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lombardo

With dual incomes, why should 4.5 time earnings still be considered the target?

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Now that women earn along with men (unlike some decades ago), why do we still use 4.5 time earnings to define what a house should cost?

If women on average earn 60% of men's earnings then the new target should be (4.5*0.6)+4.5  =  7.2

 

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3 hours ago, lombardo said:

Now that women earn along with men (unlike some decades ago), why do we still use 4.5 time earnings to define what a house should cost?

If women on average earn 60% of men's earnings then the new target should be (4.5*0.6)+4.5  =  7.2

 

I would hazard a guess - childcare costs! 

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We do not use 4.5 times earnings to define what a house a should cost as far as I know. Where did you get that number from?

I see that you started a very similar thread recently, which no one replied to.

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9 minutes ago, Richmond said:

I would hazard a guess - childcare costs! 

Yep. Kids.

JoeAverages earning peak at 32.

Plus lots of people stopping working hard after kids.

I know a huge number of women whove basically jacked in work after kids. Not due to having kuds, more fed up of work and not working is acceptable for women with kids.

 

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Perhaps I have this wrong. Maybe it's 4.5x household income and not individual earnings?

 

53 minutes ago, Ah-so said:

We do not use 4.5 times earnings to define what a house a should cost as far as I know. Where did you get that number from?

In this thread you will see that number: http://www.housepricecrash.co.uk/forum/index.php?/topic/230739- -fears-of-‘risky-mortgage-bubble’-as-buyers-stretch-to-afford-homes/

4-5 times is normally the number that people quote for long term averages.

Quote

I see that you started a very similar thread recently, which no one replied to.

Yes I am a noob, so my threads take long to be approved and can get missed.

I think this is an important topic because buyers need to know what price to target if a big crash does occur. I will probably go for 7x the average wage. So in london about 250k for a 3 bed house.

 

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12 minutes ago, lombardo said:

Perhaps I have this wrong. Maybe it's 4.5x household income and not individual earnings?

 

In this thread you will see that number: http://www.housepricecrash.co.uk/forum/index.php?/topic/230739- -fears-of-‘risky-mortgage-bubble’-as-buyers-stretch-to-afford-homes/

4-5 times is normally the number that people quote for long term averages.

 

Is that what it is now eh?

Here's what the beeb said WAY back in Sept 2014:

Quote

 

Borrowing

As a general rule, mortgage companies will allow you to borrow three times your salary, or two and a half times your joint salaries if you're buying with someone else.

 

I can see why are are confused. The current flavour of government told Gordon Brown that printing money was the mark of a failed administration. Now they think it's just business as usual. Times change, Standards slip. Risks increase. But don't tell anyone. Think this government can bail out the next bust w/o dire consequences for the pound, our exchange rate and the price of goods on supermarket shelves?

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5 hours ago, lombardo said:

Now that women earn along with men (unlike some decades ago), why do we still use 4.5 time earnings to define what a house should cost?

If women on average earn 60% of men's earnings then the new target should be (4.5*0.6)+4.5  =  7.2

More people not marrying, marrying later or get divorced are factors pointing to a lower multiple.

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28 minutes ago, lombardo said:

Perhaps I have this wrong. Maybe it's 4.5x household income and not individual earnings?

 

In this thread you will see that number: http://www.housepricecrash.co.uk/forum/index.php?/topic/230739- -fears-of-‘risky-mortgage-bubble’-as-buyers-stretch-to-afford-homes/

4-5 times is normally the number that people quote for long term averages.

Yes I am a noob, so my threads take long to be approved and can get missed.

I think this is an important topic because buyers need to know what price to target if a big crash does occur. I will probably go for 7x the average wage. So in london about 250k for a 3 bed house.

 

I think you have confused lending limits and house prices:

In June 2014 the Financial Policy Committee (FPC) issued a recommendation  to the PRA and the Financial Conduct Authority (FCA) advising that they should ‘ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5’. 

In other words, banks may lend at more than 4.5x a borrower's income, as long as this does not constitute more than 15% of total lending.

And of course, this relates to loan size - the deposit needs to be factored in to how much people actually pay for the house. There is a good graph at this link of the house price to incomes ratio:

http://www.economicshelp.org/blog/5709/housing/market/

 

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18 minutes ago, Sledgehead said:

Is that what it is now eh?

Some charts from a quick search:

34B0F0AA00000578-3610689-image-a-22_1464

 

article-2181983-145240A8000005DC-793_634

 

My question is simply: Whatever the actual figure is, do we need to adjust that now? Some on this thread indicate that the 2nd income goes all into child-care costs.

