How did the 3x or 4x income level get chosen?

puddy

What I mean is, why historically (and possibly in the future) did the figure of about 3 or 4 times your income, get chosen as the 'ideal' or correct figure for borrowing?

why not 1 or 2x? Why not 9 or 10x?

How has the figure of 3 or 4 come about?

itsnever2lateisit?

I am only guessing, but possibly some sort of affordability calculation

FWIW in 1982 the ratio was 3x higher income + 1x lower or 2.5 times joint incomw, whichever gave the higher loan

tomstickland

It was decided using a poll on MSE.

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itsnever2lateisit? wrote: »

FWIW in 1982 the ratio was 3x higher income + 1x lower or 2.5 times joint incomw, whichever gave the higher loan

It was the same up until 2001, after this time the banks started going to the markets for their funding, securitising the debt and selling it on, hence the fact from then until 2007, you could get a mortgage if you could fog a mirror, over that time we have had the biggest housing bubble in history.

Thats why lending as shrunk so much, the market taps have been turned off and nobody wants securitised mortgage debt anymore, and will probably mean with the usual undershoot, 2001 prices are quite likely.

itsnever2lateisit?

I thought prices were too high in 2001, the last time I moved

puddy

yes but why that figure? why did 'we' decide that 3x your income was the amount you could borrow for a house/property?

why was this the max rather than some other figure.

are other countries the same?

MrFonzerelli

Another finger in the air job if you ask me.

Income multiple is not the only indicator of risk.

ad44downey

jenner wrote: »

why not 1 or 2x? ?

That's not a bad idea. It'd get my vote anyway.

EdInvestor

jenner wrote: »

yes but why that figure? why did 'we' decide that 3x your income was the amount you could borrow for a house/property?

See page 8

http://www.bankofengland.co.uk/publications/speeches/2004/speech227.pdf

"Front end loading" is the reason. This is the max people could borrow at times of high interest rates and high inflation. Now we have the opposite scenario the front end loading constraint has been removed.

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EdInvestor wrote: »

"Front end loading" is the reason. This is the max people could borrow at times of high interest rates and high inflation. Now we have the opposite scenario the front end loading constraint has been removed.

It shouldn't have been removed, 'high inflation and high interest rates' were replaced by a 300-400% rise in property in 10 years, causing the same problem as high inflation and high rates, the proof ?, repo's are like to exceed 1991's figures this year while interest rates are 15x lower than they were then. IMHO, a good enough reason to restore these multiples.

1984ReturnsForReal_2

Q: How did the 3x or 4x income level get chosen?
---

A: Over a couple of whiskies in a gentlemans club in London.



Q: How did the 9x or 10x income level get chosen?
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A: Over a card game in a Lapdancing Club with some overpriced Cava prior to the funding of Labours Election Campaign in the early 90s'.