Is first time UK house buyer income really surging faster than house prices?

12th June 2014 by The Harried House Hunter

One of the features of the credit crunch has been that more than a few countries have seen busts in their housing markets follow booms. In places like Spain and Ireland these have been severe busts and of course substantial house price falls were seen in parts of America such as Florida. The International Monetary Fund which suddenly seems to have housing issues on its mind has weighed in on this issue.

In fact, our research indicates that boom-bust patterns in house prices preceded more than two-thirds of the recent 50 systemic banking crises.

If you stare hard at their global property index chart you see that the rally began as the clock ticked us into 2012. So it is interesting to see that the IMF is worried this time after only two years of house price rises! What was that about stable doors and horses?

An issue for the Bank of England

The Bank of England has been trumpeting the line that macroprudential policies are the way to deal with a house price boom in the UK. However the IMF intriguingly seems much less sure about this.

the policy toolkit to manage housing cycles is still under construction.

It does get more positive later but I note the use of short-run. What about the medium-term or even the long run?

Though evidence thus far suggests that macroprudential policies are effective in the short-run in cooling off housing markets, it is clear that honing them remains a work-in-progress.

The tools for containing housing booms are still being developed. The evidence on their effectiveness is only just starting to accumulate.

This rather contrasts with the bullishness of the Bank of England on this subject. Of course its attitude had the problem that there are times back in the UK’s economic history that such measures have been tried. The fact that they were then abandoned gives one a rather eloquent clue as to their effectiveness.

Vince Cable intervenes

The UK Business minister was interviewed on this subject on the Radio 4 Today program and if we move away from political bluster he did offer his opinions on house prices and particularly earnings to ratios.

Between 3 times and 3.5 times is stable

This was much more revealing than he intended it to be! Let me explain why by telling you that the Halifax Building Society calculated it as being 4.8 in the first quarter of this year. They also go to trouble to get a favourable number (using full-time male employee earnings for example). If the Business minister wishes to look for an affordable house then only Scotland at a ratio of 3.3 is available to him. An interesting intervention in the Scottish independence debate? Even a place he described correctly as having had substantial price falls (Northern Ireland) is on average too expensive at 3.6. So we end up with a -presumably unintended- critique of present government policy. Those of you who recall the Royal Mail share issue debacle may be thinking that Vince Cable is building a track record of underpricing things! Oh and I dread to think what the earnings to house price ratio is in leafy Twickenham which is Vince’s home constituency.

Also Vince Cable treated us to this opinion.

Clearly the solution is to build a lot more houses

Of course a lot more houses have to be built

How did that work out for Ireland and Spain? Last time I checked they had given this as good a go as they could.

Back to the IMF

As it scours the globe the IMF reminds us that Canada leads the table of house prices to rents as it is 86.8% overvalued. At least we do not have to go far to find the central bank governor who presided over this as Mark Carney will be found tonight at Mansion House for the setpiece speech. This is of course a somewhat troubling precedent to say the least. Presently the UK is at a relatively lowly 38% overvalued so there is plenty of scope to work the same trick again!

If we look at earnings to house price ratios Canada only gets a silver medal as Belgium pushes it out of the way being 49.5% overvalued compared to its historical average. The UK cruises in at a relatively lowly 27.8% which intriguingly means that we are pipped by France at 28.6%. Of course there are plainly issues using historical averages after a boom so we face the prospect that such numbers will be an understatement. Also I am reminded of the problems of macroprudential management when this happens.

One example of this is Belgium, where the IMF concluded that despite the high valuation ratios, risks of a sharp correction of real estate prices appear contained.

So you establish a set of criteria then when it is exceeded you ignore it! How does that usually end?

I have to confess that I thought the likeliest source of excitement from Belgium was going to be from its crop of young and skilful players in the world cup.

Back in the UK

Today’s data from the Council of Mortgage Lenders updates us on the state of play.

In total, 53,200 loans were advanced for house purchase, up 6% compared to March, and the value of these loans totalled £8.8bn, a rise of 11% on March…….Compared to April 2013, the number of loans increased by 33% and the value of lending by 47%.

So the figures remain pretty strong but there was something which caught my eye.

The typical loan size for first-time buyers was £121,500 in April, up from £118,750 in March and represents the highest monthly average advance for first-time buyers on record.

So as we learnt only yesterday that according to the official statistics wages are barely rising and indeed falling in real terms that tells us all we need to know about affordability? Er perhaps not….

