the housing crisis: facts behind the myths

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Fortnight Publications Ltd. The Housing Crisis: Facts behind the Myths Author(s): Mark F. Bailey Source: Fortnight, No. 450 (Feb., 2007), pp. 14-15 Published by: Fortnight Publications Ltd. Stable URL: http://www.jstor.org/stable/25561861 . Accessed: 28/06/2014 10:00 Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp . JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected]. . Fortnight Publications Ltd. is collaborating with JSTOR to digitize, preserve and extend access to Fortnight. http://www.jstor.org This content downloaded from 91.238.114.51 on Sat, 28 Jun 2014 10:00:19 AM All use subject to JSTOR Terms and Conditions

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Page 1: The Housing Crisis: Facts behind the Myths

Fortnight Publications Ltd.

The Housing Crisis: Facts behind the MythsAuthor(s): Mark F. BaileySource: Fortnight, No. 450 (Feb., 2007), pp. 14-15Published by: Fortnight Publications Ltd.Stable URL: http://www.jstor.org/stable/25561861 .

Accessed: 28/06/2014 10:00

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at .http://www.jstor.org/page/info/about/policies/terms.jsp

.JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range ofcontent in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new formsof scholarship. For more information about JSTOR, please contact [email protected].

.

Fortnight Publications Ltd. is collaborating with JSTOR to digitize, preserve and extend access to Fortnight.

http://www.jstor.org

This content downloaded from 91.238.114.51 on Sat, 28 Jun 2014 10:00:19 AMAll use subject to JSTOR Terms and Conditions

Page 2: The Housing Crisis: Facts behind the Myths

D Mark F. Bailey / economics

Are young house-buyers being priced out of the market ? Mark Bailey compares the latest figures for rocketing house prices and their impact on affordable mortgages for average couples.

The houslingm crisis:

House prices in Northern Ireland have risen dramatically over the past few years.

The price of the average house sold in Northern Ireland was ?99,786 in the 3rd quarter of 2002 - in the 3rd quarter of 2006, this had risen to ?180,128, an increase of just over 80% in 4 years. The sharpest rise has been in the past year

when average house prices rose by over 32% on a year-on-year basis.

These are just overview figures. For certain areas and for certain housing types the rate of house price growth has been

much higher. For example, the average cost of a terraced house in the province has risen by 87% in this period while the average cost of a terraced house in Lisburn has risen by 120%.

This would be less of a social problem if wages had risen at similar rates during

this time, but they have not. The gross income of a (male - female) couple increased by approximately 18% over the 2002 to 2006 period according to figures from the Northern Ireland Annual Survey of Hours and Earnings and the Northern Ireland New Earnings Survey.

The result of this is that the proportion of income needed to service a mortgage has risen quite dramatically. At the time of writing (late January 2007), the bond market has Treasury Gilts for redemption in the 2020s and 2030s having yields of approximately 4?2% which equates to an expectation of mortgage interest rates over a 25 year period for a 95% mortgage of about 53/4%.

Just focussing on the 2006 figures, the proportion of net income (after income tax and national insurance payments, but not any pension contributions) required to service the mortgage for an average size terraced house for a couple on the average income is approximately 28%.

This analysis has focused on the long term costs of house purchasing to an average couple purchasing an average terraced house, but there are other issues that should be considered.

A more short-term issue is whether the costs of purchasing a house can be considered affordable now. The Bank of England recently raised interest rates to 51/4% and it is possible that interest rates

will rise by up to ?/2% over the next few months; what seems like a relatively small change in interest rates will result in the

monthly mortgage repayment rising by ?41 which equates to an additional 1% of gross household income.

Table 1: The costs of an average terrace house in Northern Ireland: July to September each year.

2006 2005 2004 2003 2002

Average terraced house price ?142,406 ?105,097 ?88,048 ?77,805 ?76,032

Monthly Payment (for a 95% 25-year mortgage at 53?4 interest rates over the lifetime of the mortgage)

?851.09 ?628.11 ?526.22 ?465.00 ?454.40

Average Family Gross Income (With a male & female both working full-time)

?48,480 ?46,191 ?44,074 ?41,900 ?41,160

Mortgage payments as % of Gross Income 21.07% 16.32% 14.33% 13.32% 13.25%

Additionally, we have assumed throughout this analysis that the couple both earned the average income for their gender. But the average is merely a snapshot figure and varies by industry and occupation. For example, the average gross annual income in 2006 for a male working full-time in the "Elementary Administration and Service Occupations" classification was ?14,667; if his (female) partner worked full-time in the same occupation we get a combined gross income of ?27,921 - this means that the

mortgage for an average priced terrace house has repayments equivalent to 37% of their combined gross income.

Also, wages vary by age. The 2006 Annual Survey of Hours and Earnings for the United Kingdom as an whole has 22 - 29 year olds (the prime group for first time buyers) receiving, on average, 84% of the average gross pay of all workers.

