The True Cost of Housing

Am I the only one in the country who thinks the cost of housing is still insanely high? If the average wage in England is around £25,000[1], and a house should be no more than 3 times annual salary as was recommended by bankers and mortgage advisers in more sensible times, then the average house price should be around £75,000. Or alternately, if wages had kept pace with property increases, the average UK wage would be around £70,000!

After a year or so of falling prices, the average UK house price is still over £205,000! [2]. A massive £130,000 over what it should be. But it's not just £130,000 more.

I'm going to do a mortgage calculation for a couple of different scenarios using the mortgage calculator at mortgagecalculator.net.

First with Mr Lucky earning £25,000, and the house of his dreams costing a mere £75,000, let's go for a 25 year mortgage and assume that the interest rate is going to stay at 5%. He can afford a £10,000 deposit.

Total Amount Paid = £113,995
Total Interest Paid = £48,995
Monthly Payments £379

Scenario 2, with Mr Average earning £25,000, and the house of his dreams costing the average value of £205,000, keeping everything else the same, including a deposit of £10,000.

Total Amount Paid = £341,985
Total Interest Paid = £146,985
Monthly Payments £1,140

Right away, you can see that an extra £100,000 is paid just in interest. The difference in the cost of the houses is £130,000, but the difference between the Total Amount Paid in scenario 1 and the Total Amount Paid in scenario 2 is £227,000. How many years would it take Mr Average to not just earn that extra £227,000, but save it on top of his day to day expenses? He only has 25 years of course, which draws you to the difference in Monthly Payments, almost £800 per month for the lifetime of the mortgage. What else might Mr Average want to spend that money on?

Money spent on property is dead money, the only people that benefit are bankers, solicitors and real estate agents, but most people only buy one house (at a time) so only a few of those benefit – and who cares about solicitors, bankers and real estate agents anyway? Money spent on property is money that can't be spent on goods and services, holidays, having more kids, putting your kids through private education, buying a boat, putting more away for your pension, private health service ...

There's no real way to benefit from the ridiculous property prices, unless you're planning to flee the country permanently and use the money to keep yourself for the rest of your life in a country where property is cheap.

How can prices be made to fall? By decreasing demand - by taxing second home owners and buy to letters and forcing BTLs to provide a minimum standard of accommodation would be a start.

If the prices are to drop to what I'd call sensible levels, then some people will hurt, obviously, ie the people who have bought since the housing price bubble started. Those that bought near the top of the bubble will hurt most. However if prices don't fall, everybody who buys a house from now until eternity pays. Your kids, their kids, their grandkids and so on. All subsequent generations will face this millstone around their necks.

[1]statistics.gov.uk
[2]BBC News