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Price of houses vs earnings

 
#1 Price of houses vs earnings
30/05/2007 21:47

TaxMan

Just had a thought, how do people who are not consultants afford a detached house these days, or even a 3 bed semi with garage. Just occured to me when I seen an advert for Abbey at 6x salary and another article saying average UK salary is near 25k, thats £125k and you must have to hunt your own food.

Any thoughts on the property market out there, as there must be ,many international bright young things out there holding out for a decent house rather than squander on a flat?

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#2 RE: Price of houses vs earnings
31/05/2007 08:34

new analyst to TaxMan (#1)

It's a funny thing because although consulting doesnt pay that well it pays better than normal wages.

Despite that, it's very difficult to buy anywhere in London worth buying for less than 250k and if you want to have any sort of life along with your mortgage it may be silly to go above the 3.5x salary mortgage. That works out about 70k which for most consultants would take about a good 5 or 6 years to get to, and that's just a basic first flat!

Seems like you need to be a partner to afford anything decent :(

Since that's about

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#3 RE: Price of houses vs earnings
31/05/2007 08:46

The Senior Vice President to new analyst (#2)

There's only one way these kids finance their expensive flats, and that's by taking on huge amounts of debt. Debt levels simply cannot keep rising - eventually it does actually have to be paid back. This in my mind means that, once the old folk die and a lot of big houses become available, people competing to buy these will not be able to pay substantially more in real terms than the existing value of their assets (because they're already 'maxed out' and Gordon Brown takes away most of their inheritance). So, the relative price of big houses will fall in real terms. As for the smaller flats - well, I imagine these will be less affected (imagine a a 'concertina' type effect with the most expensive houses being squashed the most) because there's always a first time buyer out there somewhere and these tend to have higher incomes at all levels of their careers than the older folk. But one thing's for sure - house prices simply cannot keep rising in real terms. Eventually there has to be a limit - even if this means the limit is at the level where people are on average taking on so much debt that the interest payments alone take up all of their salary. And to be honest I don't think we're particularly far off that level right now.

That's just my own personal theory. It's a pretty grim future really. What do you guys think?

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#4 RE: Price of houses vs earnings
31/05/2007 08:53

Mars A Day... to The Senior Vice President (#3)

Apparently house price increases are slowing across the UK outside of London - so I guess this is the solution.

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#5 RE: Price of houses vs earnings
31/05/2007 09:44

The scientist to Mars A Day... (#4)

Good point, but they are not dropping and are unlikely to do so.

The population is largely static in the UK but demand is driven by the fact that more people want to live alone and more people, for work, leisure or investment reasons have more than one home. On the whole these factors are increasing not decreasing.

Property has increased by over 100% in the past ten years. It has never fallen by more than 25% during a dip and it always recovers.

We have an ever more maturing economy which is based upon leading the world in finance and technology development - unlike exporting coal or crap cars this is not something that the chinese/russians/many other states could do. As such we need to believe that the economy is stable. The most successful chancellor ever is about to become PM - and despite Cameron's bleating is likely to win another term.

So my point - you have to be in it to win it. If prices increase moderately by 5% per year you'll be looking at paying another £30k on the current average £200k house in three years time. Over the average life of a mortgage of 25 years that £30k will end up being more like £100k.

Choice is yours!

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#6 RE: Price of houses vs earnings
31/05/2007 10:02

anon to The scientist (#5)

If you dont have any other outstanding debt how much would you reailitically need to be earning to buy a nice flat for say 300k or thereabouts?

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#7 RE: Price of houses vs earnings
31/05/2007 11:37

Anon to anon (#6)

simple logic - you're not really ever going to lose on your house and if companies are offering up to 5 times salary then take it and fix it for 3-4 years on interest only. I have bought a decent size house in london and really stretched myself. in four years time when i come to look at it i will be on more money, with a higher bonus. High risk maybe to some but with my equity increase plus wage increase then it will work out.

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#8 RE: Price of houses vs earnings
31/05/2007 12:34

TaxMan to anon (#6)

80k to afford a 300k house.

remember you pay tax at 40% so the way that banks calculate affordability is in no way linked to um...affordability...

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#9 RE: Price of houses vs earnings
31/05/2007 12:37

Realist to Anon (#7)

Facts:

Wage inflation under Blair: 95%; house price inflation under Blair: 195%.

Immigration: c. 300,000 p.a. (net).

So how come the gap? Fast-rising salaries in some sectors (City lawyers starting on £65k; some consultants; GPs; public sector wage increases etc.); very low supply for many years (about half the number of houses built each year when compared with the 1930s - an obvious argument to say Labour kept it this way to ride the bricks and mortar equity wave); ever-rising demand thanks to more people living alone or with fewer other people; immigration; no capital gains tax on one's first home; the stock market wobbles of the past years; parents cascading equity wealth down to their children.

How can you afford a house in the south east on two normal salaries? You can't. Solution? More income, more debt or more deferred debt - or a combo. Frightening numbers are on interest only repayments. How to balance this with the pensions outlook and very low personal savings rates, I'm don't know.

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#10 RE: Price of houses vs earnings
31/05/2007 12:43

I.M. Alright-Jack to Realist (#9)

Have a £350,000 house with £100,000 equity and £80,000 in the bank.

Single. Consultant / Senior Consultant level in a firm that pays the average. Earn mid-£40s, perhaps more next year.

It's all down to equity and having been in the market a while (7 years or so here). The prices are only high if you are not 'on the ladder'; to the rest, they aren't the 'real' prices as everyhting has gone up and you are only effectively paying half the price, or however much.

