Halifax Says Affordability has Trebled - No Optimism Here

Yesterday Halifax revealed data from its affordability index showing that mortgage repayments were now only an average 31% of first time buyer's disposable income, down from 48% at the peak in 2007. Nationwide's affordability at the peak showed that 136% of first time buyers take home pay was equal to the average mortgage repayment. In Q4 2008 this was down to 105% and I now estimated it to be around the 95% mark.

Yesterday, I wondered what could account for such a massive difference, and phoned the Halifax to see if they could explain it. While looking at the index in more detail today, while waiting for a phone-call from the Halifax, I think I found the answer:

The figure of 31% must be taken from first time buyers who have actually been able to buy -- that can afford it --, that is to say: each month their mortgage repayments take an average 31% of their disposable income. Whereas Nationwide's figures are based upon the average wage of all registered first time buyers and average mortgage repayments.

That is the only way that such a massive difference can be explained in my opinion. As I was writing this article, Martin Ellis, Halifax chief economist called me back.

He said he didn't really know what would account for the differences, because he hasn't seen the Nationwide index.

When I put to him my theory he said: "it sounds like a reasonable possibility." He concurred that I should go ahead with that assumption, while he would have a look at the Nationwide index and get back to me if he could find anything else that would anyway close account for the huge void between the two indices.

So, based on my assumption the Halifax report of affordability trebling means nothing at all in the grand scheme of the house price correction. Yesterday I thought the difference may be from Halifax counting first time buying couple's salaries together, and that this would mean prices may not have far to fall. I am now sure that Halifax are taking their affordability data from people who have first time buyers who have successfully purchased a home, it means all bets are off; I go back to my 15% further to fall scenario laid out in this article.

You could say that the registered first time buyers currently looking to buy will be quoted the same mortgage repayments as those who have bought. This is true, but the figures make the affordability index inherently wrong; you can't judge affordability in the way we need to from people who can afford to buy.

The average wage is the middle ground between high earners and low earners, so even when the average earners and below cannot afford to buy homes, the high earners can. Therefore just because these people are paying only 31% of their wages to their mortgage, doesn't mean homes are affordable to the average first time buyer.