Dead Cat...

[threetimesdead]

This is cashflow, and it is a misleading measure.

It doesn't account for the erosion of debt, and debt payments with time. It is this erosion that is crucial.

It does! It is time data-series!

Ramp on

[threetimesdead]

This is cashflow, and it is a misleading measure.

It doesn't account for the erosion of debt, and debt payments with time. It is this erosion that is crucial. I don't get how people miss it all the time.

OH!

Now I see why you have dismissed that data and did not like it at all...

It shows the HIGHEST EVER MORTGAGE DEBT RATIO for the 3 years preceding house price crash in US!!!

I did not even realise it when I posted the link

There it is again:

http://www.federalreserve.gov/releases/housedebt/

Edited July 31, 2009 by threetimesdead

[redgenieuk]

What is the difference between 3-4 single multiple and 6-8 multiple for a family of 2 workers?

The difference is there is a higher probability of failure, rather than a lower one. Now I personally would arge that maybe if you had two stable people in uncorrelated work with good medium term prospects (say 5 years) that maybe 5-6 might be OK. IF the interest rates are low (5% maybe) and they overpay heavily for the 5 years. I would not have a problem with that, then if they hit hard times, the multiple would be more manageable.

What is the impact of having/not having council tax?

Apart from adding another 30,000 people at a guess to the unemployment registers?

[threetimesdead]

The difference is there is a higher probability of failure, rather than a lower one. Now I personally would arge that maybe if you had two stable people in uncorrelated work with good medium term prospects (say 5 years) that maybe 5-6 might be OK. IF the interest rates are low (5% maybe) and they overpay heavily for the 5 years. I would not have a problem with that, then if they hit hard times, the multiple would be more manageable.

Apart from adding another 30,000 people at a guess to the unemployment registers?

Just look at the FED link posted above - it will answer soo many questions

[MinceBalls]

it's a roaring lion. Feel the economy's power returning through the action of people selling houses to each other. Feel the raw aggression of the lion economy. Grrrrrrrrr.

Dontcha just love the automatic sarcasm that any hint of optimism evokes from the armaggedon brigade.

Have you seen where unemployment is heading?

Have you seen how much debt the country is in?

Have you seen a complete lack of leadership or indication of how we are going to get out of the mess (despite being pushed by IMF) the current government is providing?

Have you seen the GDP figures?

I dont think its unreasonable to expect such comments from people such as FallingKnife if you take a look at the bigger picture. To say that house prices are going to continue rising (other than in the short term) ignores the complete cr@p we are in. How can anyone explain how prices can continue upward with such terrible underlying economics?

And by the way, when did it become optimistic news that house prices are rising when we all know that it makes people poor?

Edited July 31, 2009 by MinceBalls

[bear_or_bull]

OH!

Now I see why you have dismissed that data and did not like it at all...

It shows the HIGHEST EVER MORTGAGE DEBT RATIO for the 3 years preceding house price crash in US!!!

I did not even realise it when I posted the link

There it is again:

http://www.federalreserve.gov/releases/housedebt/

Actually Mr. Chippy I was arguing that a high affordability ratio (i.e. "ooh, look, a 3% loan means I can borrow $90 gazillion for a monthly payment of change") is misleading. Total debt is what matters, as that's what you sign up to. Somehow wires were crossed.

[threetimesdead]

Actually Mr. Chippy I was arguing that a high affordability ratio (i.e. "ooh, look, a 3% loan means I can borrow $90 gazillion for a monthly payment of change") is misleading. Total debt is what matters, as that's what you sign up to. Somehow wires were crossed.

Please do not make up theories and definitions and then assign them to me

This is not an "affordfability ratio" that I am talking about

A "high" debt to income ratio means exactly the opposite to what you are stating above - you cannot borrow "gazillions"

The metric is dynamic from one time period to the next, and covers amongst other your total debt, interst rates, taxation

and that is how and why it is so superior to any static "gross income multiples"

And it has alone

"predicted " the HPC in US

Edited July 31, 2009 by threetimesdead

[MississippiJohnHurt]

OH!

Now I see why you have dismissed that data and did not like it at all...

It shows the HIGHEST EVER MORTGAGE DEBT RATIO for the 3 years preceding house price crash in US!!!

I did not even realise it when I posted the link

There it is again:

http://www.federalreserve.gov/releases/housedebt/

ok well at least it's a long term series. TBH I'm not sure it matters what is used - either measure is just a way of looking at present compared to past, and the longer historical data, the better. If you looked at thes income to loan multiples at the same time, they would also be rising and at historically high levels.

