Monday, Mar 16, 2009
But is this Single or Joint Incomes?
Telegraph: FSA to Cap Mortgage Borrowing
Homebuyers will be prevented from borrowing more than three times their annual salaries under new mortgage rules to be announced this week.
Posted by str 2007 @ 12:28 PM (3282 views) Add Comment
58 Comments
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1. shipbuilder said...
This is huge news that will put paid to the 'recovery just round the corner once banks start lending again' nonsense.
2. need-a-crash said...
Max 3 times borrowers salary. That really will make 55% falls inevitable. Although given the stubborn attitutude of sellers I may have to revise my plans of buying in Spring 2010, it could take much, much longer for prices to adjust to 3 times average salaries.
3. Joconme said...
In the current environment I couldn't imagine a more effective stimulus for reducing house prices. I presume the "all but the most exceptional circumstances" part will apply to politicians and bankers.
4. quiet guy said...
This will strangle the market. I think need-a-crash is right; sellers will have to sit tight for years just hoping that somebody with enough cash come along.
5. mdmick said...
I don't think I have read this right.
Someone already on the housing ladder would have some equity to act as a deposit - hopefully.
So I can see house prices involving that section of people being capable of being worth more than 3xsalary plus teeny tiny deposit.
But that requires everyone not to bottle it and make huge discounts to put property in the price range of first time buyers.
I understand people on this site pointing to 3 x salary as being a traditional ratio that should be expected to be returned to time and time again;
but, wouldn't this policy force it to happen instantly and isn't that in itself a stampede panic equity-destroying action?
Or am I putting the cart before the horse? Is it that the FSA are not pulling the strings here and that the state of bank equity globally is so dire now that actually the are stating what IS happening rather than a decision to, as Picard might say, make it so?
6. justwatching said...
This is huge. This has made me happy if true.
It stops the politicians having to come out & tell the truth over inflated house prices, yet it provides an additional mechanism for prices to come down (& quickly need a crash & quiet guy)
Massive statement of what the average price should be. It legitamises the current bank lending practises. How often have we heard that banks aren't lending. SHOULD IT READ BANKS ARE WILLING TO LEND, BUT IN A SENSIBLE MANNER, ie to people who can afford to pay it back.
lets see what the feckwits at the BEEB make of it
3 X 25ish =75K + whatever deposit average Jo& Jane can save?? 15K, 20K at most. (or equity mdmick)
I'm off to pub to gloat.
7. Joni said...
Fantastic news! Just what the housing market needs to make prices more realistic and welcomed by me as a first time buyer.
A cap on borrowing at 3x income, while i believe it makes a lot of sense for the wider housing market, could have dire consequences for a large number of first time buyers who bought over the past few years.
While the article indicates this is likely to have little effect on the immediate fall in housing prices, surely its going to be huge? The 3x cap will markedly reduce the number of potential buyers available to sellers. If sellers need to sell they will have to adjust their asking price significantly in a short space of time.
8. str 2007 said...
justwatching
3 x 'joint' £25k= £150k + 10% deposit = £166k.
Ok I don't expect the average house has a £50k income, maybe £25k + £15k = £40k x 3 + 10% deposit approx £135k.
The point I'm making is that it doesn't make it clear whether it would restrict to 3x 1 salary or 3x joint salary. I fear the latter I'm afraid.
Houses are priced at the margins. By that I mean if 1 person buys in a row of identical houses at £160k then that prices the row. A seller won't reduce their price by approaching 50% because his buyer isn't married with a working partner.
Where I see larger falls is in the higher priced properties say £300-£600k range, where a couple would have to have a joint income in excess of £100k to even get near it and the rest would have to be equity.
9. Alan Lubin said...
it'll hit the south east more. in Brighton the average wage is £25k but the average house costs well in excess of £200k.
10. flashman said...
This is momentous news but my perverse nature makes me look for the catch. Is it possible that cash rich individuals and companies will put a floor under property values by snapping them up at a value that is just beyond the means of Jo and Jane? I say this because when property looses another 15% of its value, it becomes an attractively high yielding asset. Unfortunately this new 3x salary rule means that Jo and Jane will need property to fall another 40% before they can afford a house so maybe Jo and Jane will end up renting.