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#11 RE: Price of houses vs earnings
31/05/2007 12:44

Anon to Anon (#7)

This subject is pretty close to home, and has been for almost 20 years now. The answer is it isn't easy - in our parents day the idea was to buy something cheap, fix it up and then climb up the ladder on the created equity; the problem is that the costs of fixing up (builders etc) and the costs of moving (stamp duty, plus hidden costs) make this approach prohibitively expensive now.

First timers have to be more ingeneous these days; yes, take on more debt (not more than you can afford), but also consider buying with friends/relatives, borrowing/subs from parents, moving further out on the train line, taking on a 'project' etc.

Lot's of people say the market can't carry on increasing for ever, and it is currently slowing down, but the long term trend is definately up - demand outstrips supply - so my conclusion, sadly, is that it will only really get harder.

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#12 RE: Price of houses vs earnings
31/05/2007 12:54

Realist to Anon (#11)

The trend must be up, I fear. Unless there is a general economic slump/interest rate hike/slowing of immigration of people or capital combination.

Having been in the market for years is of course the easy way: my parents bought for £13,000 in 1970; house now worth £650,000 or £1.3m with planning permission...

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#13 RE: Price of houses vs earnings
31/05/2007 13:31

Bletherer to TaxMan (#1)

I have a large, victorian, detached house and am a MC......but then again I used to work as a trader for a large investment bank. Therefore my advice would be to join an investment bank ,work your ars3 off for 5 years then go into MC for a slightly easier life having bought the house etc

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#14 RE: Price of houses vs earnings
31/05/2007 13:59

Mike Control to Bletherer (#13)

Just a word of caution. The current default rate (across all portfolios, not just mortgages) is about 0.4%. That is projected to go up to about 2.5% over the next two years and it might even go higher. Obviously this is a relatively controllable figure, but just remember, when you’re stacking the debt up to your eyeballs, what’s best for the economy might not be all that good for you.

On another fairly unrelated note, the only people who actually gain from rising house prices are the government (because of the increase in taxes etc) and people who are selling without an intention to buy again. Good for people who move in together or selling a second property – bad for everyone else. The flip side of this is that I wouldn’t really give a toss if my house fell to be worth 10p because it would mean that I could buy Buckingham Palace for a tenner.

Assuming I didn’t get busted along the way that is.

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#15 RE: Price of houses vs earnings
31/05/2007 14:41

matilda to Mike Control (#14)

Don't despair, everyone can get on the ladder somehow but you might need to wait a bit or make some compromises. Personally I wouldn't buy right now in London because the market has got a bit overexcited in the last 18 months. This is because it cooled nicely to the middle of 2005, then the Olympics arrived, interest rates were still low and suddenly London looked affordable compared to the surrounding areas. A few city bonuses later and all the decent stock had gone, people were not about to sell any property in their portfolios as they saw prices still rising, others were keen to get into the market and so last year there was a complete lack of housing stock leading to upward pressure on prices. An example of this is the house that we bought last year increasing it's value, on paper, from 290,000 to 500,00! I really don't think it's worth this but the estate agents tell me it is and others have sold for this much.

Now that interest rates are going up some people are feeling the squeeze, there's evidence that landlords are having to increase their rents and there are increasing numbers of reposessions. So some stock will have to come back onto the market, notwithstanding the pressure on housing because of general undersupply. I would therefore hold on for 12-18 months until some of the hot air has leaked from the market. After all when you're heavily indebted a 10% drop in the market will hurt.

The alternative is to compromise on location, specification or decor and make a bit of money in the process. My favourite stratgey is to buy a badly decorated place and then just declutter and repaint it. It doesn't cost a lot and badly decorated places don't sell well. Or buy somewhere where there's about to be investment and regeneration. Good luck!

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#16 RE: Price of houses vs earnings
31/05/2007 14:55

anon to matilda (#15)

one option i'd considered was buying a 2bed and renting one room out to help with the mortgage payments.

Seems like a good idea so long as the rom gets let otherwise would be in hot water!

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#17 RE: Price of houses vs earnings
31/05/2007 16:21

Realist to Mike Control (#14)

No, other people gain too: those with more than one property, as you said; those able to release equity by downsizing; those emigrating (in record numbers); those buying cheaply in good areas before renovating, selling and moving to do the same again, perhaps in an up-and-coming area.

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#18 47k salary - should I buy a house?
27/12/2007 12:25

Charlie to Realist (#17)

I'm earning 47k a year and am thinking about buying either a 1 bed flat or a 2 bed flat. Probably 1 bed as i'm tired of living with people.

Any advice? I was thinking about the 250k price range. I'll have to cut down on drinking when I go out, and limit myself to £40 max on sat night outs.

A nice batchelor pad would be pretty cool. Close to the city. Early browsing on findaproperty seem to indicate I might have a chance, although I'm not sure what the best location would be.

For eg. I reckon elephant and castle will rocket up the league of places to live within the next 5 years.

Any advice?

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#19 RE: 47k salary - should I buy a house?
28/12/2007 10:44

Mike Control to Charlie (#18)

I don't live in London so I'm going to be no help to you.

However I would like to point out how I anticipated the rise in defaults back in may. It's not often I'm right about things! Ho ho ho, maybe I should be a consultant too.

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#20 RE: 47k salary - should I buy a house?
09/01/2008 16:10

Richie to Mike Control (#19)

To Charlie:

Elephant is a hole and it's a bit of a gamble assuming the money being poured into the placd will deliver sufficient improvements.

You can afford a £250k place on your salary. I know because until this year I had that sort of size mortgage on that salary. I also just sold a 2 bed flat in an OK part of London in your price range.

My advice: be cautious in the current market but take a look in South Central and South East London - from Stockwell through to Crystal Palace. The latter (and points north) are worth a look with the pending East London line extension.

Can't speak for N and W London but I think you'd get less for your money - either moving further out / less space / nastier area.

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