First Time Buyers - Enough is Enough!

T4i

slater14 wrote:

Woby tide,

The average UK wage is in fact £23,500

I'm abit below average then

deemy2004

Looks like a bubble about to pop to me



Looks like a bubble about to pop to me

Say for arguments sake that average wages (excluding london) is £26k - That at 3.5X suggests an average house price target of £91k ! Where are av house prices today ? about £170k ! Which is 6.5X ! The average

Okay there is the low interest rate effect !, interest rates or rather mortgage rates are consistently below 6% as against say 10% consistently experienced in the past.

Lets give the house buyers a boost and imply 50% more purchasing power and suggest a current fair price of 91+1.5X =£136k - So even on this basis, house prices are 25% over priced !

Now if interest rates don't rise and say average wages rise to 30k over the next 3 years... Then that suggests in 3 years times house prices being around £157k which on £170 represents a drop of only 8%.

Now thats probably the best scenerio for house prices !
8% on the basis of 3% RPI equates to a real terms drop of about 18%.

Okay lets try a scnerio based on interest going a little higher, say pushing mortgage rates upto 7% which implies purchasing power of about 4.5X and using £30k again suggests average house price of £135k ! Which implies a 26% drop in price terms and a 38% drop in real terms !

So you can see how over priced the housing market really is , not matter what assumptions are taken in favour of the housing market !

And just for fun, cos I like playing with numbers

Say we go into a recession, average wages don't rise and stay at £26k. Interest rates go a little higher and suggest mortgage rates of 7%... That would imply a target house price in 3 years of 117k in absolute terms, and 107k in real terms.

WAIT ! Ive not finished yet

NOW ! The big problem is that as the market tends to overshoot by 25% both to the upside and the downside. So lets take off 25% off of 117k which implies a target house price of 88k !!! Which represents a near 50% drop !

:A

nelly_2

Nice one deemy, although I'm sure certain people wont agree with your numbers yet

but they will soon.

It turns out I'm on well above average wage about 40/50 k and the misses is on 28k, but we refuse to buy at prices well above what they are worth.

And many many people are saying the same thing.

When people say "oh but you have to get on the ladder/snake," I simply turn round and say "would you buy your house at its present day value?" each and every one of them says NO! Every one of them. Not a single one.

They all sit there spouting off the "you need to get on the ladder crap" but wouldnt do it themselves given the same circumstances.

Pal

deemy2004 wrote:

NOW ! The big problem is that as the market tends to overshoot by 25% both to the upside and the downside. So lets take off 25% off of 117k which implies a target house price of 88k !!! Which represents a near 50% drop !

:A

If I recall correctly, on a recent thread I argued that house price falls in the region of 50% were entirely possible and you poo-pooed the idea. Changed your mind?

dougk_2

slater14 wrote:

I am not thinking that well, maybe peoples expectations are higher or maybe they expect more today or maybe the spend more going out today....etc etc (yawn) etc.

Maybe's dont cut the mustard when you're talking about making an investment that could destroy your life for 10 or 15 years.

They are not maybes they are FACTS! Peoples expectations have grown against reality. As said No-one has the God given right to own anything.

I wish to answer also the following you said:

Interest rates are to rise FACT - How do you know? Are you on the BoE board? Its not a FACT until it has happened. Yes they may rise - so what the rate is still low and the same less than three years ago. And if you look most economists have been predicting one more rises then a static period and falls. Ok so interest rates rise that makes it more diffcult for FTB's to get on the Housing Ladder. (it has always been and always will be a ladder).

FTB's can afford to buy - mean machine and nelly are both in theory FTB's - they both could easily buy a starter home - they choose not too because they don't want to pay current prices. That is their choice.

We shall wait and see what happens to the housing market ...come back in 2 years and discuss it again.

Woby_Tide

slater14 wrote:

Woby tide,

Whether it is 1 bed flat or 10 bed mansion doesnt matter. The thing that you should be looking at is the average price of a property in this country.