In parallel to this, the typical income of a first-time buyer household increased to £37,000, up from £35,704 in March, which was also the highest average income on record.

Apparently income rose by 3.6% in April which contrasts quite a bit with the official numbers to say the least. You may note how they have switched from individual to household and also from earnings to income which will be a relief for Vince Cable’s ratios but via the moving the goal posts route. There is also a diference between weekly earnings and overall income but that is quite a gap in perspective to say the least! Perhaps first time buyers are experiencing a boom we have never seen the like of before…

Are matters cooling?

The RICS has advanced this view today which of course is nicely timed for the Mansion House speech. From the BBC

What we are really seeing is some of the very strong upward momentum starting to come off the housing market, as a lack of supply, higher prices, more prudent lending measures and some of the talk from the Bank of England are creating a level of caution among sellers and buyers.

This does however chime with this from the Black Bricks consultancy.

In recent weeks we have seen the first clear evidence of a broader cooling in the prime Central London property market for some years, with price reductions for homes above £2m across prime Central London.


There is much to consider here but let me open with a very broad sweep. How can house prices rise when wages especially real wages are struggling in so many places? If we look at the IMF data there was a worldwide surge in house prices in the preceding decade to this and we know that wage growth especially real wage growth has fallen over time. This seems to be particularly true in the UK right now if the official numbers are even half-way accurate. The factor which to coin a phrase has squared this particular circle is that interest-rates and bond yields have been falling over a perspective of years and decades. If this is to carry on we arrive at one of my themes which is that there is pressure from this route for others to follow the ECB on the road to negative interest-rates or as Talking Heads put it.

They can tell you what to do
But they’ll make a fool of you
And it’s all right, baby, it’s all right

We’re on a road to nowhere

We will find out more about negative interest-rates today as they began yesterday.Meanwhile on a lighter note I was reminded of this from JK Galbraith earlier.

The only function of economic forecasting is to make astrology look respectable.

Is World Cup forecasting more or less respectable than economic forecasting?



26 thoughts on “Is first time UK house buyer income really surging faster than house prices?”

  1. anteos says:

    great article Shaun.

    I think Osbourne may have created the boom too early, it could even fizzle out before the election. Thankfully the banks have remembered what happened during the last recession and are restraining lending. Despite the best efforts of the government to pump it up.

    Meanwhile Osbourne has passed the buck to the BOE. Who never close the barn door until its too late:

    Eventually it will all catch up with us. And who will they blame? Bankers, energy companies?

    1. Pavlaki says:

      You maybe give to much credit to Osbournes ability to influence the timing of a rise in the housing market! It needs confidence, more job security, rising rents and availability of loans before housing takes off. I suppose the government have achieved the first three but loans are harder to come by, even allowing for help to buy.

      1. anteos says:

        There was ZIRP, SMI (temporary) being rolled over year upon year, HTB and HTB 2. Quite a lot of gment policies to underwrite housing.

        1. Pavlaki says:

          My daughter an husband have just gone through the help to buy scheme and an application for a mortgage via a bank. The criteria were very strict indeed and the amount loaned a very low multiple compared to the past. I really don’t think HTB. Is pumping the market and indeed the market locally (gloucestershire) is only growing fast at he top end . Houses costing around 250k are increasing only slightly, 500k a bit faster but at the 850k and over level they are increasing dramatically – and being snapped up. The UK housing market is very un balanced and calming measures need to avoid throwing the baby out with the bath water.

          1. Mike says:

            What’s the baby here? Surely *all* housing becoming cheaper is the ideal scenario?

          2. Pavlaki says:

            There has been talk of taking away help to buy but that only helps those at the bottom of the mortgage ladder who struggle to afford a house. It is not where the bubble is.

          3. Mike says:

            I couldn’t disagree more. Struggling FTBs are exactly the people who would benefit most from FTB-type properties becoming cheaper. HtB is working against that, both directly by loosening credit taps and more importantly by sending a clear message to speculators that the Government will do anything necessary to maintain housing inflation, including throwing the entire productive economy under a bus.

            Housing is a necessity. Cheaper housing is always a good thing. It’s not something to be grudgingly accepted only in extraordinary circumstances.

          4. Pavlaki says:

            I just don’t see much of an increase at the bottom of the market so I would argue that it isn’t being inflated by HTB. Cheaper housing for first time buyers would be nice but prices around here didn’t drop much even after 2007. If that didn’t effect them then I don’t see the removal of HTB making any impact. But it will hurt those trying to buy their first property. The bubble higher up the ladder needs air letting out of it which will slow the whole market.

