Lender Get Desperate As They Seek New Business

[Realistbear]

http://observer.guardian.co.uk/cash/story/0,,1799997,00.html

Lenders try to lower the ladder

Lisa Bachelor

Sunday June 18, 2006

The Observer

For those rare individuals who are not busy watching the World Cup every night, now is the traditional house-buying season. But it is not only the lure of watching football in the pub that is putting off first-time buyers. Affordability problems are making increasing numbers opt to continue renting or stay at home with mum and dad.

One such option was launched last week by Bradford & Bingley. It is offering a first-time buyer mortgage aimed at new young professionals, specifically

those studying for professional qualifications

as a solicitor, accountant or actuary, or practising as an architect, doctor, dentist, surveyor or vet.

The loan is available on 100 per cent of the value of the property for those without a deposit and borrowers can take out up to

4.75 times their income

.

With FTBs virtually extinct the lenders are now plowing desperate ground to find someone to buy a house and get the chains moving once again. Students need a 4.75 X income debt millstone when there is no income like a bullet through the nut.

The VIs are going to have to accept that houses are no longer affordable and give up trying to lure FTBs into debt just to get on a ladder that is just going to have to collapse.

[Ritters]

I think in order to qualify for credit these days you need to meet two basic requirements.

You need a pulse and breathing, but not necessarily in that order.

[TwentyOneEleven]

Desperation indeed! With the average student accruing debts of between £10-15k by the time they finish university, adding substantial mortgage repayments to this will mean very little (if any) money to experience anything else in life except work! What about travelling, hobbies, starting a family?

I do see one slight flaw in the mortgage conditions offered by the B&B ... students generally have an income of £0, so a mortgage of x4.5 this figure is still £0! Is the mortgage then based on projected earnings on finishing uni? How can this be a definite figure? How many can guarantee they will indeed get that high-paying job on graduation ... if they do indeed even graduate?

[a j]

I think the article is badly written. I suspect they are referring to people working in jobs where earnings growth would be expected, not people still at university.

[Realistbear]

The article also said:

But while finding ways to afford a first home can be frustrating for those under 30 who live in a country obsessed with owning property, it is interesting that even The Council of Mortgage Lenders' report concluded that many in this age group may be better off renting for longer.

Better off renting? Are they accepting the reality that houses are now unaffordable? The VIs will have to face the fact that FTBs are gone and that the chains will have to collapse and prices adjust to the fundamentals. HPC here we come.

I think the article is badly written. I suspect they are referring to people working in jobs where earnings growth would be expected, not people still at university.

Not sure, the VIs are getting very desperate:

"specifically those studying for professional qualifications"

If they don't push their products how are they going to earn commissions?

[CrashConnoisseur]

Is the this for full-time students or young working graduates studying part-time or by distance learning for vocational qualifications such as ACCA, RICS membership, etc.?

[brassfarthing]

Not sure, the VIs are getting very desperate:

"specifically those studying for professional qualifications"

They are talking about young accountants, lawyers doing their articles etc who are in their first jobs, doing part-time study towards full professional qualifications. These people are notoriously badly paid, but tend to become notoriously well-paid. They are therefore a very rich vein of business for the lenders.

It's actually pretty sensible, and nothing to do with forcing debt down the mouths of starving students, as you seem to think.

That said, 4.7 x income (or whatever the figure is) won't be much good for fledgling professionals in their first jobs where they can be paid as little as 7 or 8K. You'd have to be earning at least 20K to have a sniff of a chance, so probably more realistically being aimed at young pros who've been in work for a couple of years. Financially it would be a pretty solid bet for the lenders, and unlikely to trouble the young lawyers too much either.

Another scare story punctured -- sorry!

[backtoparents]

They are talking about young accountants, lawyers doing their articles etc who are in their first jobs, doing part-time study towards full professional qualifications. These people are notoriously badly paid, but tend to become notoriously well-paid. They are therefore a very rich vein of business for the lenders.

It's actually pretty sensible, and nothing to do with forcing debt down the mouths of starving students, as you seem to think.

That said, 4.7 x income (or whatever the figure is) won't be much good for fledgling professionals in their first jobs where they can be paid as little as 7 or 8K. You'd have to be earning at least 20K to have a sniff of a chance, so probably more realistically being aimed at young pros who've been in work for a couple of years. Financially it would be a pretty solid bet for the lenders, and unlikely to trouble the young lawyers too much either.

Another scare story punctured -- sorry!

Errr, first year accountants/actuaries on 8K? Things must have changed significantly since I was offered a position as a "Yes Boy". Is it competition from Polish auditors? Has tax consultancy been outsourced?

But yes this is about people who are just out of uni and very keen to jump on the property ladder.

There was a story recently about giving mortgages to students looking to rent out with other students, not this one though. Perfectly sensible for the lender, since the mortgage is guaranteed by the parents - hooks in another property by the back door.

btp

[Charles_Darke]

They are talking about young accountants, lawyers doing their articles etc who are in their first jobs, doing part-time study towards full professional qualifications. These people are notoriously badly paid, but tend to become notoriously well-paid. They are therefore a very rich vein of business for the lenders.

