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Phlash

Affordability

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Quite alot of the time on HPC, the affordability to current homeowners is mentioned, ie. their amount they need to repay increases with interest rate rises.

There is however a 2nd effect which I feel is skipped over sometimes, the amount current buyers can borrow:

Quite a few modern mortgages look at how much you can afford to borrow, they look at income versus outgoings and come up with a monthly repayment figure you can afford, and then multiply this up at some interest rate to tell you how much you can borrow. These are the amounts someone could have afforded 12 months ago, and using the same criteria, can afford now:

............................12 months ago.....Now............@ 6%

Afford to borrow...........£100,000.....£90,400........£86,2 00

Afford to borrow...........£200,000....£181,000.......£172,4 00

**Based on a 25 year mortgage repayments.

So your first time buyer looking to buy that £110,000 flat who could previously service a £100,000 debt may soon have to find a £23,800 deposit instead of a £10,000 deposit. Thats only been caused by a 1% interest rate rise!!!

These effects will filter through to the offers buyers can make.

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To say nothing of the utterly massive levels of unsecured debt that are also affected by interest rate rises.

The phenomenon of people refinancing their credit card debts by MEWing is a ticking time bomb.

As soon as we get even close to a 'soft landing' or 'stagnation' the removal of MEW as an escape route will pull the pin out of the big credit card grenade. A grenade that is growing in strength as BoE interest rate rises take credit card rates up with them.

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Quite alot of the time on HPC, the affordability to current homeowners is mentioned, ie. their amount they need to repay increases with interest rate rises.

There is however a 2nd effect which I feel is skipped over sometimes, the amount current buyers can borrow:

Quite a few modern mortgages look at how much you can afford to borrow, they look at income versus outgoings and come up with a monthly repayment figure you can afford, and then multiply this up at some interest rate to tell you how much you can borrow. These are the amounts someone could have afforded 12 months ago, and using the same criteria, can afford now:

............................12 months ago.....Now............@ 6%

Afford to borrow...........£100,000.....£90,400........£86,2 00

Afford to borrow...........£200,000....£181,000.......£172,4 00

**Based on a 25 year mortgage repayments.

So your first time buyer looking to buy that £110,000 flat who could previously service a £100,000 debt may soon have to find a £23,800 deposit instead of a £10,000 deposit. Thats only been caused by a 1% interest rate rise!!!

These effects will filter through to the offers buyers can make.

Have you factored in wage inflation?

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Have you factored in wage inflation?

Expand on this please - I can't see that wage inflation is at all relevant to Phlash's point, which was, I think, that "if affordability is measured as proportion of income spent on interest, it is inversely related to interest rate"

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Expand on this please - I can't see that wage inflation is at all relevant to Phlash's point, which was, I think, that "if affordability is measured as proportion of income spent on interest, it is inversely related to interest rate"

Yes but if wages go up enough to compensate for the extra interest, then the change would militate in favour of a real fall in prices via nominal levelling off. They probably don't - depends whose wages and what inflation figure the mortgage company use to calculate other outgoings.

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Quite alot of the time on HPC, the affordability to current homeowners is mentioned, ie. their amount they need to repay increases with interest rate rises.

There is however a 2nd effect which I feel is skipped over sometimes, the amount current buyers can borrow:

Quite a few modern mortgages look at how much you can afford to borrow, they look at income versus outgoings and come up with a monthly repayment figure you can afford, and then multiply this up at some interest rate to tell you how much you can borrow. These are the amounts someone could have afforded 12 months ago, and using the same criteria, can afford now:

............................12 months ago.....Now............@ 6%

Afford to borrow...........£100,000.....£90,400........£86,2 00

Afford to borrow...........£200,000....£181,000.......£172,4 00

**Based on a 25 year mortgage repayments.

So your first time buyer looking to buy that £110,000 flat who could previously service a £100,000 debt may soon have to find a £23,800 deposit instead of a £10,000 deposit. Thats only been caused by a 1% interest rate rise!!!

These effects will filter through to the offers buyers can make.

You forgot to factor in shared ownership, at 50% share we're back to 170K & 350K affordability respectively, the bubble cannot pop. :angry: :angry:

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Quite alot of the time on HPC, the affordability to current homeowners is mentioned, ie. their amount they need to repay increases with interest rate rises.

There is however a 2nd effect which I feel is skipped over sometimes, the amount current buyers can borrow:

Quite a few modern mortgages look at how much you can afford to borrow, they look at income versus outgoings and come up with a monthly repayment figure you can afford, and then multiply this up at some interest rate to tell you how much you can borrow. These are the amounts someone could have afforded 12 months ago, and using the same criteria, can afford now:

............................12 months ago.....Now............@ 6%

Afford to borrow...........£100,000.....£90,400........£86,2 00

Afford to borrow...........£200,000....£181,000.......£172,4 00

**Based on a 25 year mortgage repayments.

So your first time buyer looking to buy that £110,000 flat who could previously service a £100,000 debt may soon have to find a £23,800 deposit instead of a £10,000 deposit. Thats only been caused by a 1% interest rate rise!!!

