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Crash course

Wriglesworth attacked the practice of comparing house price data against income as a means of assessing affordability. He said this method clouds the situation.

He said: “99.9 per cent of economists use the house price to earnings ratio. The Bank of England uses it, the Treasury uses it but it does not show us anything.

“Just before the last recession, the ratio peaked at five times income and as soon as the ratio went beyond five times in about 2003, speculation of a crash increased. The doomists used this ratio but the crash never happened. House prices to income went up to comical levels of seven or eight times. The answer is simple. This ratio is nonsense. It mixes up the stock with the flow. It is not really a measure of anything.

“The central determinant of affordability is interest rates and the availability of mortgages. Availability of credit is a much better ratio than looking at house prices against income.”

Halifax economist Martin Ellis said: “I agree the house price to earnings ratio is an incomplete measure of affordability and a better measure takes into account interest rates. Therefore, a higher house price to earnings ratio is sustainable in the current era of relatively low interest rates than in the high inflation world of the 1970s, 1980s and early 1990s.

“In the long term, however, house prices rise broadly in line with average earnings. As a result, the house price to earnings measure is still a relevant one.”

Wriglesworth claimed that brokers contributed to the housing crisis by recommending short-term loan deals to borrowers needing up to six times their income.

He said: “Six times income is not irresponsible if the interest rate is at 5 per cent compared with when rates were at 15 per cent in the early 1990s when lenders were lending at three time income. But six times income is only prudent provided you lock people into a fixed rate for more than five years.

“The biggest danger is putting out two-year discount rates and telling borrowers everything will be all right. Advisers were encouraging borrowers to expose themselves to the vagrancies of interest rates. There was no guarantee.

“A company mixing its balance sheets – lends variable and borrows fixed – would be crucified by credit rating agencies but every adviser was encouraging people to mix their personal balance sheets. Their mortgages were variable and their income was fixed.”

The Mortgage Practitioner principal Danny Lovey strongly refuted this claim. He said: “Intermediaries must not have a pre-determined view of the client’s circumstances, demands and needs before doing a full fact-find and discovering from all the gathered information the most suitable product to recommend. We also not only look at headline interest rates, we also look at the real costs including arrangement fees and potential early charges.

“With a long-term fix, you have to ensure they fully understand the difficulties of an early redemption charge should they break the mortgage contract. There is no guarantee that a lender which supplies a long-term fix will agree to a new amount of borrowing to move home in a few years time.”

Wriglesworth urged delegates to remember that as unemployment rises, it is not just the unemployed who will not buy houses but also those who fear unemployment.

He said: “Maybe five million people will fear for their job and will not buy. Compounding this, the Bank of England estimates that half-a-million people are in negative equity. Negative equity is not an affordability issue but if you have £2 equity, can you move house? Of course not. The Bank’s number is a wrong judge. We should be trying to look at insufficient equity instead. This infestation in terms of insufficient equity is probably round three million. We have a unmitigated disaster on our hands.”

Nationwide group director Matthew Wyles said: “Consumers make spending decisions around a set of fairly subjective judgements. Confidence is in freefall and it will keep going down but given the right stimuli, it can turn round. Confidence is a mercurial mistress. If it returns, the housing market will pick up very quickly and we will see things invert.”

Wriglesworth told delegates to look to historic economic cycles and today’s data to create a picture of where we are now and where we will be in coming weeks and years but he has a problem with house price indices.

He said: “The five major indices all come out with very different numbers. Hometrack says house prices have gone down 7 per cent, Rightmove says 5 per cent, Nationwide is now over 15 per cent and Halifax 13 per cent. What hope do they provide for understanding the future if they cannot agree on one number?

“It is because they use different data. Rightmove uses asking prices, Nationwide and Halifax use their own figures and the Land Registry uses figures from six months later. If you are measuring completely different things at completely different times, you are going to get completely different numbers so these indices do not really tell you what is going on.”

UK Valuations managing director James Neave said: “None of these indices are designed to index individual property prices, which is unfortunately what many of them get used for. For this application, the index actually needs to comprise many hundreds of different indices which can measure price trends for different types of property in relatively small geographic localities.”

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