It's actually pretty sensible, and nothing to do with forcing debt down the mouths of starving students, as you seem to think.

That said, 4.7 x income (or whatever the figure is) won't be much good for fledgling professionals in their first jobs where they can be paid as little as 7 or 8K. You'd have to be earning at least 20K to have a sniff of a chance, so probably more realistically being aimed at young pros who've been in work for a couple of years. Financially it would be a pretty solid bet for the lenders, and unlikely to trouble the young lawyers too much either.

Another scare story punctured -- sorry!

In London the starting salary for an accountant is c.£26k (I know somebody joining in August on this) and per rollonfriday.com a city lawyer starts at c.£30k. Sounds a lot but not so much considering the hours and crap that they have to endure. Beancounters and lawyers have always been able to get high multiples of their initial salary due to the expected wage growth (expect wages to at least double within 5 years) so targetting them makes sense.

Your job is fairly secure as an accountant. Even if you do get made redundant, it shouldn't be hard to get another job as there is a shortage of good accountants. I'm not so familiar with lawyers, but I don't expect the demand for lawyers will be decreasing!

[brassfarthing]

In London the starting salary for an accountant is c.£26k (I know somebody joining in August on this) and per rollonfriday.com a city lawyer starts at c.£30k. Sounds a lot but not so much considering the hours and crap that they have to endure. Beancounters and lawyers have always been able to get high multiples of their initial salary due to the expected wage growth (expect wages to at least double within 5 years) so targetting them makes sense.

Your job is fairly secure as an accountant. Even if you do get made redundant, it shouldn't be hard to get another job as there is a shortage of good accountants. I'm not so familiar with lawyers, but I don't expect the demand for lawyers will be decreasing!

Sorry, yes, my figures may be out of date. Traditionally, lawyers fresh out of university had to do 2 years of articles which were paid at subsistence level. Maybe things have changed. I shared a flat with an accountant when I was a student who complained that trainee accountants were paid less than 50% of the national average salary. Maybe that's changed too.

Point remains that these are not desperate students we're talking about but people on the cusp of a highly lucrative profession.

[tomr]

Sorry, yes, my figures may be out of date. Traditionally, lawyers fresh out of university had to do 2 years of articles which were paid at subsistence level. Maybe things have changed. I shared a flat with an accountant when I was a student who complained that trainee accountants were paid less than 50% of the national average salary. Maybe that's changed too.

Point remains that these are not desperate students we're talking about but people on the cusp of a highly lucrative profession.

If you have a law degree you have to do this. If you don't have a law degree you have to do a conversion course (1 year), then another year I think, then a year of training in a law firm before you get to the 30k starting salary, 3 years after leaving uni. And the conversion courses etc are usually hugely expensive and have to be paid for by a big bank loan.

[Realistbear]

A solicitor employed by a firm in the "Magic Circle" can expect top be on 40-50k their first year after completing qualifications. This is a relatively small number of firms in the City that specialise in M&A, bonds, high level commercial transactions and high end commercial property deals. They can expect to work at least 12 hours a day with most weekends in the office. Broken down into hours their earnings start to look a little less. City lawyers on this level of starting salary are not that numerous and if the City experiences a long drawn out bear market with stocks headed down and M& A activity drying up layoffs will follow.

During the trainee years (2) they will probably earn up to 30k so with a multiple of 5 that means they can afford a nice flat near the City for around 150k. With a mortgage 5 times salary they expect to have little left over for actual living expenses. Later, when they qualify and are on 50k they will be able to afford a 250k property near the City and have very little left over to live on. 3 times salary is the long standing limit for comfortable living which means they should opt for a flat near the City for 150k and move up to the 250k level after being in the profession for several years where their earnings rise to 80k. By that time they may be married with a couple of kids and a nice 250k flat will be just tickety.

See the problem?

Edited June 18, 2006 by Realistbear

[brassfarthing]

A solicitor employed by a firm in the "Magic Circle" can expect top be on 40-50k their first year after completing qualifications. This is a relatively small number of firms in the City that specialise in M&A, bonds, high level commercial transactions and high end commercial property deals. They can expect to work at least 12 hours a day with most weekends in the office. Broken down into hours their earnings start to look a little less. City lawyers on this level of starting salary are not that numerous and if the City experiences a long drawn out bear market with stocks headed down and M& A activity drying up layoffs will follow.

During the trainee years (2) they will probably earn up to 30k so with a multiple of 5 that means they can afford a nice flat near the City for around 150k. With a mortgage 5 times salary they expect to have little left over for actual living expenses. Later, when they qualify and are on 50k they will be able to afford a 250k property near the City and have very little left over to live on. 3 times salary is the long standing limit for comfortable living which means they should opt for a flat near the City for 150k and move up to the 250k level after being in the profession for several years where their earnings rise to 80k. By that time they may be married with a couple of kids and a nice 250k flat will be just tickety.

