Via Jack C at HPC, from Money Marketing:
He says: "In a way the pendulum has now swung too far the other way. If you are a single person, you are earning a decent salary. You go to the bank or building society, you are actually quite a good risk - they won’t give you 80 per cent of the value, they won’t give you four times your salary. You need a housing market where people are able to sell and move. The housing market has become very stuck and we’ve got to get it moving again."
Ahem. If your mortgage is four times your salary and 80% of the purchase price, that means you are paying five times your salary for the house, which is far above the long term average.
Apparently, the FSA consider a mortgage to be 'unaffordable' if the repayments are more than 35% of your after tax income. Let's assume that our "single person on a decent salary" earns £30,000, which is £22,624 after PAYE per annum. Times that by 35% = £7,918.40 per annum.
So this mortgage might just about be affordable if interest rates stay low and you get a really good introductory deal, but if interest rates were to rise above 4.3%, this mortgage is then unaffordable (in Excel: =PMT(0.043,25,120000). Halifax' current standard variable rate appears to be 3.99%, so that's not an unlikely scenario. The break-even interest rate for higher earners is even lower than that, of course, as their net income is a smaller proportion of their gross income.
Thursday, 6 January 2011
David Cameron would like to underpin house prices at five times earnings
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19 comments:
Now look, you should know by now that every politician is a 'complete bloody fool' in respect of house buying and mortgages. Why should Cameron by any more sensible. Surprised by his witlessness I ain't.
I despair of some (some? Most) of the utterances of politicians and the media about mortgage affordability.
The Daily Mail and its like are just as bad. As is Ray Boulger of recently bankrupt "advisers" Charcol. And comparison websites (thinking of your recent quiz).
And who is that complete f***wit quoted as ‘Everything is against people who have over-borrowed, including the threat of negative equity and rising unemployment. The only lifeline is low interest rates and if you take that away you could have properties coming on to the market in a fire sale.’
He's another on my list, come the revolution.....
Gaaaahhhrrr.
L, you're the one who has to disabuse our FTBs of these crazy notions.
FT, splendid, I'd overlooked that particular bankruptcy.
Sorry, still boiling.....
When rates approached, and then hit, bottom in the last months of 2008 and beginning 2009, I was reviewing clients with tracker and other variable mortgages urging them to keep their outgoings the same by overpaying (where they could within their terms). A golden opportunity, quoth I, to reduce their overall borrowing costs and personal risk profile.
Since then, (having been largely ignored) I've been suggesting that it's all very well enjoying the low payments now but when they (or I) see rates rising again, it'll be too late to be fixing at a low rate because the markets will be pricing in future increases.
I might as well be trying to persuade mosque-goers of the virtues of bacon butties, with added extra porky sausages.
WHEN rates go up, it'll be a blood-bath. Not for my lot, for various reasons - but on the archetypal UK High Street. And all the bleeding hearts will be out wailing about the poor homeowner and how I should be bailing them out. And how it's all "Thatcher's fault".
This isn't good for my blood pressure........
MW: I do I do.
FT (14.52): Me too, me too.
"Why should Cameron by any more sensible. Surprised by his witlessness I ain't."
Because it appears (see MW's posts passim) that occasionally the mind control drugs wear off and he says something sensible about housing and mortgages before the men in white coats bundle him into a waiting ambulance...
B, indeed, over the past six years, DC has talked sense on housing on three or four memorable occasions (he even made the BANANA joke* once or twice). The rest of the time it's mind control time.
* Build Absolutely Nothing Anywhere Near Anyone.
Average house price UK is £246,387
Let's drop that to £170, 000 for the prices most people are looking at out of London.
The wage most jobs are offering in Monster/Jobsite etc. is £17 000.
Therefore house prices are 1:10 but they should be 1:5, before we start looking at the LVT route.
JH, what the 'average' is depends whom you ask. Halifax, Nationwide & HM Revenue & Customs say £160,000; DCLG says £200,000 and HM Land Reg/BBC say £180,000 (or something like that).
Whether LVT would actually push buying and selling prices up or down is a separate discussion, but replacing all other taxes with LVT, slimming down the state to a bare minimum and dishing it out as Citizen's Income (and health, education vouchers)I would:
a) Double people's disposable incomes before housing costs, and
b) Encourage more efficient use of available housing (and urban land).
Cameron is not a fool. He's just a completely unprincipled marketing man.
He knows that there are votes in talking like this.
Four times income is nuts for a mortgage though. Three times ought to be the limit really. It's only a few years since interest rates were 15%!
AC: "He knows that there are votes in talking like this."
Well yes, coming up with populist, dirigiste and authoritarian crap that appeals to the lowest common denominator is quite easy, but does it require intelligence? Methinks not. Ergo, as he says genuinely stupid things I can only assume he is genuinely stupid.
All this talk of simple multiples of income - or of acceptable percentages of net income for a mortgage payment - is, broadly, simplistic, box-ticking bullshit which gives politicians and the FSA the opportunity to sound as though they know something.
A few moments' thought should enable most people to see the fallacy.
