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

[Si1]

Reversion to the mean, dear boy.

 

https://www.ukvalueinvestor.com/2016/04/uk-house-prices.html/

[acidrob]

Unfortunately, hes probably right. Because another family member is now working full-time to help pay a mortgage - not only should house prices double - all goods should double. A cheque being sent out to the the top 100 wealthiest individuals in the country for the extra gdp gained.

If they ever allow kids down tut pit again - house prices will go to the moon! 

[Si1]

3 minutes ago, acidrob said:

Unfortunately, hes probably right. Because another family member is now working full-time to help pay a mortgage - not only should house prices double - all goods should double. A cheque being sent out to the the top 100 wealthiest individuals in the country for the extra gdp gained.

If they ever allow kids down tut pit again - house prices will go to the moon! 

Oh ffs. Did it take you all of twenty seconds to think that one up?

[spyguy]

22 minutes ago, DrBuyToLeech said:

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.

Get a spreadsheet.

Put some numbers in.

Take the average it over the last 30 years. Put in your expected costs  - kids, car, petrol, other life stuff.

Youll find that 60% of your take home is dpent in kiving and working.

Most people can afford a mortgagecisting them 30% of takehome. Which comes to about 3 x highest income.

Dont make the mitake of using a 2nd income. One income goes when you have kids. If you have 2 incomes then use that for a higher deposit/mortgage overpayment - before you start having kids, like 95% of all couples.

[acidrob]

12 minutes ago, Si1 said:

Oh ffs. Did it take you all of twenty seconds to think that one up?

probably less - its pretty obvious. Same as giving 'help' to people to get on the ladder - it only adds to the price. It doesnt matter how much money you have - it only matters how much more you have than others.

[Si1]

1 minute ago, acidrob said:

probably less - its pretty obvious. Same as giving 'help' to people to get on the ladder - it only adds to the price. It doesnt matter how much money you have - it only matters how much more you have than others.

No it isn't. The dependency ratio is at a historical high. You've just made my eyes bleed with frustration. Look up dunning-kruger.

[BorrowToLeech]

17 minutes ago, spyguy said:

Get a spreadsheet.

Put some numbers in.

Take the average it over the last 30 years. Put in your expected costs  - kids, car, petrol, other life stuff.

Youll find that 60% of your take home is dpent in kiving and working.

Most people can afford a mortgagecisting them 30% of takehome. Which comes to about 3 x highest income.

Dont make the mitake of using a 2nd income. One income goes when you have kids. If you have 2 incomes then use that for a higher deposit/mortgage overpayment - before you start having kids, like 95% of all couples.

I don't see how that contradicts what I said.

These multipliers are rules of thumb, maybe consistent with rough and ready averages, but they aren't detailed case-by-case risk calculations.  

Should it be 3, 3.5, 4?   For the purpose of this question It doesn't matter. 

If you think about the risk, you can see that lending some multiple of a joint income can be much riskier than lending the same multiple to a single earner, so the safe multiplier is likely to be lower for joint incomes, whatever the original multiple is.

And that's before you start looking at childcare costs. 

 

[spyguy]

31 minutes ago, Si1 said:

No it isn't. The dependency ratio is at a historical high. You've just made my eyes bleed with frustration. Look up dunning-kruger.

Less depency ratio, its not jusp oaps these days. More number of net tax payers v. net tax takers.

More unicorns than parents working ft in private sector in my kids school.

Edited July 30, 2017 by spyguy

[Si1]

34 minutes ago, acidrob said:

Would be interested to know how you think dependency ratio fits into women working . I did look up dunning-kruger - Ill refrain from calling you an ahole

I realise it has multiple syllables but, useful definitions of it do indeed take into account economically inactive working age people.

 

[Si1]

27 minutes ago, spyguy said:

Less depency ratio, its not jusp oaps these days. More number of net tax payers v. net tax takers.

More unicorns than parents working ft in private sector in my kids school.

More sensible definitions (or the 'real' dependency ratio) do [or should] accommodate this. I completely agree with your point, in fact it is what I meant. We're running a gov deficit to pay for it.

Edited July 30, 2017 by Si1

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

23 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

 

They used to use 3 times income a couple of decades ago, when... women worked, from what I remember... then they stretched it - then they stretched the repayment period - then they invented new mortgages (btl) and so on (via The Housing Act 1988/92) and so on... they've pushed it as far as they can... now hitting the wall, thankfully. 

[Habeas Domus]

As the country becomes more prosperous your discretionary income rises, in the 1980's this was largely driven by Thatchers income tax cuts - but as this happens the banks just raise the income multiple so that the extra dosh goes to the bank instead of the 'little people' spending it on themselves.