11. str 2007 said...
flashman
My thoughts exactly.
12. Dbc Reed said...
@justwatching.BBC 1 o'clock news did n't mention it .
13. peter_2008 said...
If it is true, this is probably the most significant news with regard to HPC for the last 12 -18 months. Even more than the collapse of the banks. The funny thing is that I think the FSA has no idea of what the actual average income is. They are probably using the government's statistics which says that we all earn six figures. And FSA must think that 6 times salary was the extreme end rather than the norm during the boom.
Historically, the average house price is actually about 4 times salary, not far from what Halifax says. This breaks down as 1 times salary as 25% deposit and 3 times salary (75%) as LTV borrowing. It seems some people are confusing the house price with mortgage. The “3 times” which the bears use on this site, I think, is referring to the borrowing, not the house price.
14. phdinbubbles said...
"Is it possible that cash rich individuals and companies will put a floor under property values by snapping them up at a value that is just beyond the means of Jo and Jane?"
How many cash rich individuals and companies are there in this country at the moment?
15. flashman said...
peter: the 3 X salary 'formula' and the deposit are entirely separate. We don't know if it's 3 x one salary or joint salary but the deposit % is an additional requirement. It cannot simply be broken out from a salary in the way you suggest because the deposit is the lenders' security.
16. flashman said...
phdinbubbles: One thing you should understand is that there is always more money than there are quality assets. This is the case in good times and bad times. At the moment there is an abnormally large amount of money sitting on the sidelines.
17. benedict said...
Ridiculous idea . . . 3x salary as a good benchmark for average income households is a fairly reasonable concept, but 3x salary for someone on 6 figures or more is just an unecessary restriction.
18. mark wadsworth said...
If it looks too good to be true, it probably is.
The government has been flailing around desparately for the last year and a half trying to keep the house price bubble inflated, they will not stand for this.
19. Timwest100 said...
would the FSA make this announcement without the governments knowledge. Its a pretty bold statement to make without consulting them.
I hope it does mean restricting 3x a single borrower, but you are right, it does sounds too good to be true. The article makes no mention of 3x 1st and 1x second salary, but maybe that detail isnt out yet.
It does say in the article "maximum of three times the borrower's salary." Since this isn't plural, it is suggesting a single borrower. This ofcource maybe how the autor has interpreted the statement from the FSA
20. denzil said...
I don't think this will transpire in the way people think it will.
If we currently had a situation where nobody owned property then stipulating a 3x income would make sense and prices would fall in unison to that level, however there is plenty of people still sat on a sizeable chunk of equity so whatever they buy will be restricted to (3 x salary + equity). This will always put FTB without a sizeable deposit disadvantaged.
The 3 x salary rule could turn us into a nation of renters because prices will never fall inline with 3 x salary and those with equity are significantly more likely to become landlords as a result and thus keep prices always out of reach of the FTB and lower income group.
As for the comment above "How many cash rich individuals and companies are there in this country at the moment?"
There's probably enough and enough vested interests to stop prices returning to 3 X income. Just think of the return on cash at present. The slightest indication that property is bottoming will pull these people back into the housing market.
This news is better for landlords than it is for FTB or other groups without a deposit. I can just picture Barratt Housing etc producing mini-pods all stacked on top of eachother just to satisfy the 3 X rule.
Overall, this is bad news.
21. flashman said...
mark: I think this might actually come from the government. The very existence of the FSA is under threat and they have recently started groveling to the government. The government has belatedly realised that they are powerless in their attempts at returning lending to 2007 levels. They know they can’t re-inflate the housing bubble so they (and the FSA) are now posing as stern regulators.
22. str 2007 said...
I've tried getting a more comprehensive answer from the FSA, are calling back !
Frankly I can't believe how unprofessional this half baked, announcement is from the FSA and how poor the Telegraphs journalism is in not asking the obvious questions we all are here.
But absolutely this is a gift horse to BTLers unless they're being restricted.
