4 ms·

Comparing home price to income is incorrect. The unit of measure of home price is dollars. The unit of measure of income is dollars per year. You should compare

Comparing home price to income is incorrect. The unit of measure of home price is dollars. The unit of measure of income is dollars per year. You should compare home payment, be it a rent, mortgage + maintenance costs to income per unit of time. Home price highly depends on interest rates which vary a lot. Currently we have an ending low interest rate period and when rates will go up, situation might change.

solomatov 8y ago
If you want to see how it all works, see the chart for mortgage rates: http://www.fedprimerate.com/mortgage_rates_chart-graph.htm http://www.fedprimerate.com/mortgage_rates_chart-graph.htm It was going down for almost the whole period discussed.
deleted 8y ago
[deleted]
masklinn 8y ago
> Comparing home price to income is incorrect. The unit of measure of home price is dollars. The unit of measure of income is dollars per year. That doesn't make the comparison incorrect, it just means that the result is a "work time" rather than a unitless factor. And you can compare differences/changes in "work time" just as you can compare differences in unitless factors.
- solomatov 8y ago
  IMO, from the article linked the author doesn't consider the result of the division as time. He uses the term ratio.
ams6110 8y ago
Also consider that the standard down payment required on a mortgage used to be 20%. That limited what you could buy.
frobozz 8y ago
That is true, but it is slightly more complicated. When lenders were routinely offering 100% (or even higher) LTV mortgages, the relationship is as simple as you describe. Homeowners and renters alike pay out a portion of their income each month for the roof over their heads. When lenders require a significant percentage as a down payment, then the rate of change of house prices and the rate of change of salaries are directly linked as well as via the monthly cost of a mortgage. If prices are rising faster than you can save up a deposit and incomes are stagnant, then it doesn't matter if interest rates are falling enough to keep the monthly payments stable, you still won't be able to buy. Bear in mind that that scenario is a Landlord's dream, they can charge higher rents because everyone needs somewhere to live, which in turn prices more renters out of the homebuying market, whilst not deterring wealthy flippers. The regular payment on a mortgage varies even more greatly depending on some of the decisions you take when you get the mortgage than the underlying interest rate. (e.g. rate of the mortgage, fix/discount/tracker/offset, length of initial term, length of total term, upfront fees, size of the deposit).
- conanbatt 8y ago
  I disagree with the conspiranoic interpretation of interest rates. There are several reasons why land is expensive globally, but if we talk about places where median income is unable to buy property like SF, Buenos Aires, Vancouver, we are talking about highly regulated spots, with high productivity jobs.
  - frobozz 8y ago
    Conspiranoic? I'm just pointing out that (as solomatov summarises) that these things are complicated, and that saying that one simple comparison is wrong, and another equally simple one is right does not work. One factor that I suspect solomatov was originally hinting at, is that back in the 1960s when house prices were low against incomes, interest rates were so high that the monthly payments, as a proportion of their income, were roughly the same as they are today. However, that ignores the fact that saving up $SALARY * 2.4 / 5 for a 20% deposit in 1960, wouldn't have taken as long as saving up $SALARY * 4.2 / 5 would today. That only considers the US national medians mentioned in the article. The really unaffordable places are even worse. The longer you need in order to reach the savings target you originally set, the more you are affected by house price increases adding even more time to that period. As you say, there are several reasons for the unaffordability of home ownership. My point is they are not all completely independent of each other and are even influenced by house prices themselves. None of this is conspiracy, just market behaviour.

solomatov 8y ago

If you want to see how it all works, see the chart for mortgage rates: http://www.fedprimerate.com/mortgage_rates_chart-graph.htm http://www.fedprimerate.com/mortgage_rates_chart-graph.htm It was going down for almost the whole period discussed.

deleted 8y ago

[deleted]

masklinn 8y ago

> Comparing home price to income is incorrect. The unit of measure of home price is dollars. The unit of measure of income is dollars per year. That doesn't make the comparison incorrect, it just means that the result is a "work time" rather than a unitless factor. And you can compare differences/changes in "work time" just as you can compare differences in unitless factors.

solomatov 8y ago
IMO, from the article linked the author doesn't consider the result of the division as time. He uses the term ratio.

ams6110 8y ago

Also consider that the standard down payment required on a mortgage used to be 20%. That limited what you could buy.

frobozz 8y ago

That is true, but it is slightly more complicated. When lenders were routinely offering 100% (or even higher) LTV mortgages, the relationship is as simple as you describe. Homeowners and renters alike pay out a portion of their income each month for the roof over their heads. When lenders require a significant percentage as a down payment, then the rate of change of house prices and the rate of change of salaries are directly linked as well as via the monthly cost of a mortgage. If prices are rising faster than you can save up a deposit and incomes are stagnant, then it doesn't matter if interest rates are falling enough to keep the monthly payments stable, you still won't be able to buy. Bear in mind that that scenario is a Landlord's dream, they can charge higher rents because everyone needs somewhere to live, which in turn prices more renters out of the homebuying market, whilst not deterring wealthy flippers. The regular payment on a mortgage varies even more greatly depending on some of the decisions you take when you get the mortgage than the underlying interest rate. (e.g. rate of the mortgage, fix/discount/tracker/offset, length of initial term, length of total term, upfront fees, size of the deposit).

conanbatt 8y ago
I disagree with the conspiranoic interpretation of interest rates. There are several reasons why land is expensive globally, but if we talk about places where median income is unable to buy property like SF, Buenos Aires, Vancouver, we are talking about highly regulated spots, with high productivity jobs.
- frobozz 8y ago
  Conspiranoic? I'm just pointing out that (as solomatov summarises) that these things are complicated, and that saying that one simple comparison is wrong, and another equally simple one is right does not work. One factor that I suspect solomatov was originally hinting at, is that back in the 1960s when house prices were low against incomes, interest rates were so high that the monthly payments, as a proportion of their income, were roughly the same as they are today. However, that ignores the fact that saving up $SALARY * 2.4 / 5 for a 20% deposit in 1960, wouldn't have taken as long as saving up $SALARY * 4.2 / 5 would today. That only considers the US national medians mentioned in the article. The really unaffordable places are even worse. The longer you need in order to reach the savings target you originally set, the more you are affected by house price increases adding even more time to that period. As you say, there are several reasons for the unaffordability of home ownership. My point is they are not all completely independent of each other and are even influenced by house prices themselves. None of this is conspiracy, just market behaviour.