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15 minutes ago, lombardo said:

Some charts from a quick search:

34B0F0AA00000578-3610689-image-a-22_1464

 

article-2181983-145240A8000005DC-793_634

 

My question is simply: Whatever the actual figure is, do we need to adjust that now? Some on this thread indicate that the 2nd income goes all into child-care costs.

so clearly you are talking about some moving average that includes the 2007-08 bubble.

presumably you think the y2k dotcom valuations should be fed into acceptable PE ratio calcs?

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29 minutes ago, Ah-so said:

I think you have confused lending limits and house prices:

In June 2014 the Financial Policy Committee (FPC) issued a recommendation  to the PRA and the Financial Conduct Authority (FCA) advising that they should ‘ensure that mortgage lenders do not extend more than 15% of their total number of new residential mortgages at loan to income ratios at or greater than 4.5’. 

In other words, banks may lend at more than 4.5x a borrower's income, as long as this does not constitute more than 15% of total lending.

And of course, this relates to loan size - the deposit needs to be factored in to how much people actually pay for the house. There is a good graph at this link of the house price to incomes ratio:

http://www.economicshelp.org/blog/5709/housing/market/

 

Additionally consider that a proportion of the banks loans will be several years old, so those houses will have risen in value and the borrowers may have had some wage increases, both lowering the LTV.

So all of their 4.5 X borrowers are likely to be people who purchased recently. If the borrowers are split evenly over the 25 years of a mortgage term then the 15% will represent everyone who bought in the last 6 years..

When couples split up/divorce it is often after 7 or 10 years so they may have had time to get to a point where one income is enough to cover the mortgage, though probably not two mortgages.

Where this becomes sticky is when prices start to fall, what percentage fall do we need before the number of 4.5 X borrowers on a banks books will jump over 15%?

The 15% figure is only a recommendation, so I don't think they will issue margin calls in a falling market, but equally I don't think they will issue any new loans at 4.5 X if they already have 20% - more likely they will dial down to 3.5 X

People will say "what is the use of lower prices if the banks won't lend you the money", but thats why you need to save hard to minimise the borrowing you need.

Something that occurs to me while writing this, is that many in the boomer generation are at the age where thier mortgages are reaching end of term. Because there is a bulge in the population for that age group, the banks could find themselves with an increasingly younger and highly leveraged customer base.

The last time housing was sensibly priced was 1997 which is 20 years ago.
So that means we are in a situation where 90% of the property in a banks loan book was purchased at bubble prices.

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2 hours ago, lombardo said:

According to the ONS, 79%

Sorry that was a typo, it's 69%.

 

2 hours ago, Sledgehead said:

so clearly you are talking about some moving average that includes the 2007-08 bubble.

presumably you think the y2k dotcom valuations should be fed into acceptable PE ratio calcs?

I believe that we now have a new paradigm. Young people have not seen reasonable prices and to them a 40% drop would be seen as a bargain. They live in flat shares and generally believe that house prices wont crash. I know the latter because most of my firends are in their 20s.

That is why I think we need to include the recent ridiculous prices into the equation.

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2 hours ago, lombardo said:

Sorry that was a typo, it's 69%.

 

I believe that we now have a new paradigm. Young people have not seen reasonable prices and to them a 40% drop would be seen as a bargain. They live in flat shares and generally believe that house prices wont crash. I know the latter because most of my firends are in their 20s.

That is why I think we need to include the recent ridiculous prices into the equation.

Back in the days when only one person had to work to afford a house was when houses were what houses were meant to be.......lived in not a damn money spinner.  The sorry fact is that now days people think that it is acceptable to let prices get stupidly out of control with ridiculous thoughts such as houses being worth 7x the average wage.  It is this sorry acceptance and the banks willingness to fuel these people that has got us where we are, up the river not only without a paddle but with a large hole in the boat.

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10 hours ago, lombardo said:

Now that women earn along with men (unlike some decades ago), why do we still use 4.5 time earnings to define what a house should cost?

If women on average earn 60% of men's earnings then the new target should be (4.5*0.6)+4.5  =  7.2

 

Do we? That it was 12x in London.

 

Have u heard of arithmetic?

 

Try applying it to average wage/average house price/cost of living and tell us all what your conclusion is.

 

Ta

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2 hours ago, Si1 said:

Troll.

I havent been around as some of you. But I don't understand why I get some rude replies on here. I want a HPC as much as you all do. All I am doing is learning and I get called a troll? Have you tried going on to other forums where you are new and someone who knows nothing about you call you a troll? Humankind is truly full of diverse people.

34 minutes ago, TheCountOfNowhere said:

Do we? That it was 12x in London.

 

Have u heard of arithmetic?

 

Try applying it to average wage/average house price/cost of living and tell us all what your conclusion is.

