Friday, June 30, 2006
Are mortgage payments 42% of take-home pay?
Posted by David Smith at 10:30 AM
Category: Thoughts and responses

The Daily Mail, quoting the Nationwide building society has a headline saying 'Mortgage soaks up 42% of salaries', and that this is up from 32% three years ago. That sounds alarming. In fact, as Nationwide is careful to point out, this is a calculation that is based on somebody on average earnings buying an averagely-priced house on a 75% mortgage now. It is thus a calculation that is of relevance to first-time buyers and affordability but says little about the mortgage burden for the vast majority of owner-occupiers, which averages about 20% of take-home pay.

Other data news. The "Blue Book" revisions to the national accounts were extensive, but did not change the underlying picture much, unlike last year. First quarter growth was a touch higher at 0.7%.

Comments

With the rapid growth of remortgaging to pay for home improvements, other luxuries or even essentials, many more than just first time buyers are effectively in the position of first time buyers.

Posted by: El_Pirata at June 30, 2006 11:19 AM

Maybe, but the overwhelming majority aren't. Mortgage payments average 18% of post-tax income for households with mortgages. Roughly half of owner-occupiers, of course, are mortgage-free.

Posted by: David Smith at June 30, 2006 01:16 PM

I think the point is that this is the sort of burden you need to take on as a first time buyer (the lifeblood of the market that ultimately sets the price for the whole complex), but due to low inflation this is not "front loading", this sort of burden will be carried for much of the life of the mortgage. Not to mention what that burden will be if interest rates move just a point or two higher.

Posted by: El_Pirata at June 30, 2006 02:25 PM

The engineered housing value hikes certainly seem to have whittled the property ladder down to a lone rung for many buyers.

Your point about the 75% mortgage is almost certainly counter to the argument as it most certainly does not represent the situation for the average first time buyer, who cannot stump up a spare 50,000 (based on the Nationwide's recent average house price figures)!! The calculation is therefore flawed from the outset.

On this basis, there would be a significant number who are repaying a much larger percentage of their income than 42%.

So in answer to your question "Are mortgage payments 42% of take-home pay?", the answer is almost certainly "No. They are almost certainly significantly higher".

Oh dear.

Posted by: Terry at June 30, 2006 08:55 PM

I don't know why you're saying 'Oh Dear'. As I say, mortgage payments are, on average, nearer 20% - in fact slightly below - take-home pay. The Nationwide has used the stylised assumption of a 75% loan to value mortgage but it has also assumed a single earner, which I suspect is quite rare among first-time buyer couples these days. The average mortgage advance to first time buyers in April was 106,000, according to the CML, and interest payments were - on average - 16.4% of first-time buyers' income. There may be people paying more than 42% of their take-home pay for their mortgage but there won't be many, and they are a long way from the norm.

Posted by: David Smith at June 30, 2006 09:38 PM

I was saying "Oh dear" because the figures appear to vigorously betray your sentiment.

I'm not sure how you came to mortgages representing 20% of income, for which you haven't provided any empirical evidence.

BTW, Hong Kong was 7.3% growth in 2005 (est.), United States was 3.5% and Japan (supposedly in the depths of recession) was 2.7%. So 0.7% growth puts the UK firmly between Lesotho and the Lebanon, and on a par with Saint Vincent and the Grenadines. Perhaps best not bray too much about that one.

Posted by: Terry at July 1, 2006 12:32 AM

The Roof affordability index, prepared by York University for the housing charity Shelter, has average mortgage payments at 20.6% of income. The Woolwich affordability index has them at 18%.

On growth, I was reporting not braying. There's a school of thought out there which says that if you're not damning the economy with every comment you must be praising it to the hilt. I'd say there's a happy medium, and that people who over-criticise now will have nothing left in the locker if we were to really get into trouble. But you've misunderstood the 0.7%. That was just growth in the quarter, not an annual figure. Annual (year-on-year) growth was 2.3%, not spectacular but not that far below trend. Heaven help us if we were growing as fast as Hong Kong. The engine would blow up.

