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

GDB2222

The UK property market is momentum-driven to a large extent, ie people see house prices going up, so they pile in. People see prices going down, so they wait. So, in answer to the question originally asked (what would happen if prices fell to 3.5 x incomes), it's not clear that loads of people would pile in at bargain basement time. They might wait until they think prices have definitely turned.

The other key feature in the UK market is the availability of loans. It's pretty obvious that the 3x or 3.5x average multiplier in the past was driven by the maximum mortgages being based on those sorts of figures. With very low interest rates it's also pretty obvious that people can afford to service higher multiples of income, and that's probably all the banks are worrying about at the moment. However, there is a risk that interest rates will rise, in which case default rates will rise, and I don't think the banks can hedge that risk.

Bullfighter

Generali wrote: »

PS Banks use a product called an interest rate swap to hedge against moves in interest rates when they offer fixed rates. As long as their counterparty remains solvent, if interest rates rise or fall matters not one jot in terms of the profitability of fixed rate mortgages and that's how banks like it. Reduce risk, increase margins is the mantra.

Precisely. It is this systemic risk which means that banks are unable to hedge effectively, so banks cannot lend at the rates required to allow high salary ratios.

As for:

Generali wrote: »

People taking out mortgages on joint salaries doesn't preclude them from having kids. It will often preclude them from having as much of a hand in their upbringing as they would like but that's something for another thread perhaps.

So how much does this cost? From very recent experience I can confirm that full time nursery places cost c.£1,000pcm - equivalent to the average net salary. So unless family have understanding family then this is the same as one parent leaving an average job. If we expect grandparents to become unpaid carers, what will happen when they are no longer able to retire at 65?

tonyhamm

There are sound reasons why the ratio of UK houseprices was in the 3-4 times earnings range.

One simple reason was that housing demand pressures usually resulted in voting pressure to increase supply, and then government initiatives followed as in the 1950-60s and 70s, because of the poverty of opportunity high prices created.

That ratio dates back to at least 1870, when the working classes couldn't get credit at all and had to save to pay for spells of unemployment and healthcare and rented from the landed classes.

Of course there is also the famous Shiller Ratio http://en.wikipedia.org/wiki/File:Shiller_IE2_Fig_2-1.png which basically shows that demand creates supply and houseprices always revert to a median of 3-4 times income over the longer term dispite bubbles.

HOWEVER, This has been a period unlike any other - mass immigration in the millions, which is continuing under this current government, the Labour government reversed the taxation advantages which have normally been in place to help people fund and own a home and form a family (MIRAS: being able to deduct mortgage interest from gross wage incomes before taxes) and then levied Stamp duty on top! The difference between making mortgage payments from net (after tax) wages and gross wages are utterly immense, once real disposable income is taken into account.
Labour also massively increased numerious advantages for landlords and changing the rental market to favour landlords (changes in assured tenancy contracts, tax breaks and SIP/REIT investment vehicles).

With chain migration still in effect and thus continuing massive population demand, the likely result will be high prices lasting for a long time, and a working class having to compete with both imported labour and landlord bias, never being able to afford to buy at 3-4 times in the face of fixed supply.
Maybe another political party like UKIP will spot that this is going to be a longstanding issue and could campaign on it. The liblabcon party is not going to change anything.

buglawton

The thought occurred to me that North-West France ought to create a "Special Economic Zone" where UK Employment and Tax laws apply. Economic refugees from the UK (that is, the talented and mobile people who feel space-starved) could all then rush off there to luxuriate in the house prices of about half the UK's. Property developers could follow them, taking advantage of low land prices and no sign of medieval planning laws!

treliac

Really2 wrote: »

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

Graham_Devon wrote: »

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.

Which created the need for women/mothers to work and then locked them in to that need rather than allow them the right to bring up their own children.

citizen11

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

If you earn 130k would you want to live next to oiks earning a mere 50k?

misterspivvy

My house cost less than 3.5 times my salary. it is in a crap place, mind.

marklv

Strings wrote: »

For what it is worth, my wife and I can afford 8 times combined salary.
This is what we have done in the sense of our overpayments.

This is based on a 5% interest only rate

You probably earn megabucks in that case.

marklv

citizen11 wrote: »

If you earn 130k would you want to live next to oiks earning a mere 50k?

Oiks earning £50k? What is your defintion of an oik, then? There are plenty of oiks who earn millions a year - they are called premiership footballers. There are also a lot of hard working, pleasant and law abiding people who earn much less than £50k a year.

neverdespairgirl

pingu2209 wrote: »

In Crawley you can get a 4 bed house for that money.
In Guildford you can get a 3 bed semi easily for that money.
In Reading you can get a 3 bed semi easily for that money


So basically the average house is 3.5 times the average income. However, many people want to have an average house at 21 before they have worked up through their career. etc. They aren't prepared to live in a studio flat before they move to the next size house etc.

Fair enough. I'd hate to live in a studio, ever.

Studios are a pretty new idea, anyway.