See the problem?

In a word, no!

You seem to be envisaging not the usual ascent up the property ladder but a situation where, with every move, they give to charity (or somewhere unspecified) all the equity they have gained from 1) rising prices and 2) repayments off the capital sum, and start again at the bottom of the ladder with a 100% mortgage.

"Realist" indeed.

Edited June 18, 2006 by brassfarthing

[Realistbear]

In a word, no!

You seem to be envisaging not the usual ascent up the property ladder but a situation where, with every move, they give to charity (or somewhere unspecified) all the equity they have gained from 1) rising prices and 2) repayments off the capital sum, and start again at the bottom of the ladder with a 100% mortgage.

"Realist" indeed.

It seems you missed the point. First there are no 150k flats in London that a trainee professional would want to live in. I am not sure there even any 250k flats where a professional with a family would want to live either. Second, with a 5X multiple it is virtually impossible to have a "life" given the amount spent on feeding the mortgage.

I am not sure where you see a buy and sell situation in my example

IN any event it is not realistic to assume that anyone who buys this late in the cycle is bound to make money as property can go up as well as down.

[El_Pirata]

In a word, no!

You seem to be envisaging not the usual ascent up the property ladder but a situation where, with every move, they give to charity (or somewhere unspecified) all the equity they have gained from 1) rising prices and 2) repayments off the capital sum, and start again at the bottom of the ladder with a 100% mortgage.

"Realist" indeed.

Errr...all the equity they have gained from rising prices will be wiped out by the rise in price of the next rung on their housing ladder. In fact as prices rise the rungs get further apart, so they may even be worse of.

As for capital repayments - so what? it's only forced saving.

[brassfarthing]

It seems you missed the point. First there are no 150k flats in London that a trainee professional would want to live in. I am not sure there even any 250k flats where a professional with a family would want to live either. Second, with a 5X multiple it is virtually impossible to have a "life" given the amount spent on feeding the mortgage.

I'm using your own scenario!

In reality, people will do what's best for them. Jokes aside, we can assume that the average young city lawyer will have some intelligence. He/she is unlikely to take out a £250K 100% mortgage, though even if they did, that would be monthly repayments of £1400 which is probably quite do-able on a take-home of about £3K(?) a month. But if they can't get a mortgage and "have a life" then I guess they will rent for a couple of years or however long it takes for their salaries to surge upwards. By this time, once they've pooled their earning with their partners, I'm sure they'd be able to take care of their housing needs.

More generally, there are plenty of places to live within commuting distance of London. Where I am, in Bucks you could get a pretty decent place on a lawyer's salary. I don't go along with this stuff about places that "trainee professionals would want to live". They'll live where other people on those salaries live. Not all young professionals aspire to live in riverside loft apartments, quaffing Champers all evening.

Errr...all the equity they have gained from rising prices will be wiped out by the rise in price of the next rung on their housing ladder.

Of course, but that's not the point. Increasing equity allows you to put a larger deposit down on the next purchase which in turn opens you up to far more, and cheaper, mortgage deals. It also means that you have a cushion against negative equity.

[MarkG]

Increasing equity allows you to put a larger deposit down on the next purchase which in turn opens you up to far more, and cheaper, mortgage deals.

Big deal. You buy a 150k flat over a crack den rather than a 250k house. Five years later prices have doubled, so you've made 150k on your flat. But the house you want to buy is now 500k... so you're 100k worse off than you were before: you'll need a 350k mortgage to buy that house which you could have bought for 250k.

The sole 'benefit' is that someone who didn't buy a 150k flat over a crack den and rented a nice place with decent neighbours is 150k worse off than you are. You still end up paying 350k plus interest for a 250k house, so you'd have been better off if prices had remained flat.

Edited June 18, 2006 by MarkG

[Realistbear]

Big deal. You buy a 150k flat over a crack den rather than a 250k house. Five years later prices have doubled, so you've made 150k on your flat. But the house you want to buy is now 500k... so you're 100k worse off than you were before: you'll need a 350k mortgage to buy that house which you could have bought for 250k.

The sole 'benefit' is that someone who didn't buy a 150k flat over a crack den and rented a nice place with decent neighbours is 150k worse off than you are. You still end up paying 350k plus interest for a 250k house, so you'd have been better off if prices had remained flat.

I think this sums up an article put out in the press last week, that it is not just FTBs that are priced out but move-ups also. HPI has made the leaps too expensive. In reality, the whole pyramid is too expensive and if move-ups can't afford it anymore it is not long now before the whole thing collapses in on itself.

Economic history will look back and see the HPI phase as a giant pyramid scheme in which the ones who got in early made out well (if they sold before the crash) and everyone who got in late was a loser as there was no one to pass the property onto at the point where pricing reached its maximum.