Posted by: David Smith at July 1, 2006 10:22 AM

You are living in a dream world if you think 20% is a realistic amount 100,000 would cost roughly 600 a month with some discount so you are implying first time buyers are taking home 3000+ a month.. come on get in the real world have you seen how much burger king pays? my guess would be closer to 75% of take home pay an dthat is based on reduced rate mortgages if / when the interest rate rise this could quickly go past 100% of income with each point representing about 150 more a month.. oh dear is putting it mildly

Posted by: Peter T at July 1, 2006 11:01 AM

I don't get it.

Why are you now switching housing data sources to York University and the Woolwich of all places?

Here's a link to that York University Roof Affordability Index report:

http://england.shelter.org.uk/home/home-624.cfm/pressrelease/88/

I think you'll find it says the following:

"By the end of the year, if forecasts for house prices and interest rates are correct, it will be more than 40% harder on average for people in the UK to become home owners than it was a decade ago."

I'm still not sure where you got this 20% from, but I don't think anyone is taking your figure seriously.

Posted by: Terry at July 1, 2006 01:34 PM

In response to Peter T - I don;t know whether you're interested in some real figures but the CML figures - look at www.cml.org.uk - are for gross income. They have the median (household) income of 33,165 for first-time buyers, and 42,750 for home-movers. In the case of first-time buyers, they calculate mortgage interest payments at 16.2% of income and for movers 14.4%. That grosses up, after tax and NI, to 22.3% for first-time buyers out of post-tax earnings, and 20% for movers. The average for all buyers, where the average income is 38,676, grosses up from 15.2% to 20.8%, in line with the York calculation, though note this refers to movers - who are fully exposed to current house prices - and could thus be expected to have higher mortgage payments than the rest of the population.

Terry, I'm afraid you and statistics just don't mix. It is perfectly possible for mortgage payments to have risen by 40% as a share of income in a decade and to still be 20% of income, which is the York figure. All it requires is for mortgage payments to have risen from 14% to 20% of income. The York figures are produced for Shelter, which is why I quoted them. It is not trying to prove housing is cheap.

Posted by: David Smith at July 1, 2006 02:31 PM

Yes, I saw that 40% and jumped to a wrong conclusion there.

But you haven't answered my question about why you've discarded the commonly published sources in favour of these. Perhaps it appears that grim facts and your opinions don't mix well either David?

There's no-one else in the lending industry that appears to share your view which is why I think you've chosen these obscure Woolwich and Shelter statistics.

You'll have to just bite the bullet and go it alone on this one too.

This does remind me of the old joke about the brigade of guards on parade, with one little guardsman horribly out of step. When the drill sergeant bawls at him, an old lady attacks him with an umbrella saying: "Leave him alone, my boy Peter is in step, it's all them other so-and-so's what are the problem!"

Posted by: Terry at July 1, 2006 03:27 PM

Sorry that's pathetic. What are the CML figures if not lending industry data? You're wasting my time.

Posted by: David Smith at July 1, 2006 04:49 PM

But you've not quoted the CML figures!!

You've eschewed the Nationwide's figures in favour of Shelter/York University's hitherto disregarded figures. You've not answered why.

And you've stopped me posting - thank goodness for anonymous proxies. Which means that I presume you're not going to admit defeat.

That's sad. Very sad.

Posted by: Terry at July 1, 2006 05:14 PM

Just try to read what's on the screen. CML fugures were quoted two responses ago.

Posted by: David Smith at July 1, 2006 06:02 PM

No thanks, I've wasted enough time reading these increasingly solitary and divergent views on the UK economy.

It should occur to you by now that reading through the archives here (I note I'm not the only person who has had to use a proxy server after being banned from posting facts which don't chime with your views), most of the posts from people have been to inform you that you're quite misguided in many of your conclusions and observations, which are often only backed up by ever more obscure data sources.

Food for thought? I hope so.

Cheers

Terry

PS. if ever - ever - you do find a source selling oil for $40 a barrel, do please write an article about it

Posted by: Terry at July 1, 2006 06:37 PM

Bizarre from beginning to end. Just like your uncannily similar twin of a few weeks ago. As I said to him, I'm happy to debate with anybody, but there has to be a modicum of reality on the other side. That means, as other users of this site are aware, engaging in a few facts, not mindless assertion, not statistical nonsense. Mortgage payments do not take 42% of the average salary. The Nationwide is not saying that (ask them), nor is anybody else. I do hope, like your strange twin, you've now gone away.

