I stumbled upon an interesting piece a couple of days ago:
IRISH HOUSING AND WAGES, 1977 to 2006: PORTRAIT OF A SCAM
Jun 8th, 2010 by Conor McCabe
I knew that Irish house prices had become ludicrous in relation to salaries but I’d not seen data before. It seems a perfect illustration for page 1 of a basic economics text: that price is dictated by willingness/ability to pay.
A young person ambitious to launch out into life can be vulnerable to overcharging on housing. (I remember!) There was a time when such a person’s ambition/desperation was limited. In the early 70s the building society formula was that loans were for 75% of the house price and the loan amount was calculated thus: 2.5(Annual salary 1) + Annual salary 2.
Take two people on good incomes setting up home in the early 70s. Say, Salary 1 = 1.5K and Salary 2 = 1K. This gives: 2.5(1.5) + 1 = 4.75. That is to say, these two young people could borrow up to 4.75K as 75% of the house price. The house price then comes out at 6.3K. Guess what? In 1970-71 Gallagher’s were selling 3 bed semis in Lucan, Tallaght and Raheny for a tenner less than 5K.
Let’s try this calculation with Euro and today’s incomes. What would be good incomes for two young people today? Well, let’s assume that equality has made strides and that it is two young people on the same income. How about 35K each or a “household income” of 70k?
Here goes: 2.5(35) + 35 = 122.5. That would be a 122.5K mortgage as 75% of the house price. This would give a present day price of 163K for a 3 bed semi in the Dublin “commuter belt”.
I accept that these calculations ignore many variables. They’re rough! However, they indicate that an affordable 3 bed semi with gardens to which two Dublin residents on good incomes might aspire should be about 160K. The price today – AFTER all the reductions of the past year or so – is still in the 220 to 300k range.
The scam was worked by abandoning the 2.5(X) + Y formula and giving 100% + mortgages to people made desperate by incessant talk about the “property ladder”.