23. uncle tom said...
Well, lock the gate after the horse has bolted..!
I suspect it won't happen after people have thought about it a bit - there are a few problems..
The biggest of those is that it will make it impossible for millions to move house, or re-mortgage when they come to the end of a fixed rate deal
However it could (and should) be imposed on FTB's, but not 3x joint income, as that is a recipe for financial problems when relationships fail, and another generation of latch-key kids when they don't.
3x largest salary + 1 x other salary, max loan 95% is sane socially responsible lending.
Trouble is, that means most houses have to cost less than £100k..
24. 51ck-6-51x said...
Such market distortion is a despicable idea. I agree with the principle, but the decision should be with the lender. The reason it got out of control was not because there was no regulation stopping the practice.
25. Neil B said...
This is great news. This is the only way to reduce house prices to realistic values. This is not unrealistic at all as this was the norm when I bought my house 10 years ago. These were great times when a teacher or a nurse could actually afford to but their own house.
26. gone-to-colombia said...
I agree that this is likely to be the most important news for HPC in years. Let's hope it's true.
There has to be some kind of rigor to bank lending, the mess we are in is due to the casual lending of recent years. If they introduce a three times salary rule then it must be a simple rule for all, no exceptions. In the exceptions begins the rot that starts the next bubble.
27. flashman said...
This half-witted idea would amount to total state control of the mortgage industry. Competition and innovation would be stamped out and the consumer would suffer the consequences.
All we need is for strict leverage laws to be applied to the banking industry. Any attempt at bypassing these leverage limits (with off balance sheet devices and opaque trading) should be met with imprisonment. The EU successfully threatened the car manufactures like this a few years back (the entire board of Volvo were threatened with jail for flouting the pricing rules).
28. stillthinking said...
Bombshell ! I can't believe it. This is the lid on the coffin. There will be a huge uproar.
29. str 2007 said...
gone to columbia
What about BTL lending then ?
As far as I can see with above in place BTLers will simply be able to bid 3.1 times ave. sal for properties plus deposit, out bid owner occupiers (as they have in the past) and force families to rent.
I've been told today that for an HSBC residential mortgage you need to have a repayment vehicle in place ie no interest only. Oh a good thing I hear you say. Yes, but how can you then compete with BTL investors who don't have to repay capital.
Simple answer is - you can't. And most here will get forced to rent for ever more. Once again BTL will create it's own market place through out pricing and renting back.
30. Gilo1979 said...
Been waiting for this for some time. However, although this would be good news for me and many others I feel very sorry for people who bought their home in the last few years.
I'm a FTB lucky enough to have a healthy deposit and a high-ish salary. In my town (near but not in London) I can just afford a 1 bed flat - I've always wondered where that leaves the other 90% getting their mortgages?
Something has to give. Still, I would be surprised if this pans out as some on here are expecting. It was be catastrophic for many families and (more cynically) there are a lot of voters who would not be very happy......
31. flashman said...
A bank might use its research department to identify a particularly strong new category of borrower (by profession/character type etc) and a particularly strong type of property (up and coming area, eco house that costs less to run etc). In this situation, why shouldn't the lender and the borrower benefit from a slightly higher multiple? If this rule is imposed then a perfectly strong mortgage candidate might be priced out of the market. In the meantime a BTL landlord would be able to buy the house for cash and then rent it out. He would then be able to obtain a mortgage on the property because the rental income would easily satisfy the 3X rule.
32. debtfree said...
Private Home Ownership - A thing of the past.
Must have mentioned this 2-3 years ago, but never thought this would happen so soon. If this gets pushed forward then a large amount of the 'would be buyers' are going to be renting for a while... maybe forever.
You'll never going to own a home unless you inherit or have a huge deposit plus a good job in a bad environment.
Prices maybe be dropping, but so are the investment vehicles in which to purchase a home.
Not good.
33. george monsoon said...
