The Affordability scam explained

Turnbull2000

http://www.scribd.com/doc/17827322/View-From-the-Mountain

Read on from page 13.

Many commentators today argue that, as most people borrow money for a house rather than pay in cash, comparing the price of houses vs. earnings, inflation, or rents is misleading. They dismiss how much a property actually costs as irrelevant, going on to say that it only matters how much it costs to borrow the money to buy it. They claim that the true measure of affordability is solely the cost of servicing the mortgage payments - if the initial monthly payment is a high percentage of take home pay then the house is relatively “unaffordable”, if it is a low percentage of take home pay then the house is relatively “affordable”. Simple, no?

In summary, affordability is based on the unlikely premise that rates will remain low, however if they do, so will salary inflation and total mortgage repayments over 25 years far surpass those of the higher rate era. In the 'unaffordable' 80's, mortgage repayments relative to salary halved in 7-10 years. In today 'affordable' environment, the repayment burden will not ease by a similar margin for at least two decades should inflation continue on it's subdued path. Should rates and inflation rise, then your stellar loan will have stellar repayments to match.

Lose, lose. But great for the lenders.

PasturesNew

I am banned from scribd.

nearlynew

Good article that.

HAMISH_MCTAVISH

As someone that went through 15% mortgage rates the first time, I can assure you that it sucked.

Wage inflation nowhere near kept up with general inflation, as wage increases LAG other price rises. People were permanently skint because of that.

Prices today are much more reasonable on so many things, mortgages included, and now that control of interest rates has been passed from government to MPC, the return of shockingly high interest rates is near to impossible.

When we took out our latest mortgage, at 2.7 times income (now less than 2 times income remaining due to pay rises and overpaying ) we checked what it would be at 15%, and we could afford it, just. It would be horrible, but it could be done.

If we can afford it, so can others.

And interestingly, the average loan multiple of actual house buyers according to CML is still only 3 times income for FTB's, and 2.75 for second buyers, and it never crossed 3.5 times income even at peak.

So most people are in a similar boat to us in this regard. The mass waves of repo's are not going to happen with base rates at 0.5%, and they're not going to happen with rates at 5%, and in reality, they wouldn't happen unless rates crossed 10%, and even then, most people would still choose to pay the mortgage rather than buy other stuff, so the real economy would get hammered by high rates far worse than the housing market. (another reason it's staggeringly unlikely to ever get that high again)

Low-ish rates are here to stay. The targeting of inflation with rates by the MPC is effective, and a range of 3% to 5% seems to work rather well. It doesn't stop asset bubbles, but thats not the remit of the MPC.

Crashaholics dreaming of super high interest rates spurring a "next leg down" are doing just that....... Dreaming.

Graham_Devon

HAMISH_MCTAVISH wrote: »

Crashaholics dreaming of super high interest rates spurring a "next leg down" are doing just that....... Dreaming.

Well that I do believe you have experience in, so I shall take it seriously.

Thrugelmir

The targeting of inflation with rates by the MPC is effective, and a range of 3% to 5% seems to work rather well

2% Inflation

Rates will rise if as need arises to control.

Seems like they missed the housing bubble though.

HAMISH_MCTAVISH

Thrugelmir wrote: »

2% Inflation

Rates will rise if as need arises to control.

Seems like they missed the housing bubble though.

Asset bubbles are not within the MPC's remit.

Inflation is.

Controlling inflation to 2% has never required interest rates in double digits. There is no reason to suspect it will now.

Affordability is the key measure of house prices now, it has been for the last decade or so, and it will remain so for the future.

And those who think we will see double digit base rates again are deluded.

LydiaJ

Thanks Turnbull2000. I've always felt slightly uneasy that I couldn't see where the extra money came from in the "buy something small and trade up a few years later" concept. This article has filled in some gaps for me.

SingleSue

My salary certainly jumped in the late 80's early 90's...my normal payrises were in the region of 27%, my lowest being 17%!

And that was when I wasn't moving companies, one such move saw my salary double in one fell swoop.

We weren't skint either....regular holidays (only in this country), cash paid for a car (second hand), out every night of the week and oodles in savings enough to pay for a wedding, house deposit and still have a healthy cushion all in the space of 1 month.

Life was certainly sweet back then....even if I worked my butt off to have that life.

LizzieS_2

My wages in the 80's were circa £60pw - I could have gained a mortgage if house prices were at early 70's rates but not the 80's rates.

When I did eventually get a mortgage my income was much higher than the equivalent of todays minimum wage - it was still a struggle then as it was a huge proportion of income.

It doesn't really matter what decade you first buy in - unless you are lucky, you will always find it hard to get to the first hurdle.

1984ReturnsForReal_2

I disagree.






Its 3 celebrities at most.