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

ad44downey

wolvoman wrote: »

Why are these ratios even important?

My mortgage is currently 4.5 times salary and it's an utter piece of cake to pay it off. In fact I'm overpaying by a huge amount.


Yet some on here would 'prevent' me from having that option - how sad.

So naive. Wait until interest rates hit 10% and you'll know all about it.

itsnever2lateisit?

scousethife wrote: »

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

I have no idea

but

When that was the status quo, banks did rather well

Sinse they dropped that idea, and lent anything to anyone, they virtually ALL went bust.

Sorry all went bust and got tax payers money and bonus'

We should have had a referendum on the bail outs.

|I bet that lawyer who gets all the Man utd players off can bring the government to court and get our billions back

Pre-packed administration would have been better, eeryone else is at it, why not the Govt?

wolvoman

ad44downey wrote: »

So naive. Wait until interest rates hit 10% and you'll know all about it.

But surely less naive than assuming everyone should live and adhere to the same rules with no flexibility or account taken of personal circumstances.

And as it happens I can afford up to about 12% to 12.5% before things become very tight.

bubblesmoney

jenner wrote: »

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?

see prev discussions in mse forums regarding this issue. see my prev post (post # 78 in this thread) regarding this issue. in that post see this link specifically that explains the issue in detail.

see this extractle 1

Demographia Housing Affordability Rating Categories

Rating Median Multiple
Severely Unaffordable 5.1 & Over
Seriously Unaffordable 4.1 to 5.0
Moderately Unaffordable 3.1 to 4.0

Affordable 3.0 or Less

The Demographia International Housing Affordability Survey uses the “Median Multiple” (median house price divided by median household income) to assess housing affordability. The Median Multiple is widely used for evaluating urban markets, for example being recommended by the World Bank and the United Nations
.................
In recent decades, the Median Multiple has been remarkably similar among the nations surveyed, with median house prices generally being 3.0 or less times median household incomes where demand and supply are balanced. This historic affordability relationship continues in many housing markets of the United States and Canada. However, the Median Multiple has escalated sharply in Australia, Ireland, New Zealand and the United Kingdom and in some markets of Canada and the United States.

Indeed, this historical relationship should have provided a warning to the economics and policy community, much of which seems to have assumed prices would continue to escalate to previously unknown heights. The severe price declines that have occurred in some markets over the last year strongly attest to the significance of the historic Median Multiple norm.

ps: in that article there is not a single uk city is rated as affordable. almost all are rated as unaffordable or severely unaffordable in that report !

IveSeenTheLight

ad9898 wrote: »

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.

Why do people make up figures and state them as facts.

In 1991 there were 75,500 reposessions. The CML expect reposessions to be 75,000 in 2009. Therefore the CML do not expect reposessions to exceed the 1991 level although they are very close.

The CML also predicted 45,000 reposessions in 2008 and the actual figure was 11% less

http://www.cml.org.uk/cml/media/press/2108

http://www.defaqto.com/insights/news/mortgage-repossessions-less-expected-%E2%80%93-2009-course-match-1991/2907

bandraoi

lostinrates wrote: »

It could easily be within affordabilty .

eg Half your income to a mortgage is hard if you earn, say 25k, and it leaves you with half that after mortgage, not so hard to live within if you earn, say £100k.

I have to disagree. Financial commitments and expectations tend to rise in line with income.

If you're earning £100K and living in an expensive house, then socially you will be expected to spend more. Your local restaurants will be that bit more expensive, if you invite your neighbours over the bottle of wine they bring will be £20 instead of £10, donations to school fundraisers will be higher, your colleagues will suggest more expensive venues for after work activities etc.

Theoretically it's easier to survive on remaining 50%, but practically it can leave you a bit isolated.

lostinrates

bandraoi wrote: »

I have to disagree. Financial commitments and expectations tend to rise in line with income.

If you're earning £100K and living in an expensive house, then socially you will be expected to spend more. Your local restaurants will be that bit more expensive, if you invite your neighbours over the bottle of wine they bring will be £20 instead of £10, donations to school fundraisers will be higher, your colleagues will suggest more expensive venues for after work activities etc.

Theoretically it's easier to survive on remaining 50%, but practically it can leave you a bit isolated.

Whatever society expects its easier to cut back on non essential spend than essential spend. I agree, financial commitments can rise, but it is disingenenuous to potray this expenditure as essential spend, and therefore not availabke to redirect elsewhere if required.

ETA: Its also worth pointing out that in my personal experience we can spend very little on socialising without being isolated. Whether I can be bothered to go is another issue....I kinda like a bit of isolation these days.

SingleSue

Unless of course you are like me and can't bear the thought of spending silly money on things which can be purchased cheaper.....

bandraoi

lostinrates wrote: »

Whatever society expects its easier to cut back on non essential spend than essential spend. I agree, financial commitments can rise, but it is disingenenuous to potray this expenditure as essential spend, and therefore not availabke to redirect elsewhere if required.

ETA: Its also worth pointing out that in my personal experience we can spend very little on socialising without being isolated. Whether I can be bothered to go is another issue....I kinda like a bit of isolation these days.

I was posting in the context of what is easier, not what is possible.
Any home owner who is spending on the bare essentials only has a serious financial problem.

Expenditure may not be essential spend, that doesn't make it easy to give up treats, say no to friends, alter regular commitments or to source the cheaper alternatives. Sourcing cheaper alternatives can be a particular problem if you live in an affluent area.

ETA: Just to flesh the above out a bit. I did a full time post grad in London for a year and worked there afterwards. Doing the full time post grad, everyone was in the same boat and had little money. Suggestions to meet up were for coffee not dinner, everyone brought lunch to college with them and found somewhere to eat together. Starting work a year later I was still broke for the first few months but lunch was a trip to a local cafe for a group while I sat and ate sandwiches alone, meeting up became a dinner out to which I had to say no. I had more money in the second situation, but I felt like I had much less and it was more difficult.

Pobby

ad44downey wrote: »

So naive. Wait until interest rates hit 10% and you'll know all about it.

In fact by the end of 1973 minimum bank lending was 13%. I`m afraid that a lot of this is beyond me but what would stop a return to 8%? Surely the last 10 years has been plagued with " manipulative financial tools" I am thinking of high loan to value, interest only, 125% loans and so on. Which of course we are all paying the price now! Duh!