These effects will filter through to the offers buyers can make.

Inheritance fuels a good deal of this so im not sure that FTB borrowing is as sensitive as you suggest. Also, i read recently that FTB % of pay spent on mortgage had risen to around 28%. Hardly awe inspiring. The stat would be different if it was mortgage payments as a % of gross pay (ie its financed out of taxed income) but ive never seen it expressed that way.

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Also, i read recently that FTB % of pay spent on mortgage had risen to around 28%. Hardly awe inspiring. The stat would be different if it was mortgage payments as a % of gross pay (ie its financed out of taxed income) but ive never seen it expressed that way.

Be careful with this one. That's FTB % of pay, measured from mortgage applicants. Remember them? The bunch of liars who will say anything to get a loan, and, also are now on average 34 years of age.

It's not 28% of the ONS average national wage. It's 28% of a gallon of thirty something's cow dung.

The current average affordability (or unaffordability), based on average wage, average house price and a repayment mortgage at 2% over base, has repayments representing 85% of average salary. This level of unaffordability was last seen during the surge to peak in Q3 1988, during the surge to peak that heralded the last crash.

Unaffordability peaked at 114% last time, in Q3 1989, just before the meltdown, with interest rates at 13.8%. Interestingly, the much reported 15% interest rates that would allegedly be needed for another crash, did not arrive until Q4 1990, fifteen months after the crash began.

Given the availability of personal debt now, and the much wider home ownership and therefore exposure of average and below average earners to this unaffordability, it will be interesting to see how far we need to go from the current level before this crash kicks off.

My suspicion is that this one will fold long before. Part of this suspicion is because interest rates went up so quickly last time that we can't be sure that all of the rises were actuall necessary to provoke the crash, so we can't predict with any great accuracy what the break down point might be.

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You forgot to factor in shared ownership, at 50% share we're back to 170K & 350K affordability respectively, the bubble cannot pop. :angry: :angry:

Until the sharing owners get divorced and have to sell up to split their assets.

Biggest cause of marital strife is financial stress.

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The current average affordability (or unaffordability), based on average wage, average house price and a repayment mortgage at 2% over base, has repayments representing 85% of average salary. This level of unaffordability was last seen during the surge to peak in Q3 1988, during the surge to peak that heralded the last crash.

2% over base? who pays that kind of rate, except those with shocking credit histories (who probably should have bought in the first place). When I took out my first repayment mortgage which was for 100%, that was only 0.75% over base.

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To say nothing of the utterly massive levels of unsecured debt that are also affected by interest rate rises.

The phenomenon of people refinancing their credit card debts by MEWing is a ticking time bomb.

As soon as we get even close to a 'soft landing' or 'stagnation' the removal of MEW as an escape route will pull the pin out of the big credit card grenade. A grenade that is growing in strength as BoE interest rate rises take credit card rates up with them.

A point I often think about. Would be interested to know a little more about the effect on unsecured debt that rising IRs has.

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2% over base? who pays that kind of rate, except those with shocking credit histories (who probably should have bought in the first place). When I took out my first repayment mortgage which was for 100%, that was only 0.75% over base.

I understand that you mean't "who probably shouldn't have bought in the first place."

This is a central bear argument. There are countless euphoric mugs who probably shouldn't have bought in the first place. They have lied to their lenders to secure their own homes and their 'investment properties.'

It seemed like a good plan, because prices only ever go up, so they just had to keep up with the 're' payments for a little while, then cash in their gain.

"Game over. No points. Oh, and by the way, you owe us 40 grand and the fraud squad want a word."

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The level of unsecured debt in 2007 means we are in a totally different world to 1989... it is different this time... people are far more leveraged and therefore expect the fall out to be much worse......

I predict the 80's anthem 1 in 10 will get re-released into the charts as a dance track.. DJ Chav's 1 in 5 remix anyone?????

Edited by theblacksheeple

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It's a good call by Phlash and one of the reasons why this board is better than any newspaper. Even the best newspaper article can only skim the surface and summarise crude points. The toxic brew of rising IRs with the associated credit crunch has only been dealt with properly on this board - indebted readers of newspapers are just waking up to the truth but they still have not realised the true horror of what may face them.

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Quite alot of the time on HPC, the affordability to current homeowners is mentioned, ie. their amount they need to repay increases with interest rate rises.

There is however a 2nd effect which I feel is skipped over sometimes, the amount current buyers can borrow:

These effects will filter through to the offers buyers can make.

To my mind this is definitely the most important factor as a house is only worth what the bank will lend you to pay for it. Current owners may take an additional job, pimp out the wife etc. in order to hold onto the dream and prevent their whole life/marriage/credit rating imploding, but a rational FTB is not going to resort to such desperate measures as they will decide it's not worth it.

Prices are set at the edge - i.e. where transactions are occurring. Those who are holding do not influence prices so much (particularly in a leveraged asset situation where the supply of credit is more important than the supply of houses to the market).

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