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It Is Easier Now For First Time Buyers To Get On The Ladder Than It Has Been For Decades!

By Andy Shaw | January 23, 2010

Originally Posted 12th November 2007

Affordability is it really the issue the media makes out it is?

What I am attempting to do with this article is to show you that the media is taking individuals pieces of information and then adding them up in certain ways to give them a result that allows for a headline which they can take to the bank. In other words they are looking to take an arguable figure and hang their hat on it. And that the best headlines for the media are the bad news headlines, as nothing sells like bad news.

What brought this on was, I was thinking about the article I wrote the other day, ‘House Prices Are 40% Overvalued According To The IMF’, and the article from the previous day, ‘Second Worst House Price Crash In History’, and it made me think it was time I proved this affordability issue that is so commonly discussed by the media is the absolute rubbish that I know it is. When you read what’s below it should give you even more confidence in the market and help you to continue to act boldly.

First off I’m going to base it all on the averages. The info has been taken from: – Bank of England historical interest rate figures on the government’s website: – http://www.communities.gov.uk/housing/housingresearch/housingstatistics/housingstatisticsby/housingmarket/livetables/ and the average gross weekly earnings 1938 – 2006 chart that I was sent by the National statistics office (this was really easy to get hold of Ray & Trevor…not!)

1990

In 1990 the base rate was 14%, the average house price was £59,785, and the average wage was £13,681

That would mean that the average house price was 4.37 times the average wage.

Now if we said that the average mortgage was 85% LTV, we’ll also assume a mortgage of 0.75% above base rate (very achievable now, less achievable then). That would mean that in 1990 you would have a mortgage of £50,817 and an annual mortgage payment of £7,496. Which as a percentage of their gross income was 54.79%.

· 1990

· 14% base rate

· £59,785 Average House price

· £13,681 Average wage (income tax was higher then than today, but I haven’t factored that in)

· 4.37 House price x the average wage

· £50,817 Average mortgage (based on 85% mortgage)

· £7,496 annual mortgage payment

· 54.79% of the gross income

Now I’d say that is not affordable, well actually I know it wasn’t as I was on above the average wage at the time, and I had several months of arrears. You can see this is the primary reason why so many properties were reposed. Simply put they were not affordable, and yet we are being told today that houses are less affordable now than they ever have been. Are they right?

2007

In 2007 the base rate is 5.75%, the average house price is £218,479, the average wage is £28,043 (2006 figure, my estimate for 2007 is £28,800 but we’ll stick with 2006’s figure). That would mean that the average house price was 7.79 times the average wage.

Let’s stop there for a second and look at the two figures so that I can demonstrate to you what I mean when I say they are taking isolated figures and adding them up for their own purposes.

1990 the average house price was 4.37 x the average wage

2007 the average house price is 7.79 x the average wage

In other words it is over 78% higher now than it was in 1990! Well that’s a headline grabber if ever I saw one… We’ll come back to this later!

Now if we said that the average mortgage was 85% LTV, we’ll also assume a mortgage of 0.75% above base rate (very achievable now, less achievable then). That would mean that in 2007 you would have a mortgage of £185,707 and an annual mortgage payment of £12,071. Which as a percentage of their gross income is 43.05%,

· 2007

· 5.75% base rate

· £218,479 Average House price

· £28,043 Average wage

· 7.79 House price x the average wage

· £185,707 Average mortgage (based on 85% mortgage)

· £12,071 annual mortgage payment

· 43.05% of the gross income

Now I’d say that is higher than where I’d like it to be, personally I’d like to see it around 30% of the gross income. But that said it is still 27% more affordable to buy property now than it was in 1990!

Now why isn’t that being said out loud? Why is it we are not being told that it is so affordable now compared to back then? The more I dig into this question the more I realise how easy it is to get wealthy in this country if you just continue to take steps in the right direction.

Surely it can’t just be because analysts can’t add up as I am only an amateur analyst and when I first pulled this article together I used the figures from the USA social security dept, so I’m definitely not perfect, but why is it that no one has said this stuff?

Remember these figures: -

1990 the average house price was 4.37 x the average wage

2007 the average house price is 7.79 x the average wage

Well here’s some new figures that are somewhat more headline worthy

In 1990 the average house price was 4.37 x the average wage and the mortgage was 54.79% of gross income.

In 2007 the average house price is 7.79 x the average wage and the mortgage is 43.05% of gross income.

In other words property is 27% more affordable today than it was 17 years ago!

Next time you watch the news or read a headline, that predicts doom and gloom, I suggest you count to 10, because they are nearly always wrong, and no I do not believe I am generalising here. I have yet to find someone in the media or an economist that really understands the property market, so they are commenting on something they really don’t understand, and you are basing your investment and life decisions on what they are saying – it really is that simple!

And if there was something terrible coming I would accurately be able to predict it far in advance of them anyway. The only way they could predict it before me was if they just happened to finally get it right, as Tommy Lee Jones said in the Men in Black, ‘yeah the papers get lucky occasionally’.

And even then it’s only a forecast not a prediction, the idea of this site is that I give you a warning if something’s about to happen, I can do this thanks to my unique perspective. These guys don’t have that perspective, and they are all trained in the same way and that’s why they don’t understand it. As the guy I met in Cyprus said, ‘They all copy each other, and the guy who did it first got it wrong!’

The reason I’m bragging like this is not to make my head any bigger, I have trouble getting it through doors as it is :-) No the reason is to keep you on track, on the right path.

It is this simple if you know the direct path to wealth then you will get there a lot quicker, that’s if you can take the most direct (straight-line) route to it!