Also as noted earlier, house prices vary by location. At a broad area level, in the 3rd quarter of 2006, the average price of a

Mortgage repayments A couple in the Northern Ireland working full-time and earning the average wage who have just purchased an average priced terrace house with a 95% repayment mortgage. * In 2002, the mortgage repayments

for the house would have cost them approximately 13% of their gross income.

* In 2003, the mortgage repayments for the house would have cost them approximately 13% of their gross income.

* In 2004, the mortgage repayments for the house would have cost them approximately 14% of their gross income.

* In 2005, the mortgage repayments for the house would have cost them approximately 16% of their gross income.

* In 2006, the mortgage repayments for the house would have cost them approximately 21 % of their gross income.

The results are summarised in Table 1.

PAGE 14 FORTNIGHT FEBRUARY 2007 MARK F BAIL

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Page 3: The Housing Crisis: Facts behind the Myths

facts behind the myths

terraced house in North Down or Lisbum was just over 14% more than the Northern Ireland average whilst the average price in

East Antrim was almost 20% less than the Northern Ireland average.

Finally, it is quite within the bounds of reason to see the rise in house prices as one of the less-anticipated effects of the "Peace Dividend". According to the

Nationwide House Price Index (http://www.nationwide.co.uk/hpi/), in the last quarter of 1986, the average purchasing price for an house for a first time buyer in Northern Ireland was 77% of the UK average (?C23296). By the last quarter of 1996, the average purchasing price for an house for a first time buyer in Northern Ireland was 94% of the UK average; as of the end of last year, it was 7% above the UK average approaching prices in parts of the South East of England.

All house price figures quoted in this article are taken from the University of Ulster Quarterly House Price Index produced in partnership with the Bank of Ireland and the Northern Irish Housing Executive (www. engj. ulst.ac. uk/RPP/): a well regarded barometer of the housing market in Northern Ireland. Any conclusions that are drawn from the figures here should not be taken as being those of the authors/creators of the index.

| Fortnight talked to a random

selection of people in Belfast on their

experiences of buying, or dreaming

of buying, a home. The first person we spoke with was a middle aged man, married and with a young son. He felt trapped; "We bought our house in south Belfast 20 years ago for ?26,000. It's now worth ?200,000.

We can't believe how prices have boomed, it's amazing. It sounds like we've got it made but the reality is we feel trapped in our tiny two up, two down dreaming of moving to a bigger, better place but it's just like building a castle in the sky as the prices everywhere have soared as well and don't even mention the rates! We don't stand a chance of getting the size of

mortgage we'd need, along with our equity, to afford to move on - our incomes are inadequate. I feel sorry for people trying to get started on the property ladder, it's depressing for us but worse for them."

The feeling of being trapped was common - even for a young man who has just started working; "I left school last summer. I decided not to go to university for financial reasons - my family aren't well off. I was lucky enough to fall into a good, well paid job. It pays me around ?16,000 a year. It's great to earn money for myself but I'm still living at home with my dad and sister. It's not what I'd imagined my life

would be like. There's absolutely no prospect of me being able to buy my own place either now or in the future unless my lottery numbers come up. My girlfriend keeps thinking we could afford a place if we buy together which

would be great but even then it's impossible. I feel like I've outgrown my childhood home but I'll probably never escape it. Mortgages are for the rich."

Having to live with parents is not restricted to young people. A middle aged woman, recently divorced, told of how she'd had to return to the nest; "I split up with my partner last year. We'd

been together 15 years and we had made a lot of money from the sale of our home - it had nearly quadrupled in price over those years. We both thought that we would have no problem buying a small apartment each with our profit and getting on with our lives independently. I earn ?10,000 yearly and my ex earns not much more. We soon found out that we couldn't afford even the smallest, dingiest of places. The apartments had lots of people bidding for them and

would always end up going for from ?20-50 or even ?60,000 over the asking price - and they started at over inflated prices to begin with! He now lives back in his parents' home and I'm back in

mine. We're both lucky to still have our parents for refuge but it's not the independent life you expect when you get older.

For some people it seems that their children will live with them for a lot longer than they once anticipated; "My son's 30 years old and he's still living

with me and his daddy - he's got the same room he had when he was only five. Honestly we can't get rid of him.

He's doing well for himself working in the civil service. He's had a couple of promotions and the girls love him but he won't settle down 'til he's found the right one. He's told us that he'll probably have to move his wife in with us as well

when he does take the plunge as he studies the house market all the time and he knows he can't afford a house of his own. He'll just have to wait on us popping our clogs and he'll be set up alright then but that's not for a long time yet, please God. But we're happy to have him, he's a good lad and it's hard for the young ones now sure if it's not one thing it's the other with the rates and the water bills coming in and sure

who can afford a mortgage nowadays, it's terrible."

ECONOMICS FORTNIGHT FEBRUARY 2007 PAGE 15

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