This is interesting news. I have been unable to browse this site for several weeks due to a busy workload, but now I come back to this kind of news. I have mixed feelings about the cap on 3x borrowing. On the one hand, I can see the benefit, in that it may limit peoples ability to get further into debt, but on the other hand, I struggle to see the logic in applying this kind of rule now, when the government purtains to be doing "all it can" to get the housing market back up onto its feet.
With all that in mind, I do hope that this forces houseprices to fall much quicker, because 3x my wage + 1 x my wife's wage is less than 40k, and we have less than 5k in the bank, so I am looking at a house for around 120 to 130k..
34. Expat said...
Gordon the moron has mentioned in the past that he wants to set up professional landlord companies such as already exist in Germany, Holland etc.... His intention is that FTBer's do not get a chance to buy, but rather give a big hand up to a few big BTLetters (all the NuLab policies are there to help the rich get richer).
Having said that, being an expat and renting from one of these corporate companies I can say that it is almost as safe and good as owning your own place. The laws here are more on the renter's side and renters can do up the rented place as they please (within reason, no extensions) and own pets etc... They fix any big repairs so no outgoings there. This gives people a chance to save more and invest.
35. Lukeskywalker said...
All prices will fall.
People moving out of their first homes must price for the next FTBer - so they will lose equity. They now cannot afford the next rung up, so prices up the market will have to come down. And so on. And so on.
Its no different to the more natural lending restrictions we have today as a result of the crunch. The market is dependant on new entrants. But they also need a land tax to prevent the rich getting richer and buying up all the housing that is more affordable to them for income. However, investment in housing will be slightly curbed (until the next bubble) if this goes ahead.
They couldn’t pop the bubble and create the global mess when it was happening, for that would not be very popular with the UK people or the countries buying our debt, but now its naturally popped, they can tear holes in it.
Whether the FSA will be ordered to hold off for a few years will be telling. If you consider that the only effect of falling prices will be on first time buyers since maybe 2000, (for the others will lose money that was never there) and that their debt burden is likely to be inflated away, it’s more important that people in negative equity stay in work. They will end up in the same amount of negative equity either way, but speeding up the process and recovering quickly means they’re less likely to be made redundant and default.
But the government, via lending rates and controlling of lenders are seemingly trying to fan the flames of the debt fire that got us into this mess – if the FSA impose this today then these efforts oppose each other and the latter are just a charade.
36. robh said...
I don't know which is worse, pulling the ladder up this way, putting an end to buying for large groups of people (certainly for social mobility purposes)... or having mortgages so large available that people effectively put themselves in wage slavery
The mess certainly doesn't get any better does it
37. it_is_going_with_a_bang said...
Taxes will need to rise sooner rather than later. I can see a time when it will be politically correct and acceptable to Tax private landlords properly for their investments and thus giving the average homebuyer some help when it comes to competing with BTLrs.
I don't see a big issue with BTL taking everything is sight. It simply is not possible - the numbers are too great.
38. d'oh said...
Flashman, are you serious!!!..."innovation" in the mortgage industry is part of what got us into this mess. 3x largest salary plus 1x secondary salary is perfectly reasonable and all that is necessary, especially given the cost of actually building a house (as opposed to paying for land, which is driven by planning restrictions and most importantly credit availability.)
39. timmy t said...
Maybe they are announcing this now because they have plans to take salaries through the roof with QE
40. uncle tom said...
I don't know why people are getting worked up about BTL - lending money to people to buy properties that will then be let is dead, finished, finito..
The landlords of the future will be confined to those that own the property outright, and there is a place for them in the market.
So long as rents are over 6% gross p.a. of the property's capital value, landlords will buy. When supply is too great and rents fall below 6%, they'll start selling. A supply/demand balance will emerge - don't worry about it!
41. kruador said...
peter@13: the 'average' used by Haliwide is the mean full-time male salaried employee's salary. That data comes from National Statistics' 'Annual Survey of Hours and Earnings'. By those figures, the 'average' salary is £35,122.
However, the statistics are heavily skewed by some very high earners. The 'average' is well above the median salary (that where 50% of earners earn less, 50% earn more) - in fact it's £750 below the 70th percentile of male full-time salaried workers (£35,877). The next percentile down is at £31,200 (60% earn less than this).
