House ownership exclusion rising in UK, Ireland, elsewhere

The trend of earning rises lagging house prices is evident in many metropolitan areas across the globe and with cash purchases in the UK rising to a third or more of transactions — up from 10 to 15% prior to the financial crisis in 2008 according to the Financial Times — and almost 50% in Ireland in 2015, compared with about 5% in 2010, according to Savills, the estate agents, ownership will increasingly be a privilege for only above average earners.

Ireland in common with other advanced countries experienced no significant real (inflation-adjusted) housing price rise in 1975-1995 but despite the Great Recession, the Bank of Canada says:

a generalized upward movement in house prices began in the second half of the 1990s and is continuing today, even after post-crisis corrections. Real prices remain well above 1995 levels for almost all countries.

Spain is the exception.

When County Dublin's land prices rocketed 530% in 9 years

In the early 1970s there was no material price differential between national Irish houses prices and Dublin prices but by 2014 new house prices in Dublin were 35% above the national average and the differential for second-hand homes was 33%. This compared with 29% and 31% respectively in 2007.

We did an analysis in 2014 suggesting that the ratio of house prices to earnings remained relatively static in 1973-1993 but in 1993-2013 almost doubled to 8.3 — in effect typically requiring two salaries to get a mortgage.

Using average industry earnings (including clerical + management) of €45,000, the ratio was 8.4 in 2015 — annual earnings rose 22.5 times while the nominal cost of a second-hand house in 2014 was 35 times the 1973 level.

The average price of a new home in Dublin in 2014 was €334,000 and a second-hand home was at €348,000 according to the Department of Environment and Local Government.

However, full-time workers on 36 hours had average incomes of about €40,000 and according to Paul Sweeney of Tasc, the economics think-tank, median earnings were estimated at €28,500 in 2015 for all those at work. So about 964,000 people at work earned less than €28,500 and half earned more. For full-time workers, median earnings were estimated at €32,000 in gross income.

So with social housing almost phased out in recent times, it's easy to see that a couple on below average income would have little choice but to rent, which in Dublin is back at 2007 boomtime highs.

In the UK, real median pay (mid-point where 50% are above and 50% below) rose 101% in 1975-2003 (Office for National Statistics) while house prices in London rose 316% to Q1 2015 and 176% nationally (The Economist).

In Australia, News.com.au reported last year that "in 1975, the average full time earnings were $7,618. In 2015 it was almost 10 times more at $72,000.

In Sydney, the average house cost $28,000 in 1975. Today, it costs $850,194. That’s 30 times as much as it used to be. Your 10-times as much annual earnings isn’t looking too great right now, huh?

Melbourne is even worse, at 31 times the cost of 1975. Back then, the average house was $19,800. Now, it’s $615,068.
In Brisbane, it’s 27 times higher from $17,500 to $473,924.
In Adelaide, it’s 28 times higher from $16,250 to $459,258.
In Perth, it’s 32 times higher from $18,850 to $604,822.
In Canberra, it’s 21 times higher from $26,850 to $573,326
In Hobart, it’s 21 times higher from $15,200 to $322,274."

Wealthy foreigners are also stoking prices in key global cities — some of course with money they wish to launder.

According to Knight Frank, the UK estate agents,  from mid-2011 to mid-2013, non-UK nationals accounted for 69% of prime central new-build purchases in London. In the period July 2014-July 2015 63% of buyers of homes worth more than £10m were non-British.

The New York Times reported last year that Chinese buyers spent $28.6bn on American homes in the year ended in March 2015, more than double their purchases two years before, according to the Realtors association. Chinese purchases in overseas commercial real estate jumped 49% last year, Jones Lang LaSalle, a big real estate brokerage firm, estimated.

Vancouver, Canada, which is popular with Chinese, saw house prices rise 20% in 2015 while prices in Sydney added 14%.

Last November, the FT reported that in the 1990s, the real household income of the average UK first time buyer was about £33,000. The most recent data suggests it is now nearly £50,000, putting them in the top 30% of UK households, according to data from estate agency Savills.

In other words, said Neal Hudson from Savills:

The average buyer no longer has an average income.

The FT wrote:

One of the biggest changes in the market since the financial crisis has been the rise of buyers who are not also selling: Hometrack estimates 45% of residential sales last year fell into this category. These include an increasing number of cash buyers — the number of cash-only transactions has doubled since 2005 — and Britain’s growing army of small scale buy-to-let landlords.

Almost 80% of landlords in the UK only have one rental property and while low interest rates have kept existing mortgages affordable, older people are accumulating property while young people are shut out of the market.

Data this month from the Office for National Statistics underline the challenges for many British people in their twenties and thirties to get on the property ladder.

A record 2.2m people were still renting in their thirties in 2014, compared to 1.24m in 2007.

An analysis of almost 40 years of earnings data from 1975, published by the FT in 2014, show huge changes in the earnings rankings of different professions.

Professors Brian Bell and Stephen Machin, leading labour economists, reported that the average London financial services worker was paid about £3,800 a year in 1975, a salary that was outstripped by a sizeable proportion of other professionals. Academics were paid about £5,000, around a third more, while natural scientists and engineers received roughly 10% more than finance workers.

Now the average London financial services salary is about £102,000 including bonuses while academics are paid about £48,000, natural scientists average about £42,000 and mechanical engineers £46,000.

In 1975, further education lecturers and teachers together made up almost one in 10 of the top 5% of earners. Thousands who worked in manufacturing and industry were also in that bracket.

Financial professionals in the top 10% rose from over 7% to almost 18% while the divergence between the top 1% and the other 9% grew.

Prof Bell commented:

The jobs which pay staggeringly high money are all in London. Forty years ago there were very well paid people around the country in manufacturing and they have all vanished. If you want to earn £1m it is difficult not to live in London.

The Economist wrote in its 30 April, 2016 edition:

from 1993 to 2008, the cost of a hectare of residential land in London increased by over 300% in real terms, to more than £8m ($15m) [ ]  Between 2008 and 2014, Londoners’ disposable income (ie, after housing costs) fell by 4%, a steeper decline than in any other part of England. According to the Centre for London (CFL), a think-tank, the disposable income of private renters in inner London dropped by 28% between 2001 and 2011. [ ] Poor land-use regulation is the main reason for London’s crazy prices. Two problems stand out. First, not enough space is given to new development. About 25,000 homes were built in 2015, half of what was needed. Over one-fifth of London’s land is “green belt”, open space encasing the city that is largely off-limits to developers. People imagine that green belts are pleasant spaces for walking dogs. In reality about 7% of London’s green belt consists of golf courses. Over half is agricultural. There is enough green-belt land in Greater London to build 1.6m houses at average densities, says Paul Cheshire of the London School of Economics (LSE) — about 30 times the number of new houses London needs a year.

We recently reported on research which shows that most of the rise in house prices in advanced countries since 1950 has been driven by land prices.

President Obama's chief economic adviser has claimed that zoning restrictions add as much as 50% to the cost of building a house in an urban area.

There are demand factors as well in capital and leading commercial cities — such as migration, foreign buyers, and demographic factors such as the rise in demand from people who live alone — a speech last August by Lawrence Schembri, deputy governor of the Bank of Canada, covered these issues.

Source: Bank of Canada