All of this miss-information out there alters your direction, my goal is to keep you on track, and if you can handle the time commitment to keep re-tuning here on the site then we’ll get you there quicker. The problem is that when you do not re-tune by listening to something logical then what happens is you slowly come off the straight-line. Then you end up looking back and saying, ‘what happened? I was doing so well, then all of a sudden I stopped doing what I was doing!’ You know what I mean here, and that is the true essence of value here on this site. Why did you come off track? Because you let the subliminal programming by the media and other people around you change the direction that you have already accepted as the truth. This is why you really do need constant re-tuning.

One of the reasons I did this site was to force myself to get this stuff out of my head and onto paper. I knew by having committed myself to others that the end result for me would mean that I get moving in the right direction far quicker than I would have done if I didn’t need to keep adding things to a website. What would have happened is my time would have filled up with all sorts of other stuff and I just wouldn’t get round to it. This is the biggest thief of potential that there is and we have to fight it all the time if we really want to achieve that what we know we can.

I’m reading a book at the moment that really nut shelled this for me, when he said that the real skill is not to learn 4,000 different things and hope that one of them would be the key to it all. But it is to learn a dozen things and practice them 4,000 times with stubborn pig headedness.

Ok, let’s now go back to showing just how affordable property is now. Now I’m going to change tactics now and shift the property from the average property to the average first time buyer property.

A first time buyer should not be buying the average property either, they should be buying a one bed flat or a studio, and I know the average price of one of those in Worthing right now is £100k (I find Worthing’s prices are pretty much the same as the average property price figures), so someone on a salary of £14k (half the average wage) should easily be able to afford one. When I first bought, I bought the average house and it took me and two others to be able to do it, and we nearly failed to make the payments and keep the house.

So let’s say the first time buyer, had a little financial education. They would not become a first time buyer; they would become a first time property investor.

They would take a 85 – 90% mortgage and need to find a maximum of £15,000 deposit. We will assume that they pay at market price and not by below market value.

Their mortgage wouldn’t be based on income multiples but purely on a lenders criteria. I am going to use The Mortgage Businesses product here to demonstrate this, but if theirs isn’t quite right there are several others that will do the job.

85% LTV at 125% rental cover 6.99% interest = £5,942/anum – £495/mth

The cost to rent a studio in Worthing varies from £375 to £495; I think we are renting them at £450 – £460.

They borrow £25,000 preferably on credit cards at 0% and they make interest only payments. Year 1 = £0

Year 2 would probably = 9% (just by negotiating) = £1,350/anum – £113/mth. If this was a problem then they could always let the debt spiral for 5 years. Which would mean that they would owe approx £7k more. So they now owe £22k rather than the £15k but it hasn’t cost them anything. This could of course be sustained further if the market wouldn’t sustain a refinance.

Let’s say they had to get a loan instead of credit cards then they simply let the extra money raised pay the loan itself, and then refinance the loan back up to £25k after two years and continue.

So lets say they’ve owned the property for two months and made a couple of mortgage payments, and they wanted to use their new property to live in now, rather than let it out. How can they do this, well they’ve had a change of circumstances of course. They just let the lender know and the lender will convert it over to a residential mortgage. One little piece of direction like that could get how many first time buyers onto the property market? Can’t get on the ladder, what a load of rubbish, can’t be bothered to try and get on the ladder more like!

Now when we were first time buyers, we only had to come up with a 5% deposit. The only way I could come up with the 5% was getting the money off my Dad. We had to prove that our income would sustain the mortgage at 2.5 times for joint or 3.5 times for single, so I had to get all sorts of paperwork that wasn’t real to back this lie up. In today’s world 5 or even 6 times income for a single person is readily available, and upto 120% first time mortgages are available so it’s somewhat easier now than it was then!

In today’s world, I could simply go online, get a decision in principle from a mortgage lender, then go and find a studio or flat, then get a mortgage offer. Then apply and get either a £25k loan or several interest free credit cards. And I could buy my first home without having to lie, and without having to ask my family for money, other than maybe proof of deposit.

Oh and if you don’t like the idea of credit cards or personal loans, well what’s going on anyway? The media are telling you that the nation is in debt up to it’s eyeballs (which is very, very wrong as well by the way, but that’s for another time) so wouldn’t it be a good thing for first time buyers to use the credit available to them to create good debt instead of bad debt?

So let’s couple affordability into this, well even if the first time buyer. If we assume that the figures will be the same % of discount to the prices of today, then the first time buyer of today will have to commit 43.05% of their income to get on the ladder, whereas the first time buyer in 1990 would have had to commit 54.79% of their income.

In summary: -

IT IS EASIER NOW TO GET ON THE LADDER AND AFFORD IT THAN IT HAS BEEN FOR DECADES!

So how does this help us, well this should give us confidence that despite what we are told about affordability the information they are telling us is bo**ocks, and what that means to you is that the property market will continue to rise, so buy with confidence. But remember you are not buying in the property market you are simply buying A property, and you have to make sure that you are buying that property hopefully below market value, but definitely no more than market value.

Best wishes

Andy

PS Oh there’s one last little thing, that I didn’t factor into the 1990 affordability calculation. It is pretty big though, so I suppose I could have easily used it to make my figures a lot more impressive. But I felt I’d already made the point. But here is the 14lb cherry to go on top of the cake: – Back then we were all on paying either capital repayment or endowment mortgages! I’m surprised after I received my wages after tax, paid my mortgage which included capital repayment that I actually had any money left for food. I hardly think it was surprising that so many people went under!

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