FT, I didn't actually have a mortgage until my third house (long story) but back in the day when they were cheap, my mortgage was 2.7 times my gross salary, and I wanted to repay it over eleven years, so the monthly repayments were about half my net income. Is that the sort of thing you mean?
It probably is, as I see no reply to the last question. :)
Hmm. No, not exactly. What I'm getting at is that for as long as some mechanistically-minded politician or FSA official - one of whom, if he has a mortgage at all, probably gets subsidised by the taxpayer, and the other of whom is so well paid he can well work with a mortgage of a small multiple of salary - wants to have nice, simples rules as to how much we can all borrow, it's a system doomed to failure. It'll just define a different group of victims and losers.
The reason, of course, is that different people have different circumstances. Take Lola, for instance - without knowing anything about him except his passion for racing cars. Is 35% of his net salary a reasonable indicator of borrowing capacity if he spends another 20% on his passion, and has a bunch of kids and wants two holidays a year? And Lola's (hypothetical) brother or neighbour who earns much the same but whose passion is fishing in the local canal which costs him £5 a week? And those with children who choose a private school - is their disposable income for other items (mortgages, perhaps?) greater or less than the person who earns a similar amount and has no children? Or than their neighbour who's content to put their children through the local State school?
My point is simply this: the amount an individual can safely or reasonably borrow isn't something that can be encompassed within a simple formula, as much as politicians and the box-ticking junkies at the FSA would like to do it. It's a contract between a willing borrower and a willing lender; there's no place for government in deciding it.
If the lender over-lends, then the borrower over-borrows and must share the problem with the lender. If the borrower takes on debt without taking on insurance for that liability, that's their risk and there's no reason why the lender or you, or me, should be obliged to bail them out. If the lender chooses, as a matter of customer service / loyalty / branding to forbear, great. They can build the cost in.
Or is it similarly the case that to protect businessmen from "excess risk", their business should only be able to borrow n% of revenues? Or y x net profit? And which definition of profit would you like?
MW, I'm not making a point about whether 2.7x was good or bad all those years ago - clearly, it was in principle much better than 5x these days. I would much rather see house prices falling to something approaching a real value, and mortgages accounting for such massive chunks of income. Which is why simple box-ticks and simple rules are nonsense; lenders' obligations to caution are then lost in "is it 35% or less of net income" simplicity, rather than looking at individual circumstances.
I talked to someone within the past 12 months who was having difficulty with their mortgage payments because income was down (shorter hours). Wanted to remortgage, suffering a penalty of several thousand pounds to get out of their existing arrangement. Reason - wanted to go from a fixed to a tracker to get lower repayments; looking at their budget in detail the difference they needed was within their tobacco spend each month. They saw no reason why they shouldn't switch; I declined to "help" and told them what they didn't want to hear.
Was I right, or wrong? Realistic, or a patronising bastard?
And faced with that as a "normal irrational" stance from a borrower, what price a 35% or "n times income" limit?
The underlying problem is simply that people will tell any lie, and rationalise away any objection, to "get on the property ladder" because they've been convinced they'll make a no-risk fortune and they're "missing out". Tax property ownership realistically, remove the capital appreciation / investment element, and the whole issue just goes away. Lending issues sort themselves out without regulation.
After all, it's not as though regulation ahs solved any problems so far, is it?
Mr Shapps has cognitive dissonance too
http://www.ftadviser.com/FinancialAdviser/Mortgages/News/article/20110106/66418380-1800-11e0-a55e-00144f2af8e8/Showdown-expected-when-minister-meets-Sants.jsp
FT, agreed. As to your client, I think you were right - he was being 'Penny wise, pound foolish'.
AC1, the core of that fine article is this: "Mr Shapps is expected to use the meeting to tell Mr Sants that the FSA’s regulations governing lending practices must not shut first-time buyers out of the market and deepen the property slump."
That's perfect Home-Owner-Ist DoubleThink isn't it?
FT - eggsaktly. Me too, re the smoking client.
I was UCB Homeloans biggest user in my area up until about 2003 ish. UCB was - IMHO - the best self cert lender out their. Not because they were cheap, they weren't, but because they knew aht they were doing, knew the type of client they wanted, and knew well their introducer base, most of whom like me were genuine pre-underwriters. (They also used estate agents - but I know from their rep that we could get a shed load more mortages through them because we only introduced stuff that worked)
Then along comes Brown and buggers up the money and the banks and introduces box ticking regulation and everyone and his dog was doing ludicrous self cert - and then the trouble starts. Eventually UCB was forced out because it would not compromise on its experience and its rates and LTV's were no longer competitive. I had a long chat with its MD about this problem at the time and we agreed that it would end in tears.
The point is that this experience re-inforces FT's analysis. The UCB mortgages I arranged were very rarely 'affordable' in the box ticking sense, but all made perfect sense to the universally entrepreneurial and risk taking people who used them. And I know of none that have defaulted.
Lola, without wishing to sound too like a conspiracy theorist, who ultimately benefited from Goron's self-cert shambles? The big banks AFAICS. And who lost out? The big banks' competition, like UCB.
Now, tell me again; who really runs the country?
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