What would happen if house’s dropped to the magic 3.5 times average income?

Joseph_Bloggs_2

Wasn't it mortgage loans at 3.5 times salary rather than prices?

Really2

Joseph_Bloggs wrote: »

Wasn't it mortgage loans at 3.5 times salary rather than prices?

It is, and I do not think they have been above that, that often on average.
(some post them on here I think we are something like 3.4X now)


The only thing I could find is that in may this year the average income multiple was 3.14%

buglawton

If prices dropped to 3.5 times, we would be living in a differnet country, one where the ratio of inhabitable buildings to adults was much higher then the UK.

Strings

Chris2685 wrote: »

I remember seeing something a while ago, can't remember what show it was. A woman had a whole bunch of houses, and basically had bought them all out of the perceived equity of the other houses, and it just spiralled on and on and on until she had a whole load of houses, but didn't actually own any of them. What she actually had was a whole load of debt, built up on equity. When the market faltered, her whole empire came crashing down. Can't remember the ins and outs of it, but it was quite interesting.

It seems to me like this type of thing is what Strings is basing his buying power on, correct me if I'm wrong though.

Not quite I am assuming a scenario like this

My wife and I earn lets say £130k pa, meaning we could potentially spend or buy houses to the value of 130 x 3.5 =£455k

If the average salary for a couple is £50k - they could buy something a house up to the value of £175

what is stop me from buying two properties for £175k each, lets say a place in London and a beach house in Cornwall. I can afford both based on income.

Then what happens if I get out bid by a buyer by 5k, I can easily afford to pay more in the above case

Graham_Devon

Really2 wrote: »

(some post them on here I think we are something like 3.4X now)

For those who can afford to buy and indeed, have done.

Not against the average salary.

With the statistics you quote, prices could average £1m, and turn out to be 2x average salary...as it only count's those who can afford to buy in the first place....as long as those buying have a salary of £2m a year plus, it works out a 2x salary (or less).

Other indicators take the average salary of the UK, or an area within the UK and compare that against the average price of the house. For instance, in my area, it's up around 8.9x salary.

angrypirate

Strings wrote: »

Not quite I am assuming a scenario like this

My wife and I earn lets say £130k pa, meaning we could potentially spend or buy houses to the value of 130 x 3.5 =£455k

If the average salary for a couple is £50k - they could buy something a house up to the value of £175

what is stop me from buying two properties for £175k each, lets say a place in London and a beach house in Cornwall. I can afford both based on income.

Then what happens if I get out bid by a buyer by 5k, I can easily afford to pay more in the above case

and who said greed was a bad thing....

Really2

Graham_Devon wrote: »

For those who can afford to buy and indeed, have done.

Not against the average salary.

It was in regards to

Wasn't it mortgage loans at 3.5 times salary rather than prices?

lending has never been based on 3.5% house price, it has been based on 3.5X income + deposit.

Bullfighter

Generali wrote: »

There is nothing important about house prices being 3.5x the average salary. It's rubbish just like when at the end of the news they say the Dow was down by 5 points because of a rise in the oil price.

Markets are just a bunch of buyers and sellers being brought together. House price indices are just a particular set of averages measured over the course of a month.

So could house prices be maintained at 40x or 100x average salary? If not, why not if there is 'nothing important' about this ratio?

House prices are mostly a function of salary (means to repay), savings (initial deposit) and mortgage price & availability (credit).

I know you understand all this Generali, so what am I missing?

The 3x to 4x salary is a rule of thumb that is based on historical interest rates (3%-8%) and provides a range of interest payments that won't exceed the ability of the average mortgagee to repay on the salary in question.

Sure, given incredibly low interest rates, that ratio will skew against the salary multiple.

Banks aren't offering 1.5% fixed mortgage rates today to new customers, because they are aware of the significant likelihood that their borrowing rates will increase at some time in the future.

If we include joint earnings into the multiple to increase the ratio then we are effectively assuming that the couple never have children.

Graham_Devon

Really2 wrote: »

lending has never been based on 3.5% house price, it has been based on 3.5X income + deposit.

Since when?

If it had of been, we would never have all the problems we have now.

You were still using the salary vs price figures either way, as to say mortgage lending has not gone over 3.5x income on average very often is laughable. The whole boom was based on ever increasing multiples.

Really2

Bullfighter wrote: »

So could house prices be maintained at 40x or 100x average salary? If not, why not if there is 'nothing important' about this ratio?

Yes they could be, if you altered the affordability to do so. So in theory if you made the mortgages longer it should support a higher price if the higher price could not be supported by wages.

This is not advocation of doing so but it is theoretically possible to do so providing the punters accept it and the banks are willing to take the risk.