Shouldnt salaries increase along with property prices?

Question

I havent studied economics but it seems logical as to purchase a house a mortgage lender will multiply your wage to see how much they can lend you. If salaries dont increase isnt there an imbalance? If so what problems could this cause ?

Answer 1

That would be a real mistake, because real estate values fluctuate up and down; not just up. The best way to accurately judge salaries would be by comparing prices of daily expenditures. (food, clothing, utilities, transportation, etc...)

Answer 2

You are correct. If house prices increase faster than wages go up then many people won't be able to afford houses. In theory this means that the demand for houses will decrease and therefore the prices would stop going up as quickly.

For all practical purposes in the UK this hasn't quite happened in the last few years. The house prices have been racing ahead of wage increases, but people are still finding ways to buy: first time buyers are getting help from their parents, cities are helping lower earners onto the housing ladder and banks are allowing people to borrow more money for longer periods. So because the demand is still there, the prices keep going up.

What everyone is worried about is that this creates a 'bubble' of artificially high house prices and then at some point in the future, the demand will dry up. All those people who can afford to buy will have done so and the demand will drop suddenly. This could result in a house price crash. Bad for people who borrowed a lot of money to buy a house as they now own something that they can't sell for the price that they bought it. When this happens more people tend to go bankrupt etc and the demand for houses is further depressed until the prices become affordable again.

Everyone has been expecting housing prices to settle down. The longer it takes the worse the crash will be if it happens. Things that could trigger a crash are large number of redundancies, a severe drop in the stock market or increased interest rates.
Economics (wages and prices) is all about supply and demand.

Answer 3

Firstly you have to know why house prices increasing. You have to remember that house prices are determined by houses sold. So if only expensive houses the size of castles were being sold then house prices will be extremely high. Also house prices can increase by people improving them such as changing the interior, adding rooms and extensions.

Anyway back to the question. If wages increase then people have more money to spend on housing which sounds like a good thing. This increases the demand of houses because the people who could not afford a house before can now. However, the increase in demand will mean house owners will be able to increase their asking prices. So house prices will go up. Unfortunately your solution will make the situation worse not better but the number of houses sold will be higher.

A better solution is to get the government to build more cheap and affordable housing. There simply is not enough houses.

Answer 4

Housing prices increase because salaries have increased for the people who buy houses. It just does not happen in a smooth way overtime. In the 90's the stock market was going up and housing prices did not keep up with inflation but since 2000 housing has gone up. The most important effect however is the growing inequality in income that allows the top to pay an ever increasing amount for houses, while pricing the middle out of the market in many regions of the country. For example, in Mountain View California, the home of Google, an ordinary house that would sell for $150,000 in many places cost over a million because of the high income of Google employees.

Answer 5

So what happens if your salary goes down and you dont report it? do they take back the money the lent you? If they saw that you make alot of money and multiplied it with their multiplier and it came out to 3 million dollars. what happens when the house you buy is only worth 500 k and you default? Dont you think this would make people buy bigger houses then they would normally buy? If salary increases, then doesnt interest rates increase? Then houses would also inflate. So, is the salary increase a positive or negative increase? Real salary would increase, but the money wouldnt be able to buy the same things as it did in the past. And this defeats the purpose if you were looking at a house. Interest rates in houes are tricky. Look it up and you will find that houses go up in value as economy goes down. If you tie that into your "suggestion" it makes no sense. Because If economy goes down, salary goes down. So, lending would go down. BUT, real estate property would go up. So who gets to buy a house? And if bought, who can keep their house? Do you see the problem you cause if you do what you wanted to do?

Answer 6

Just an example. My country of origin Bulgaria was in the recent years swept by British people looking to buy properties. the prices went up 200 % for 2 years. the salaries were up no more than 10% for that same time. So, I reckon the market regulates the prices. What should and should not does not play any role in reality. the market is not moral.

Answer 7

They should shouldn't they! But will that ever happen? NO! I have no faith in the promises these politicians make. The problems this causes are huge. Just look at the debt problems today. The average Briton owed £4,000 in unsecured debt at the end of 2004. That has surely increased by now. There is no way out though. As you pointed out prices are rising but wages are not.

Answer 8

They do *in theory*. Prices increase, inflation increases, wages increase. *in theory*

Answer 9

If the property market crashed, would you take a pay cut?

Answer 10

Depends if you are a wage earner or an investor.