Thursday, August 6, 2009

How reliable is the Halifax house price to earnings ratio?

Yesterday, I posted a chart illustrating the Halifax house price to earnings ratio. It showed that the ratio in July was 4.33. Furthermore, it is now converging to its long run level of about 4. The Halifax ratio was calculated using an average income of ₤36,576, and an average house price of ₤159,623.

However, one of my blog readers - Powerman - left a nice comment, asking where the Halifax got their estimate of income. He also left a link to the Office of National Statistics, which states that median male full time income is ₤521. This gives an annual total of ₤27,092. With this lower income level, the house price to incomes ratio rises to 5.9.

I took a closer look at the Halifax numbers. It turns out that they are using average annual income of a full time male.

The Halifax are being very naughty using average rather than median incomes. The distribution of income is very skewed. The vast majority of us earn around ₤27,092. There is also a tiny minority of people who pull in millions. When the ONS calculates a simple average, the minority of big earners pull the average up.

This is why the ONS prefers to use the median. That measure is defined as the mid-point, with 50 percent of the population earning less than that amount, and 50 percent earning more. If we use median incomes, we would know that half of the male full time workforce face a house price to earnings ratio of at least 5.9. Not even Northern Rock offered mortgages with those kinds of numbers.

The plain fact is that home ownership remains prohibitively expensive, particularly for young workers who tend to earn bless than the median income. The Halifax house price to earnings ratio neatly obscures this fact by using a biased measure (in a statistical sense).

Finally, I resent the fact that the Halifax are using male full time earnings to calculate their measure of this ratio. Using male income gives a further upward bias to this measure, since men earn more than women. It really should use a non gender specific estimate.


  1. As ever - lies, damn lies, statistics and vested interests.

  2. Actually Alice, looking at the chart again. even on the measure they suggest the long term average is not a ratio of 4. The chart covers two blips. I bought my first house at the peak of the late 80's blip, and my latest one at the start of this last bull run. Both of these are exceptional spikes. A more useful graph might go back a lot further.

    Looking at the chart casually, the red average line is drawn at 4, but if the spikes are regarded as anomalies, an equally valid line may be one drawn nearer to 3.

    This looks like one of those chopping exercises we were taught about in stats classes. We need some whizz kid to differentiate ( mathematics) the chart and so determine the underlying average. This chart is suspect.

  3. They fooled you though! Where would you be without your comments section keep schooling you.

  4. Alice, it may be that their 'earnings' figure is unrepresentative, but that does not actually mattter, provided it is applied consistently over time.

    If you used modal earnings or included part-timers as well, then the long run average price-to-earnings ratio wouldn't be around 4, it would be around 6, and the recent spike wouldn't have reached 6, it would have reached 10. So what? What we are all waiting for is for the ratio, as published by Halifax, to go back to 3 (like in the mid 1990s).

  5. Top earner's salaries have steamed ahead since the mid 1990s, Mark.

    These comparisons can no longer be made if 'average' earnings are going to be insisted upon.

  6. There are a lot of people who earn just above minimum wage - even the cheapest house in the most deprived areas would be 6 or 7 times their earnings.
    All this talk about the UK coming out of recession and a return to another housing bubble is nothing more than hype.
    Coming up to a general election, it is exactly what that pillock Brown wants - everyone feels wealthy again and he comes out smelling of roses... absolute bullsh!t !!!

  7. Sorry Alice, it think your point about Mean vs Median is just plain wrong.

    When talking about the stats for "average house prices" they are calculating the mean so you need to use mean incomes. The mean house prices are skewed upwards by chelsea townhouses just as much as mean wages are skewed up by banker bonuses...

    As your not looking at median house prices, median incomes are irrelevent. You need to compare like with like.

    Now whether the mean you use is "full time male earnings" or another measure is a valid issue...

  8. Whatever is going on the Halifax do not seem to want to let the cat out of the bag so that we can all clearly see the ratio of the average price of an ordinary 2/3 bed house(i.e. not all houses) suitable for an ordinary family, to their ordinary income.
    My conservative guess would be in the £130/140k:£24/27k range-approx 5.3

  9. I wonder what house prices will look like with 10 million unemployed?

  10. DK - Chelsea Town houses. Interesting point.

    I was offered £50k basic to work in London (a significant pay rise). I couldn't take the job because it would have meant a drastic cut in my standard of living.

    An executive in London on £100k could feasably find himself stretched affording a terraced house in a so-so area which was once bought by a milkman on a single wage.

    Any chance of factoring in living area in a Floor Space:Average Earnings:Price ratio ?

    I think we'll find that in reality people are getting poorer - certainly in terms of cat swinging potential. Things have changed and I believe Nu Lab have deliberately set out to decieve - that's why they are so desperate to re-inflate the house bubble.

    The disparity between median and average wage is simply too great to ignore and imperils our economy in the long term.

  11. Electro-kevin's broader social observation intuitively seems spot on. It must be possible to demonstrate this numerically.

  12. Comparing house prices to individual income may also be suspect. Most people that I know seem to buy houses in pairs where both elements of the pair have a job. This probably makes things a lot more affordable...

  13. Most people that I know seem to buy houses in pairs where both elements of the pair have a job. This probably makes things a lot more affordable...

    Yes. The double income trap - now it becomes twice as likely that a job loss will lead to repossession.

  14. Yes, there are many reasons why mean male full time income is no longer a good model for house prices. Presumably the reason they keep using it is that it was the wage stat which has been collected for many decades, and so allows us to see the long term trend.

    However, rather than criticising their methodology, I thought it would be interesting to directly investigate Halifax's claim of 4.36 x mean male full time earnings as this still seems wrong. I pulled out the April 2008 ASHE survey, which does actually contain mean male full time earnings per week on page 8.

    If you multiply this by 52, then divide Halifax's index by the result, you get a ratio of 4.86 if bonuses, commission, overtime and shift work are excluded and 5.26 otherwise.

    So either they are claiming earnings have gone up something like between 10% and 20% since April 2008 or they are cooking the figures as far as I can tell.



  15. Three years ago I moved from the UK to the US. The primary motivating factor for this was the cost of getting onto the UK poperty ladder. I ended up buying a house in the US (detached 3 bedroom house with a good sized swimming pool for $200K - roughly the same price as a one bedroomed flat would cost me in any average UK city). I would only consider returning to the UK once the price of housing has gone through its long overdue correction process (say a 30% to 40% drop). Im guessing/hoping this may be achieved within the next 5 years. Anyway, the longer this takes to happen, the longer the UK's economy will remain in the doldrums