The point I thought you had missed is that it probably doesn't matter whether you use wage to loan or another long term data set - the important thing is why, at a given point in time, conditions were as they were. So, pre the crash - why had disposable income dropped compared with long term averages, or why had wage to loan ratios been able to rise compared to long term averages. In my view it was far more to do with credit conditions allowing the market to overheat, than it was environmental or social issues which were causing a "new paradigm". I think past booms were caused by credit too, which informs my view that this crash isn't over yet. If it somehow was, the market would be behaving inexplicably differently to the way it has always behaved inthe past.

This - ie what caused the boom - is the bit that I can't get bulls to debate on.

[sdc395]

Sorry, missed this. House prices don't need to come down anymore. That will mean thousands of people lose their homes, people with babies out on the street, destitute and homeless.

I guess this is ok by you as long as you get a mansion to impress you friends for £20k though...

It's so frustrating that you can't see that high house prices are the cause of these people's circumstances. Falling prices don't make people homeless, over-stretching budgets to afford a house combined with the natural economic cycle is the problem.

Think on.

[threetimesdead]

ok well at least it's a long term series. TBH I'm not sure it matters what is used - either measure is just a way of looking at present compared to past, and the longer historical data, the better. If you looked at thes income to loan multiples at the same time, they would also be rising and at historically high levels.

No, for instance, gross income will rise and personal tax will rise leaving you with same disposable income. Your multiples will miss that development, will tell you that your affordability has risen , my ratios will not miss it and will tell you that affordability has stayed the same or has fallen. And same applies to many other crucial factors.

The bottom line is that anyone using historical gross income multiples is simply deceiving oneself and ends up with silly expectations re HPI/HPC movements.

Edited July 31, 2009 by threetimesdead

[threetimesdead]

I think past booms were caused by credit too, which informs my view that this crash isn't over yet.

"Mortgage repayments as percentage of disposable household income" methodology will include effects of any cheap credit

Standard "Gross income multiples" methodology will miss it - cheap credit - completely

Edited July 31, 2009 by threetimesdead

[athe]

It does! It is time data-series!

Ramp on

I thought you said your model wasn't predictive, so why a time series?

[threetimesdead]

I thought you said your model wasn't predictive, so why a time series?

It is only as predictive as a yardstick can be - is that ratio historically low or historically high? This would indicate the next price move

[jonboy]

No, I never went to the Convent in Lechlade

Or stats class. 100% correlation? WTFIT?!

[threetimesdead]

Or stats class. 100% correlation? WTFIT?!

Its is a simplification for those who never had a stats class.

For those who did - it is a "perfect" correlation

[athe]

It is only as predictive as a yardstick can be - is that ratio historically low or historically high? This would indicate the next price move

But if you only want a yardstick then any long term measure of affluence is surely as good as another?

I am just not sure that the dynamic metric you like is a good idea when dealing with loans whose durations span a significant proportion of a working life, and at least five different government cycles (and thus inevitably highly variable levels of taxation, unemployment, benefits etc). Surely the sensible thing is to look at worst case scenarios, rather than month to month affordability.

[MississippiJohnHurt]

No, for instance, gross income will rise and personal tax will rise leaving you with same disposable income. Your multiples will miss that development, will tell you that your affordability has risen , my ratios will not miss it and will tell you that affordability has stayed the same or has fallen. And same applies to many other crucial factors.

The bottom line is that anyone using historical gross income multiples is simply deceiving oneself and ends up with silly expectations re HPI/HPC movements.

I think we're talking at cross purposes a little, but I see what you're saying. What I was trying to get at initially was that lots of bulls on this site won't accept that boom/bust exists, they will look for reasons why exponential growth will occur. And them reasons are bunkum, imo.

Nice debating with ya although I don't have a natural maths/stats brain, I was just trying (clumsily) to get across that it doesn't really matter what measure you use, as long as you use one that spans a long enough series to see what happened after previous booms.

[threetimesdead]

I am just not sure that the dynamic metric you like is a good idea when dealing with loans whose durations span a significant proportion of a working life, and at least five different government cycles (and thus inevitably highly variable levels of taxation, unemployment, benefits etc).

How else (if not by using a dynamic metric) would you clear the HP moves from the effects of any rates changes (in particular in a market considered very unusual by both - americans and europeans - because of its predominant reliance on variable rate mortgages) as well as effects of constant and various govt interventions

By including them, what you effectively achieve over the long term, you get to the core/base of the consumer/housebuyer behaviour, you achieve exactly the opposite - clean it from the "noise" of those govt interventions

[athe]

How else (if not by using a dynamic metric) would you clear the HP moves from the effects of any rates changes (in particular in a market considered very unusual by both - americans and europeans - because of its predominant reliance on variable rate mortgages) as well as effects of constant and various govt interventions

By including them, what you effectively achieve over the long term, you get to the core/base of the consumer/housebuyer behaviour, you achieve exactly the opposite - clean it from the "noise" of those govt interventions

HP?