It's a classic sleight of hand, giving you money with one hand and taking it away with the other.

Why 3 X wages?, well as a rough calculation ignoring interest/inflation, just assume that interest payments will be roughly equal to the rent you would otherwise be paying, you will have to repay 3 years wages over ~30 years which is 10% of earnings going towards repayment of the debt.

[Democorruptcy]

18 hours ago, lombardo said:

According to the ONS, 79% of women work. This is not much higher than in 1995 (62%) when house prices were low. Thus women at work is not a very significant factor for the recent high price to earnings ratio.

https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/bulletins/uklabourmarket/mar2017#employment

It's the way the woman's income is used in income multiplier for the mortgage.

The 1998 Bank Act made the BoE Independent. At the time mortgages were 3x Main Income plus 1x Second Income. With average wages then at 17k and 9k that meant 3 x 17 + 9 = 60k. The average house prices was 60k.

The BoE has encouraged larger lending multiples since and their 2014 'no more than 15% at 4.5 or more times household income' using salaries of 25K + 15k = 4.5 x 40k = 180k. That's a tripling of house prices from 60k to 180k even though wages only went up by 50% from 26k to 40k.

If the BoE were worried about risky mortgages, the obvious thing to do would be to decrease the 'no more than 15% at 4.5x or more' to nothing more than say 4x household income.

In 2014 I suggested the no more than 15% at 4.5x was a call for more lending. I think people didn't realise how high lending multiples were available again since the financial crisis. This article implies lending has indeed gone up since. This could be another excuse to make it known how easy lending is or to say they cannot increase rates because... somehow...cough cough... people have been allowed to borrow too much.

    

 

[winkie]

3 hours ago, gruffydd said:

They used to use 3 times income a couple of decades ago, when... women worked, from what I remember... then they stretched it - then they stretched the repayment period - then they invented new mortgages (btl) and so on (via The Housing Act 1988/92) and so on... they've pushed it as far as they can... now hitting the wall, thankfully. 

When it was 3 times income interest rates were ~7% or 8%.......it could be 10 times income or more if interest rates forever 1% repayment over two generations with guarantor......never mind those only paying the interest only....they'll be renting for a long time yet...if sold, sell to rent again.

[Hullabaloo82]

I think your maths is a little confused on the first post. 

Using your 4.5 income multiple as an example, a couple earning a combined £60k will be able to borrow more in nominal terms (£270k) than a single person earning £40k pa (£160k) even though the ratio of lending to earning is the same. 

In terms of the cap, as a relatively young person and reasonably new entrant to the market I've been offered and seen income multiples much higher than 4.5 (offered as high as 6; currently on a mortgage of a bit more than 3x my wife and I joint income) and suspect that the market simply wouldn't be open to new entrants if that weren't the case. Few people are able to come in at 3x earnings in their 20s these days. 

[iamnumerate]

When women started working more, food didn't become more expensive, in a proper market neither would houses have done so.

[TheCountOfNowhere]

3 minutes ago, iamnumerate said:

When women started working more, food didn't become more expensive, in a proper market neither would houses have done so.

Yip, but the bankers/government/establishment have played a blinder and convinced people to pay what they can afford for a house rather than a price measured in turnips.

I look at some of the asking prices now and I just shake my head, there is no correlation between price, value and actual physical worth now, none.

Will British people open their eyes, I doubt it very much, they WILL be forced to though.

Over heard a conversation at the weekend where young lad ( 30 ) told his mate he was a "Northampton yuppie" and Northampton pwopatee was going to double in the next 7 years.

I later over heard that he was a plasterer.

 

[suresh786]

23 hours ago, DrBuyToLeech said:

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.

+1

[Riedquat]

On 30/07/2017 at 10:04 AM, 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.

I'm assuming that's why he's asking, rather than stating that that's what they should be. The people who have heard it all before are the ones to ask.

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

23 hours ago, winkie said:

When it was 3 times income interest rates were ~7% or 8%.......it could be 10 times income or more if interest rates forever 1% repayment over two generations with guarantor......never mind those only paying the interest only....they'll be renting for a long time yet...if sold, sell to rent again.

Yes but the world has work has shifted remarkably... less secure income streams, stagnant or even falling incomes and so on. 

[winkie]

1 hour ago, gruffydd said:

Yes but the world has work has shifted remarkably... less secure income streams, stagnant or even falling incomes and so on. 