 

Ta

Please elaborate because I don't know. London is currently over 17x. I know that since I live here. I have done some calculations and think that 7x is what London may see even if other regions go lower.

I think some of the early posters made a good point about childcare taking away the earnings of a wife.

In regards to the 4.5 value, you may not use it but many do. 4-5x is the general number given by many. BTW it is the price of the house and not the amount borrowed that I am referring to (unlike that article in that other thread).

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53 minutes ago, HaveAniceDay said:

Back in the days when only one person had to work to afford a house was when houses were what houses were meant to be.......lived in not a damn money spinner.  The sorry fact is that now days people think that it is acceptable to let prices get stupidly out of control with ridiculous thoughts such as houses being worth 7x the average wage.  It is this sorry acceptance and the banks willingness to fuel these people that has got us where we are, up the river not only without a paddle but with a large hole in the boat.

And that was exactly my point. The new generation will unfortunately accept outrageous prices. Among my family and firends, I am the only one who thinks that a big crash will happen. I have to be silent about it because they think I am being stupid. Others get upset when I speak becasue they fear negative equity.

However my speculation could be wrong and maybe when houses do get to 7x in London then there will be appetitie/fear for lower prices and they may go to 3-4x like they were at points in the past.

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You get called a troll because you haven't thought very hard before posting. I'm sure you're nice and well intentioned, but I've heard it all before vis a vis what you're saying.

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9 minutes ago, Si1 said:

You get called a troll because you haven't thought very hard before posting. I'm sure you're nice and well intentioned, but I've heard it all before vis a vis what you're saying.

Plateua at higher prices.... young people must get used to paying 120% of their income for a flat ... spend it on iphones .... no holidays .... at their age i soon got a frew promotions and double my income.... not giving it away etc etc.

Edited by spyguy

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20 hours ago, lombardo said:

Now that women earn along with men (unlike some decades ago), why do we still use 4.5 time earnings to define what a house should cost?

If women on average earn 60% of men's earnings then the new target should be (4.5*0.6)+4.5  =  7.2

"To define what a house should cost"?  I can only assume you are in the business of selling houses to mugs.

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27 minutes ago, spyguy said:

Plateua at higher prices.... young people must get used to paying 120% of their income for a flat ... spend it on iphones .... no holidays .... at their age i soon got a frew promotions and double my income.... not giving it away etc etc.

I wonder what his Auntie Mabel thinks BP shares should cost considering average incomes?

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No-one, as far as I know, has actually calculated any of these rule-of-thumb multipliers, and so there's little justification for any of them.

If I don't know why 3 is right for one person, then I don't know why 6 or 7 is right for two either.

That said, I think it's far from clear that doubling the multiplier makes sense. 

If you lend 80k to one person, on the basis that they can just about afford the mortgage from their salary, then the biggest risk is that they lose their job and can't afford to pay the mortgage. 

If you lend to two people on 40k, then the risk is that either one of them loses their job.  That could be up to twice as likely.

So the absolute maximum tolerable amount of borrowing is likely to be lower for two people on 40k, than one on 80k. 

The real statistics are likely to be complicated. Is an 80k earner more or less likely to lose their job than a 40k earner?  More or less likely to save?  Are we talking about single people, or single earner couples?  

There's lots of factors that should be accounted for, and a simple multiplier is unlikely to capture them.

In any case, that calculation is purely about the risk to the lender.

The other aspect, sadly ignored by regulators, is the cost to society of allowing huge debts based upon joint incomes. 

Firstly, it creates a housing bubble.  This was (probably, because nobody really knows) a significant contributor to the first housing bubble (1997-2008), when there was no real income cap. The endemic use of liar loans meant that stated incomes could be 'adjusted' if ever the cap was an issue.

House price inflation destroys your productive economy as surely as tax rises. It essentially is a tax rise.

Furthermore, as people are forced to borrow more to outbid each other, more and more people are forced into work simply to pay for the cost of housing.  

In a rational economy, the most productive use of many people's time is to raise their own children, not to serve cappuccinos to other people who also wish they were at home looking after their children.

This increase in the workforce puts downwards pressure on wages, and has all kinds of negative social effects. 

Ideally, borrowing would be capped at as low a level as possible, and landlording banned.

There is no reason whatsoever that prices should be allowed to rise above the cost of a second hand building. 

Individuals can't agree amongst themselves to limit each other's borrowing, there's too much incentive to cheat.  This is an externality effect.  If you alone borrow more than everyone else, it makes you better off. This forces me to do the same and now we are both worse off.

If there is any merit in government at all, this is precisely the sort of problem they ought to be solving.

Edited by DrBuyToLeech

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