[threetimesdead]

HP?

House Prices, sorry for laziness

[Bloo Loo]

Please do not make up theories and definitions and then assign them to me

This is not an "affordfability ratio" that I am talking about

A "high" debt to income ratio means exactly the opposite to what you are stating above - you cannot borrow "gazillions"

The metric is dynamic from one time period to the next, and covers amongst other your total debt, interst rates, taxation

and that is how and why it is so superior to any static "gross income multiples"

And it has alone

"predicted " the HPC in US

course, no one could have forseen it.

they measure, they discuss, they ignore.

[threetimesdead]

Surely the sensible thing is to look at worst case scenarios, rather than month to month affordability.

Historical average should be your worst case scenario accepted by consumer - a maximum he is willing to pay out of his take home

Now suppose the BoE and the Treasury have already build this model

They know that historical average is X% of the take home (say 20%)

The market has been overheating for whatever reason reaching 25% in 2007

In order to stabilise HPC I, as the BoE, will need to bring the base rate by us much down so as the mortgage payments roll back close to historically sustainable 20% of the take home income

If that is not sufficient to get me there - I can reduce the VAT rate - increasing take home (instead of reducing the mortgage payments)

Knowing that historically acceptable average can be a very powerful tool in the hands of market manipulators

[athe]

House Prices, sorry for laziness

It's the end of the week, my brain has clearly given up if I couldn't spot that one!

Okay, so I think we agree for the most part on what the aim is. My stance is that by choosing a conservative metric (eg 3.5 x single salary) then rises up to quite high interest rates are allowed for (for instance when I first bought, I bought at 3.5 x salary and calculated that I would be alright up to 12%, could probably struggle by up to 14 or 15%). Whereas by choosing a more dynamic measure something that might be affordable under the current regime won't be in the future (unless I take a long and thus expensive fix). From the point of view of my own purchase I benefit from sticking to the conservative metric.

Of course salary multipliers only really work if the banks stick to them. When the banks started using affordability the multipliers shot up and surprise surprise so did house prices. I guess at the moment in a period of adjustment none of the banks are really saying what they are planning to do re this long term and that is the most important thing re HPs ( ) Anecdotally I can say that my last agreement in principal (a couple of weeks ago) was 2.65x joint, or 5x single (not that I actually needed more that 3.4x single but that's what they offered).

[athe]

Historical average should be your worst case scenario accepted by consumer - a maximum he is willing to pay out of his take home

Now suppose the BoE and the Treasury have already build this model

They know that historical average is X% of the take home (say 20%)

The market has been overheating for whatever reason reaching 25% in 2007

In order to stabilise HPC I, as the BoE, will need to bring the base rate by us much down so as the mortgage payments roll back close to historically sustainable 20% of the take home income

If that is not sufficient to get me there - I can reduce the VAT rate - increasing take home (instead of reducing the mortgage payments)

Knowing that historically acceptable average can be a very powerful tool in the hands of market manipulators

Fair point - a holistic government/private sector approach like that would be a good one - but surely unlikely. Changing tax codes to allow for house prices! Better just to stop overheating in the first place through a land value tax maybe.

[Bloo Loo]

Historical average should be your worst case scenario accepted by consumer - a maximum he is willing to pay out of his take home

Now suppose the BoE and the Treasury have already build this model

They know that historical average is X% of the take home (say 20%)

The market has been overheating for whatever reason reaching 25% in 2007

In order to stabilise HPC I, as the BoE, will need to bring the base rate by us much down so as the mortgage payments roll back close to historically sustainable 20% of the take home income

If that is not sufficient to get me there - I can reduce the VAT rate - increasing take home (instead of reducing the mortgage payments)

Knowing that historically acceptable average can be a very powerful tool in the hands of market manipulators

well, as we have seen, all that reducing the cost and increasing the supply of credit is to put asset prices up.

this increases equity and allows banks to lend even more.

we know where this cycle ends.

and they cant lower rates from here.

nice theory, but failed.

multiples would have capped the market, prevented wholesale securitisation and prevented a major meltdown.

people would have spent their spare cash ( with low rates) in the economy.

course,the fly in all these theories is the size of government debt and the size of the public sector...at some stage all the disposable is spent propping up the debt required to just run a government,

I beleive the USA is just about there. indeed, with todays GDP, some treasury spokes lady said the great GDP they acheived (-1%) would have been much worse had the government stimulii not starting to kick in... US governement spend was UP 5%.

the squeeze is on.