          5. therrawbuzzin says:

            A time when the counterfactual may actually be appropriate: if you enforce stricter criteria on potential buyers, to ensure that they can actually afford their mortgages, without HTB underpinning the prices, you get a decline in demand at the bottom, lowering prices, preventing people who have to sell to buy, from moving upwards.

          6. Mike says:

            If it’s preventing significant numbers of second-time buyers from moving up then that feeds through to a fall in demand for STB properties, lowering prices there too. And so on. Everyone still wins.

            If you’re afraid that STBs may get outbid by wealthier FTBs – so what? The national assumption that those who already own property should be favoured over those who don’t is exactly what got us into the current fustercluck. There’s a legitimate need to prevent both FTBs and STBs from being outbid by speculators, but I suspect falling prices would work wonders there too.

    2. Anonymous says:

      Hi Anteos and thank you.

      This movement of powers from elected politicians to unelected Quangos has been a clear trend over the last decade or two has it not? So when it goes wrong the politicians concerned can sing along with Shaggy.

      “It wasn’t me. It wasn’t me”

      If we exclude the Governor can anybody name a member of the Financial Policy Committee without googling it? I can but as I worked with her it is not quite fair.

      It returns me to my suggestion that the Bank of England MPC should be elected and now so should the Financial Policy Committee.

      1. Eric says:

        Hi Shaun, If Quangos were ever to be elected, which I doubt because the whole point of “independence” is that they are not elected, then would “they” let you stand for the MPC?

        I guess none of us here need Google to answer that.
        But don’t let that deter you from haranguing “them”!
        Great stuff.

        And nope; can’t name any of ’em; probably because the FPC haven’t done much (yet) to generated media heat.
        No excuse, I know.

  2. forbin says:

    Hello Shaun,

    of course not

    but house prices are a fact of the shortage of houses versus demand. Classix econ babble would have us believe this will mean a increase in the mount of houses

    ‘fraid not

    its the economics of shortages at play. and has been so for 30 year or more , except we’ve imported more population as well

    also we can’t all live in the South East with out it being turned into Hong Kong or Singapore . You can see they “solved” that problem by building flats and high rises ….. so the British will have to come to terms with loving them !

    throw away planning permission = Brazillian slums

    tarmac the Green Belt = you’ll be back in 10 years for more ( also all this will actually result in is the Land banks of the big majors increasing and ergo their profits – build more ? sure a little more , don’t want supply and deamnd operating unfavourably for them do they? )

    reduce demand = major economic recessoin – naw , not gonna happen , not by choice anyways


    1. therrawbuzzin says:

      HS2 is the answer.
      It raises the area of shortage.

      1. forbin says:

        sort of, I think its there to allow MPs to buy further from London,

        any help for anyone else is just a co-incidence 😉

        good job they can get popcorn cheaper in London …


        1. Anonymous says:

          Hi Forbin

          You may enjoy this from Yes Minister which is on your theme…

          “We got to Oxford in little over an hour. The M40 is a very good road. So is the M4, come to think of it. I found myself wondering why we’ve got two really good roads to Oxford before we got any to Southampton, or Dover or Felixstowe or any of the ports.

          Bernard explained that nearly all of our Permanent Secretaries were at Oxford. And most Oxford Colleges give you a good dinner.

          This seemed incredible – and yet it has the ring of truth about it. ‘But did the Cabinet let them get away with this?’ I asked.

          ‘Oh no,’ Bernard explained. ‘They put their foot down. They said there’d be no motorway to take civil servants to dinners in Oxford unless there was a motorway to take Cabinet Ministers hunting in the Shires. That’s why when the Ml was built in the fifties it stopped in the middle of Leicestershire.’

          There seemed one flaw in this argument. I pointed out that the M11 has only just been completed. ‘Don’t Cambridge colleges give you a good dinner?’

          ‘Of course,’ said Bernard, ‘but it’s years and years since the Department of Transport had a Permanent Secretary from Cambridge.'”

          The wittiest satire always has a list an edge of truth I think!

      2. Anonymous says:

        How many commuters can HS2 help ?
        Assume commuters arrive between 7 and 10am.
        I guess a train every 3 minutes. (20 per hour)

        Ergo we have maximum 60 commuter trains into London in morning and similar number returning. The existing 8 to 9 trains run full, but 7 am trains are less than half full.

