Wednesday, May 09, 2007
Why the true cost of a mortgage to income is much closer to 1990 peak than data suggests
find.co.uk: From the frying pan into the fire, would-be first time buyers boost rental yields
Apparently, although mortgage interest payments as a percentage of income are at the highest level since 1991, they are still way down on the peak seen in 1990. Back then, the ratio of interest payments to income peaked at 28.1 per cent. In March of this year the ratio was just 18.3 per cent. The inference is clear, houses remain affordable.
But there are holes in this argument. For one thing, the CML data does not take into account disposable income, and completely ignores the fact that back in the early '90s tax relief - or MIRAS - was available on mortgage payments.
Then throw in mortgage re-payments and the expected imminent rises interest and it seems, that, during the course of this year, the true cost of a mortgage to income will be approaching the levels seen in 1990.
5 Comments
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1. richc said...
Trotting out the income-to-payment ratio and claiming that it currently stands below previous highs is just plain wrong -- nothing but propaganda sent out from the CML and swallowed at face value by lazy journalists. It only looks at year one of the mortgage rather than the cost of the mortgage over the life of the loan. The income-to-payment ratio ignores the fact that incomes in the late 80's/early 90's were growing at double digit rates, meaning that high payment to income multiples in the first year of a mortgage were soon inflated away to a more manageable (and then negligible) size in later years of the mortgage. Now, incomes are growing much more slowly. Average real household disposable income actually declined last quarter. This means that income-to-payment ratios that are high in the first year of a mortgage will stay high for a much longer period. If you look at the cost of a mortgage over the whole life of the loan and then compare that to expected earnings over that same period, housing has never been anywhere near as expensive as it is now. The current ratio is double the long term average since the mid 70's and 40% higher than the previous peak in the early 90's.
2. Orwell said...
Looks like Gordon the Gulper will be taking the removal van to Westminster UBO even if he doesn't get JSA because he was sacked for Gross Misconduct !
3. Sitting Tight said...
Blair to announce his departure date tomorrow - surely no coincidence with mpc announcement?
4. layers said...
Agree, but add in the credit accumualtion by today's average person (the highest in Europe they said a while back), maybe much higher insolvencies today or IVAs, and I would say that disposal income today is much lower than '91 and probably the worst ever. It will take many months but ALL the factors and indices are looking very ominous.
The snowball is gaining momentum...
5. Crash Bandicoot said...
Why is there such a fascination with the (un)affordability level of the 1990 peak. Surely even the most avid housing market bull would have to concede that that level is unsustainable - it was responsible for a market crash. Even from the level that we are at now, prices fell in real terms for another five years. It's just that the prevailing sentiment at the time was that the market was falling rather than rising. Looking at the headlines for the last couple of weeks we can see that the public is being prepared to once again accept the fact that prices can fall as well as rise. All it will take now is a trigger to start the whole thing moving.