To give you a very simple demonstartion of what is trying to be shown by the likes of meanmachine, deemy etc is this -

To buy the average property today you would need to be on an average UK wage of £51,000

The average UK wage is in fact £23,500

So, for the average man to buy the average property in UK he would need to borrow to dangerous levels somewhere close to (or over) 6 times salary. The norm used to be 3 - 3.5 times salary.

Ok then, how do you decide which is more dangerous, is a mortgage of 3 times your salary but with a monthly payment of 50% of your salary more dangerous than a mortgage of 6 times your salary with a monthly payment of 25% of your salary? Is a multiple the over-riding factor or the affordability?

Pal

The multiplier is the more "dangerous", because a higher multiple means that interest rate rises have a much more significant impact on your ability to afford the mortgage. A couple of interest rate rises can very rapidly turn 25% of income into 50% of income if the multiple is too high. This is the entire reason that lenders have traditionally used multipliers to limit mortgage lending.

Just because something is affordable now doesn't mean it will continue to be in the future. Large multiples lent to people on the basis of affordability is a major financial misselling scandal waiting to happen.

meanmachine_2

Woby_Tide wrote:

Ok then, how do you decide which is more dangerous, is a mortgage of 3 times your salary but with a monthly payment of 50% of your salary more dangerous than a mortgage of 6 times your salary with a monthly payment of 25% of your salary? Is a multiple the over-riding factor or the affordability?

How can a mortgage be six times someone's salary but only 25% of their monthly outgoings?

Also, everything is subject to change. So if you are already stretching the income multiplier even with IR rates below the historical average, you're going to be dead in the water if they start to rise.

Repos are already 45% up after a tiny 1.5% rise. Think where we'll be if they go back to 6%. If you think there's a glut of properties now, the market will be flooded on a scale not seen since Noah's day!

dougk_2

I think what W_T was saying was say 25% of your take home salary a safe amount to spend on a mortgage.

To me yes. That still leaves me with 75%. Of which after all the other things to do with living (the essentials) and then I would still be left with 50% of my wage.

25% of a take home salary on an "average" wage would be about £400. Base this on a couple on "average" salaries and the amount available is £800 per month. For that I am guessing but you could get a mortgage around about £175k. Which is more than the average house costs.

If security against interest rates is an issue that is what fixed rate long term mortgages are for. The banks and lenders are not stupid and are currently offering long term mortgages (10 years +) at just over 5%..... so if they think that rates are going to increase that much do you think they would be offering such deals?

Pal

dougk wrote:

I think what W_T was saying was say 25% of your take home salary a safe amount to spend on a mortgage.

To me yes. That still leaves me with 75%. Of which after all the other things to do with living (the essentials) and then I would still be left with 50% of my wage.

To a certain extend, using percentages is misleading. The question is how much disposable income a person has after paying all their bills. For example assuming the mortgage cost is 25% of take home pay, and another 50% was used on essentials like food, travel, electricity etc, you have 25% of your wages as "spare". In practice this is very generous - people earning below average wages don't have that much - maybe more like 10-15%. Anyway, it takes very few interest rate rises to eat into the 25% disposable income. Add in that the interest on most credit card debts will start to rise as well and that is when the problems start.

25% of a take home salary on an "average" wage would be about £400. Base this on a couple on "average" salaries and the amount available is £800 per month. For that I am guessing but you could get a mortgage around about £175k. Which is more than the average house costs.

I think it is closer to £120,000 give or take a few thousand.

If security against interest rates is an issue that is what fixed rate long term mortgages are for. The banks and lenders are not stupid and are currently offering long term mortgages (10 years +) at just over 5%..... so if they think that rates are going to increase that much do you think they would be offering such deals?

The problem is that fixed interest rates run out, leaving the borrower in the crap if rates have risen in the meantime. Fixed rate mortgages can only protect someone for so long.