        Even if we allow 2000 passengers per train, that is 120,000 people. The IEA estimate £80 Billion cost. So I calculate the track cost per passenger at over 66,000 each. Add in cost of trains, staff and electricity.

        So I predict unaffordable rail tickets – ordinary workers will be priced out of HS2 commuting.
        Farnborough – Waterloo 35 miles, was £300 per month. Birmingham – Euston 120 miles – maybe £1000 per month
        Manchester – Euston ????

  3. dutch says:

    ‘The media and the blogosphere continues to buzz about the risks building
    in the UK residential housing sector. Just look at this housing price
    index – we are way above the pre-recession peak. Compare it to home
    prices in Spain to see this massive divergence (see chart). It’s a bubble and it’s about to burst…Hogwash’

    Sober Look says no,but I can’t see what’s going to sustain the UK market higher if it’s not wages/increased bank lending.
    Isn’t the increased popn decreasing salaries?
    Isn’t the incresing popn relying on the gment to sustain growth with unsustainable deficit spending and monetary easing?
    I really enjoy sober look but he/she/they seem wide of the mark on this one

    1. Anonymous says:

      Hi Dutch

      I think that whoever wrote this has little or no experience or exposure to the UK. If they did then neither of the points below would have been made.

      “Furthermore, there is little evidence of any material speculative investing activity in resi property markets that we saw in the US prior to the crisis. And most importantly there is no evidence of aggressive mortgage lending.”

      Buy 2 let is back and are were signs of higher loans to value again

      Or why have both George Osborne and Mark Carney responded at Mansion House tonight?

      1. Noo 2 Economics says:

        If you saw the Florida housing market 10 years ago you would understand the comment. A friend has been a realtor (Estate Agent) in Miami since 1995 and the “speculation” we have seen here is dwarfed by what happened in Florida and elsewhere. They do things on a much much bigger scale, so our “speculative property price increases” are small beer to America.

  4. David says:

    When we bought our first house back in 1978 the Halifax BS would only lend max. of 2.5 x my earnings plus 2 x wifes and you had to have a min 10% deposit and be interrogated before they agreed to anything. There was plenty housing choice. Today less choice of stock but easier access to funds/debt. On reflection we had it easy by comparison (no student debts either).

    1. Eric says:

      Absolutely David. Me too in ’76. The pre-approval inquisition by the Leeds Permanent was scary. I think the interest rate was higher than today too – but it was the only debt I had!

    2. Anonymous says:

      Hi David and welcome to my part of the blogosphere

      Those were very different days indeed and in a way the macroprudential policies are an attempt to turn back the clock to then. The catch is that the world has changed as you point out with the reference to student debt. Some students are claiming they were told that student debt would not count as regards mortgage affordability and I think that everyone can guess what happened next (MMR)!

  5. Anonymous says:

    Ireland and Spain construction was done speculatively by developers using finance.

    To match construction with demand, a mutual type structure could be used. Competing projects could offer property off plan, and the planning go ahead to build made dependent on a project achieving 70% (or similar) sales.
    Benefits include
    – competition motives good design, specification
    – competition promotes affordability
    – 70% sales will finance construction, lessening risky property loans and reducing bank risk from real estate bust

    1. Anonymous says:

      Hi ExpatInBG

      That’s an interesting idea are there any such mutual structures around? I do not want to scotch the idea that building some more house might help what I was trying to scotch was that it was like a magic wand. After all if it was that easy they would have been built into the rallying house prices would they not?

      Perhaps Paul C’s ecohouses will start to see some more UK demand…

      1. Anonymous says:

        Original idea, I don’t know of any examples.

        A big problem in London is developer entry. Only big well financed players can build. Planners cannot be held democratically accountable. My idea puts decision of which projects are best in buyers hands, and lessens the possibility of planning bribes. Supply restrictions = higher prices.

        With creative thinking and politicians willing to ignore vested interests, lobbyists to act in public interest – great achievements are possible.

        Initial Bulgarian sales were to real buyers wanting a property to use, who had the funds available. Strong sales bought in big marketing outfits and big money developers who built in Spain. Some agents promoted “flipping” – buy now and resell next year at a profit when it’s built. This ponzi scheme was bound to end in tears.

        Getting accreditted buyers signed up reduces much risk and cost. Cost savings can be passed back to buyers. Self financing affordable apartments is much better than shared ownership scams for essential workers or govt liability from help to buy.

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