No problem, reclaim ownership, change terms so as to rent for life.....all about accumulation of assets that generate constant payment of rents this lifetime and for lifetimes to come.....rents pay, work is irregular, seasonal, variable, unknown and unstable....

[Bland Unsight]

I've been maintaining a thread on LTIs since last March which may have some relevance here.

One element not addressed here is that LTIs do not drive the approach of either the FCA (as the conduct regulator) or the Bank of England (who intervene here in line with the FPC's financial stability remit and macro-prudential powers).

Both are driven by the notion of affordability. The Bank have repeated countless times that their working model is debt service ratios (DSRs). They made the same point yet again in the latest FSR:

Quote

Mortgages are the largest loan exposure for UK lenders. They can be a source of risk for lenders’ resilience, impairing the provision of credit. In a severe downturn, some borrowers will be unable to repay their mortgages even after cutting back on spending, for example, in the event of a rise in unemployment. The resulting defaults can affect lenders’ resilience, with mortgages accounting for around two thirds of major UK banks’ loans to UK borrowers.

The proportion of households experiencing repayment difficulties can rise sharply as the share of income spent on servicing mortgage debt — also known as the mortgage debt-servicing ratio (DSR) — increases beyond a certain level (Chart A.6). Both the average DSR of the UK household sector as a whole and the proportion of households with high mortgage DSRs have fallen since the crisis, supported by the low level of interest rates. But households’ ability to service their mortgage debt could be challenged by either a rise in mortgage rates or a fall in incomes. As an illustration, Bank staff estimate that in the event of a rise in unemployment to 8%, the proportion of households with high DSRs would double, reaching a level close to that seen in 2007 (Chart A.7).

During the global financial crisis, loss rates on mortgages were contained, reflecting the sharp fall in interest rates and a rise in unemployment that was relatively modest given the fall in economic activity. But in the 1990s recession, which was marked by a significant rise in interest rates and unemployment, loss rates were more material.(4) And results from stress tests of major UK banks suggest that they could reach similar levels in future periods of severe stress (Chart A.8), particularly if house prices were to fall significantly, increasing lenders’ losses in the event of borrower default. Significant falls in house prices are highly correlated with economic downturns, when borrowers are also more likely to become unemployed and default on their mortgages. In such a severe stress, lenders are likely to incur larger losses on lending originally extended at high LTV ratios. This is because such mortgages are more likely to experience ‘negative equity’ in the event of a fall in house prices, meaning that the value of the housing collateral will be less likely to cover the mortgage loan.

Source

The TL;DR version of that is that the LTI soft-cap is about protecting banks from themselves (and not some wacky marketing scheme for high LTI lending as per the arguments of certain other posters).

[Bland Unsight]

22 hours ago, Riedquat said:

I'm assuming that's why he's asking, rather than stating that that's what they should be. The people who have heard it all before are the ones to ask.

I'd make the point that Lombardo is repeatedly telling (not asking) and what he's telling anyone who inclined to listen is that there is an army of naive young people who'll start buying house prices at the first sign of drops because they are habituated to high prices.

It's a very dubious argument. In big chunks of the South East the falls need to call forth an army of young people financed with post-MMR lending would be 'interesting'.

I have no dog in the fight and no particular care regarding whether or not Lombardo is a troll or is just posting innocently, but I think Si1's call is a reasonable one to make.

Edited August 1, 2017 by Bland Unsight

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

On 7/31/2017 at 5:32 PM, winkie said:

No problem, reclaim ownership, change terms so as to rent for life.....all about accumulation of assets that generate constant payment of rents this lifetime and for lifetimes to come.....rents pay, work is irregular, seasonal, variable, unknown and unstable....

It's worse than anything feudalism dished up, really... in my part of Wales the land is scattered by Ty Unnos - landless people were allowed to stay in houses built and claimed in one night... now those very same houses are £500,000 holiday homes and the poor rent from the Ty Unnos dwellers - stop the world! I wanna get off! 

[Democorruptcy]

BoE say 12,000 a month: 

Quote

 

Fears of a “risky mortgage bubble” are growing as the number of people with super-sized home loans has accelerated sharply, putting tens of thousands of borrowers at risk if interest rates rise.

Up to 140,000 people took out a home loan of more than 4.5 times their income over the past year, an increase of 15 per cent on the previous 12 months, analysis of Bank of England lending figures shows.

The proportion of borrowers with these high-risk loans is now double the level before the financial crisis struck.

https://www.thetimes.co.uk/article/fears-of-risky-mortgage-bubble-as-buyers-stretch-to-afford-homes-n7hwk3h7k