It's also well-known that full-time staff earn more than part-timers (pro rata), salaried staff earn more than people paid hourly, and men earn more than women. The data for gross weekly pay shows that, annualized, the mean male FTE earns more than 80% of the entire workforce do. A fairer measure would be the median of all workers' pay, annualized: the median is £388.40/week which comes out to £20,196 for 52 weeks.
See tables 1.1a and 1.7a at http://www.statistics.gov.uk/downloads/theme_labour/ASHE_2008/2008_all_employees.pdf.
It's important to remember that the proposed cap is *not* 3x the average earnings. It's 3x the applicant's earnings.
Joint income is trickier to assess but is far lower than twice the average salary, or even average male + average female. The average household does not have two average earners. In 2006/7, National Statistics estimated the median household income, before housing costs, at £377/week. That's only £19,604 annually.
DWP Households Below Average Income data at http://www.dwp.gov.uk/asd/hbai/hbai2007/pdf_files/full_hbai08.pdf.
42. str 2007 said...
Uncle Tom
''So long as rents are over 6% gross p.a. of the property's capital value, landlords will buy. When supply is too great and rents fall below 6%, they'll start selling. A supply/demand balance will emerge - don't worry about it!''
Rents are well below 6% gross value of property now, so are you suggesting BTLers are currently selling ?
I think you're suggesting house prices will fall until rents are 6% of house value.
IMO opinion that would still put a houses value above what you could afford to buy it for given a 25% deposit and 3x1 + 1x1 salary ratio.
IE would be supported by BTLers above owner occupier affordability.
43. str 2007 said...
kruador
Thanks for that detailed explanation of wages.
How is it possible though that the median household income at £19604 (including 2 wages I assume where there are 2) is less than the median of all workers pay (singular only).
This seems impossible in my mind so perhaps you can de-confuse me.
44. flashman said...
d'oh: I almost didn't use the word innovation because I though it might cause the HPC police to make a midnight arrest. Read my comment @ 30 for an example of acceptable innovation. Innovation is the lifeblood of a healthy society both in fiscal and social terms. We shouldn't revert to totalitarianism just because something has got out of wack. It is important to take a step back and make measured, sensible adjustments. Allowing reactionary zeal to influence policy always does more harm than good. My comment @ 30 also suggests a sensible policy to avoid the overleveraging
45. shipbuilder said...
While this may not be the best way to do it, a speeding up of the change of sentiment from 'i'll hold on for the recovery just around the corner' to 'i'll sell at a reasonable price' can only be a positive. The slow death of the market and resulting uncertainty seems to be killing everything.
46. flashman said...
kruador: I suspect that these average income tables do not take into account the sizeable cash economy or the various types of income that go undetected (several types of capital gains and even things like EBay).
47. d'oh said...
flashman: It was your comment at 30 that led to my response. I just disagree, basically because a large part of the current price of a house is the land, and that is driven by credit. In a saner market, 3x salary + decent deposit should be enough to buy a reasonable house. The problem with your innovation argument in my opinion is that everything (up and coming, classes of buyer etc.) is arguable, and that is what led to the ridiculous mortgages that were on offer in 2007.
One group who will unfairly suffer though are those who have variable earnings etc. The no-doc loans did serve a valid market, it is just that they were abused.
48. flashman said...
d'oh: I hear you. Subjective lending policy will always be arguable but that is where the skill (or lack of skill) of the underwriter comes in. My point is that if you take away the right to make commercial decisions, then you end up with effectively State controlled banks. It’s a racing certainty that a state run bank would be a twatish organization prone to buffoonery and political whim. I think you nailed it in your last sentence (some groups would suffer unfairly and that perfectly valid lending policies were spoiled by abuse). I think we all agree that there needs to be some sort of regulation. I am firmly in the camp that simple high-level laws should be imposed on leverage but that we should avoid over complicated meddling. In the end it comes down to a choice between a private banking system or a public banking system. The private banking system has behaved appallingly but I still believe it to be the better option (obviously after punishment and sensible regulation is put in place)
49. Tenyearstogetmymoneyback said...
st 2007 at 29 said
"What about BTL lending then ?"
