blog Comments
Blog: Today's nationwide report states that house price to earnings ratio is 5.2.
before the last crash in 1990 this ratio peaked at 5.0 (long term average is about 3.6 -4.0).
City boys are no predicting a 15-20% reduction in prices to restore equilibrium.
Is is time to sell up and leave the country?
Blog Reply: So what?
The prevailing interest rates at the time, also need to be taken into account. In 1990 interest rates were a lot higher then they are today. This means that houses are still more affordable then they were in 1990. (If you look at the proportion of peoples income that goes on mortgage payments, it is a lot less today then it was in 1990.)
No one statistic tells a complete story.
Blog: I studied this chart (or one with the same stats) on a website at the weekend and it was at its peak at the end of last year and has aleady started to fall - no great falls in prices and the HP/E already stabilising so no crash looming IMHO.
I agree, different factors, market and conditions - its affordibility that counts and no matter what these stats say - mortgages are still very affordable even though prices per se might not appear to be.
'Statistics are just a bunch of numbers looking for an argument!'
Blog Reply: No, the report has not taken the interest rates into account. If we accept that interest rates are now 4% ish (residential mortgage rate) whereas in 1989 they were 12%+, then if a ration of 3 or 4 was acceptable, then that would translate to a new factor of 9-12!!
Frankly, I think it is logical that house prices will rise again toward those levels, once the masses get over the hysteria pumped out by the media!
Blog Reply: Perhaps the French financial experts have advice on all this?
Blog Reply:Absolutely !
As said above, it is a question of affordability ie % of earnings that go towards mortgage costs.
eg: Assuming interest rate @ 12%, interest only mortgage would cost £12k per annum
A PE of say 4 average means people on average £25k pa would buy house on average @£100k. £12k interest = approx 50 % of earnings
If int rate = 4%, all other things being equal, £4k interest = approx 17% of earnings. So prices can still go a long way up (thus increasing PE ratio), unless interest rates were to rise dramatically (very unlikely in the short term...).
Having said that, PE is an average and does not reflect the two extremes (ie first time buyer / top end of the market) and if First Time Buyer affordability starts to be affected, it has a knock on effect on the rest of the buying / selling chain.
Bonsoir !
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