Posted by: David Smith at July 1, 2006 08:09 PM

"uncannily similar twin"

Is that a defense? That we're the same person?! You don't mean that do you? Do you actually think I'm El-Pirata and Peter T and everyone else disagreeing with you?

Second thoughts, don't answer that. Wow. Err, I am speechless now.

It's a nice evening. Step away from your computer. Go out for a walk. Get some fresh air.

Take care.

Terry (and no-one else)

Posted by: Terry at July 1, 2006 09:05 PM

I am always interested in real figures.. I can assure you I am not Terry although I don't really care if you think it is a conspiracy if everyone disagrees with you.. as you quoted the median which is a middle figure so you must accept that at least 50% are under that figure in fact they could be so low under it as it is a median and not an average.. then add into that that people lie shock horror about their wages then you will have to agree that 20% is just rubbish. Unless you just blindly follow glossed up figures.

Posted by: Peter T at July 2, 2006 12:25 AM

I think what is unavoidable is that whatever the figures may say they do very little to sway public perceptions - and those perceptions are broadly that the cost of living is rising faster than the inflation figures suggest and that house prices are at levels that strike the majority as high (and I include homeowners in that because they've been unusually willing in recent years to borrow against paper increases in the value of their homes).

I don't doubt David's mastery of the raw data, he always argues a cogent case, but I do think that there's a striking disconnect between that and public sentiment. And I still maintain that sentiment is as much a factor in markets as data.

Posted by: Jonathan at July 2, 2006 01:23 AM

OK, no twins - the one I was thinking of left us some weeks ago, as I said - apologies for the confusion.

Just to finish this off: Mortgage payments as a percentage of post-tax income across all borrowing households are a little lower than I thought, at 13-14%. Source: CML Risk Repossession Review, February 2006 - based on FSA, CML and Bank of England data.

However, the newer people are in the market the higher those payments will tend to be. The CML's first-time buyer figures include "returners" - those buying after a period of renting (having owned before) or people buying after divorce. The burden on true first-time buyers will be higher. I don't dispute that affordability is a problem for them, and that house prices have risen far faster than incomes.

Posted by: David Smith at July 2, 2006 01:05 PM

As with any property crash, it will only ever involve a minority of buyers and sellers so you quoting figures that show most people don't pay 42% of their income in mortgage payments isn't very comforting.

Enter the real world and you will see more and more people struggling to pay mortgages, 'sub prime' borowers who are very likely to default and so on.

Posted by: David P Smith at July 2, 2006 11:55 PM

Not comforting at all and add into that the buy to let mortgages that depend on low interest rates to enable the owners to cover mortgage repayments with rent. With buy to let mortgages encouraging 1 - 10 properties per person at 2.5 million max. Could these mortgages also be cheating the stats as income for five properties would be say 4k a month 48k a year but on five different mortgages the same income + wage figure is applied ? the more they buy the higher the income. All I know is interest rates had better not go up more than 2% or there will be one almighty bang. Go back and look at one of your charts and see how high it has been in the past.... hmmm 12% would be very interesting I remember rates that high.. do you ? How quick would the buy to letters try and cash in on paper profits.

Posted by: Peter T at July 3, 2006 06:07 PM

Will any of you so called economists face reality? The housing market is grossly overvalued. The wolrd's supply of cheap credit form Japan is about to stop. Interest reates are going to rise. Inflation cannot be held at historically low rates for much longer. Oil prices will probably hit $100 a barrel by the end of the year. We have a per capita debt even greater than the USA which is itself heading for bankruptcy. Vast swathes of the world's wealth is migrating to China, India and the far east. If the 42% nett income is overstated now, it certainly wont be in 2 years time. When will people learn you can't borrrow your way to prosperity forever?

Posted by: Mattsta at July 16, 2006 05:11 PM

"If the 42% nett income is overstated now, it certainly won't be in 2 years time." Yes it will be.

Posted by: David Smith at July 16, 2006 08:06 PM

lending 5 times joint income must take it past that and beyond.. hold on tight as the bubble bursts in march 2007 or before.. IMVHO

Posted by: Peter T at August 9, 2006 09:58 PM

Its March and America housing bubble busting as predicted... will UK be next hmmm i imagine so... what a surprise ...not. What wise words now DS?

Posted by: Peter T at March 17, 2007 09:02 PM