It depends on whether the rules cover BTL
Just ten years ago the BTL mortgage market hardly existed.
I've just done a very quick Google search and the first thing that came up (from Feb 2007) was
"Buy-to-let mortgages increase by 48%" and that was just in one year.
The best things that could happen IS three times salary including any BTL mortgages.
Then people wouln't be able to consider buying one until they had paid off their own mortgage.
:- Duncan
p.s A bit further down the search I found (from 2008)
Discover landlords 90% ltv buy to let no fees, no vaulation fees, no broker fees, no lender fees, no redemption penalty 90% buy to let mortgages. Buy to let mortgage ltv 90% can be achived if you need to get money out of your BTL property portfolio to buy more property for increased gearing. Even if the rent does not cover the mortgage you can get a 90% ltv self cert morgage
I wonder if that one is still available :-)
50. This comment has been removed as it was found to be in breach of our Blog Policies.
51. House said...
I remember before the days of easy mortgage, if you wanted to buy a property as an investment then you had to put down 50% deposit (ie.matched funding) with a normal repayment mortgage. I can only assume the banks would introduce these rules too. This means that buy to letter's will be in the same position as everyone else.
52. uncle tom said...
str 2007,
Don't forget that rents are also falling, and that many landlords would sell at the moment - if they could!
53. Tenyearstogetmymoneyback said...
d'oh said at 44
"One group who will unfairly suffer though are those who have variable earnings etc.
The no-doc loans did serve a valid market, it is just that they were abused."
Back in the mid 1980s I lodged in a house being bought by a self employed musician.
He was buying the house on a ten year bank loan because normal mortgages were simply not available
for that type of person.
What amazes me is the banks idea that the more you borrow the lower the risk.
The average landlord might be able to sustain one BTL during a void period, but if the've
go four and they all go void at the same time .......
:- Duncan
54. bellwether said...
This has attracted a lot of posts but it's clearly bullsh!t at some level. The proposition if enforced would kill house prices whereas this governments pretty much sole objective is to ensure that house prices do not crash as most credit money and consumer spending is linked to these values.
55. amjidk said...
no much money from coming from the east, after the great debacle that we are witnessing, will probably mean that the banks can't lend at high multiples even if they wanted to..
56. gone-to-colombia said...
Though I agree with bellwether that the government will not want to see house prices fall as fast as is likely with this new lending criteria, this government seems to be completely powerless in the face of the present economic conditions.
Prices are falling, they are likely to fall much more and at a greater rate.
Behind all their policies and pronouncements has to be a realism, they are not so stupid that they fail to appreciate the crash that is in progress.
Regarding BTL, that is a market that is finished; its death is a reality, the fact of which has yet to be announced.
All signs point to a crash in house prices, and a big one. Those wanting to buy wait a while, you are a major part of house demand, and the market will not be able to ignore your present inability to buy.
57. Tenyearstogetmymoneyback said...
A final thought from last night which ties up with amjidk's comment at 55.
I wonder if the FSA are doing this to try and get more money into the mortgage market.
If you were trying to sell a load of CDO's to the Chinese which would have the better chance of persauding them to lend.
"Of course we have tightened up lending criteria. No one is allowed to borrow more than three times salary which traditionally has been
an affordable amount"
or
"Once you lend us some more money we will be able to reintroduce mortgages such as Northern Rocks 125% LTV "Together" loan.
The concept of a new car and instant negative equity on the day you moved in was one of the great innovations of the 21st Century
and needs to be restored".
:- Duncan
58. 51ck-6-51x said...
shipbuilder said... "The slow death of the market and resulting uncertainty seems to be killing everything." (Monday, March 16, 2009 05:39PM ) -
I totally disagree. A sharp adjustment would cause a huge overshoot in price to the downside as a large number would suddenly be forced to sell, this in turn would hurt these people far more than they may be during a slower adjustment period and leave them with such a large amount of unsecured debt that the economy would feel the effects for even longer (unless there is a plan to hyper inflate too!).