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laurejon

Ftb'ers Spend 20% Of Income On Buying A Home

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Mortgage meltdown: Are we about to follow the US into a house price crash?

By city editor ALEX BRUMMER - More by this author »

Last updated at 00:47am on 12th July 2007

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The UK might be about to follow the US into a house price crash

As Chancellor, he commissioned and published a series of heavyweight reports from distinguished economists designed to modernise the market for home loans and shake-up Britain's planning laws.

Unfortunately, most of these documents have been allowed to moulder away in Whitehall while the country has, year after year, failed to meet targets for new, affordable homes.

Now that there is a full blown housing crisis, with a shortage of properties driving up prices ever higher and placing enormous pressure on family budgets, the new Prime Minister has been forced to recognise desperate difficulties in the market-place.

The problem is that Brown's solutions, such as creating a new market in fixed-rate, long-term mortgages and easing the financial constraints on local authorities, could take years, if not decades, to make a difference.

In the meantime, surging mortgage charges (which are likely to rise again) are causing enormous stress on consumers, especially those tempted by lenders into over-borrowing.

The result could be that Britain - like the U.S. - will soon face a housing catastrophe.

The causes of this mess are manifold.

First, by concentrating on controlling inflation, rather than asset prices such as property, the Bank of England has allowed a bubble to develop in mortgages, credit and house prices.

Second, an influx of immigrants from East Europe improved the labour supply and boosted economic growth but has also placed pressure on the country's housing stock and social services.

Third, Britain's private sector house builders have failed to act fast enough to accommodate the needs of those looking for new homes.

Also, too much investment has gone into high density apartments and not into building new family homes which are traditionally everyone's aspiration.

Most importantly, it is the Bank of England, which has regularly warned about the threat to financial stability posed by people taking out mortgages beyond their means, which is behind the immediate crisis.

In June 2004, after a period in which house prices had risen by 20 per cent, the Monetary Policy Committee hiked interest rates from 4 per cent to 4.75 per cent.

The increase was successful and the boom subsided.

However, the Bank reversed course in August 2005 and, of course, the property market started to explode again.

A subsequent series of interest rate hikes, starting last summer, have failed to slow the bandwagon.

Data from the Council of Mortgage Lenders this week showed that, in May, first-time buyers would have had to borrow 3.37 times their income to get on the housing ladder.

With interest rates climbing, this means mortgage payments would take almost 20 per cent of a typical new homeowners' monthly pay - the highest ratio for 15 years.

As for those who are already loaded down with mortgages, they are faced with ever higher monthly bills.

The standard variable rate mortgage cost has jumped from 5.8 per cent in April 2004 to 7.2 per cent today, a rise of 20 per cent.

The real shock is still to come for two million homeowners currently shielded from market reality by low-rate fixed deals which will come to an end over the next 18 months.

The Prime Minister believes that part of the solution is to divorce housing costs from the interest rate cycle, by developing an American-style market with more fixed rate mortgages - including some that last up to 25 years.

The trouble is that if the American experience is anything to go by, few people will stick with such deals over the long term.

Evidence shows that whenever interest rates drop, people try to switch to lower price deals.

Another difficulty is the fact that huge regional disparities in house prices have built up - with prices in London and the South-East soaring faster than in other parts of the country, partly a result of the huge rewards in private equity and City trading.

With 4,200 new bonus millionaires created in the financial community last year alone, the price of housing in many parts of London, is now way beyond the means of ordinary earners - let alone people working in health and education services.

Among the key reasons for Britain's booming house market has been the low supply relative to demand.

It is estimated that 223,000 new houses are needed each year to keep up with demand, but even in the best years, only 160,000 are being produced.

Blame for the dearth of new houses is put on protracted planning procedures-which Gordon Brown is seekingto ease.

Yet there is also the impression that some house builders are happy to sit on tracts of land (which have been granted planning permission) and watch its value soar rather than start building work.

They then blame local authorities for failing to put in place the necessary infrastructure.

One of the great unspoken pressures on the housing market is immigration. A recently published report from Capital Economics said this was a key factor behind the affordability crisis.

The consultants estimated that the number of households in Britain has increased by 900,000 since 2004.

Yet over the same period, fewer than 600,000 new houses have been added. It is not therefore surprising that we are witnessing double digit house price rises year on year.

During the period when interest rates were relatively low, home buyers were able to live with surging prices.

Equally, there has been no shortage of lenders willing to take on "sub-prime risks", lending more than borrowers can really afford.

Only this week, Datamonitor warned that unaffordable mortgages have been rising 20 per cent faster than any other sector, pushing this form of lending to £26.4 billion.

The days of smug dinner party chatter about the house price boom are over.

The fact that housing costs in so many parts of the country are exorbitant will mean that the correction - when it happens - could be every bit as sharp as that which is already taking place across the Atlantic.

Edited by laurejon

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Second, an influx of immigrants from East Europe improved the labour supply and boosted economic growth but has also placed pressure on the country's housing stock and social services.

RACIST !!! Eastern Europeans are like snails they bring their houses on their back and cost no money what so ever.

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Interesting when they quote 20% as the percentage of monthly income spent by FTB's on homes. I would venture higher than that. A 100k mortgage is going to be around 700 a month plus bills plus council tax etc etc. You have to look at around 850 perhaps even 1000 a month purely on sustaining a roof above your head. Even if you consider just an IO mortgage on 100k at 600 a month, this would mean that a household would have to be earning around 3k a month to make the first statement true. Personally I cant see many joint incomes being around this 45 to 50k a year mark. The percentage is more like 35 to 40%.

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I'm paying exactly 40%.

Don't tell me I should be worried. I've been worried since 2003 when I bought the run down shit hole. I was still worried in 2004 when I managed to afford a sofa.

Edited by Bushy Tail

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Data from the Council of Mortgage Lenders this week showed that, in May, first-time buyers would have had to borrow 3.37 times their income to get on the housing ladder.

Ahh, but now we all know how much more the average FTB earns compared to the national average. Boink!

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Interesting when they quote 20% as the percentage of monthly income spent by FTB's on homes. I would venture higher than that. A 100k mortgage is going to be around 700 a month plus bills plus council tax etc etc. You have to look at around 850 perhaps even 1000 a month purely on sustaining a roof above your head. Even if you consider just an IO mortgage on 100k at 600 a month, this would mean that a household would have to be earning around 3k a month to make the first statement true. Personally I cant see many joint incomes being around this 45 to 50k a year mark. The percentage is more like 35 to 40%.

I bet they're looking at gross income which might make it true. I pay 25% of my net income (eek, I miscalculated it yesterday, didn't realise I paid that much), but it is 'only' 18% of my net income. That's on a mortgage of 2x my wage, so god knows how this is worked out.

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Interesting when they quote 20% as the percentage of monthly income spent by FTB's on homes. I would venture higher than that. A 100k mortgage is going to be around 700 a month plus bills plus council tax etc etc. You have to look at around 850 perhaps even 1000 a month purely on sustaining a roof above your head. Even if you consider just an IO mortgage on 100k at 600 a month, this would mean that a household would have to be earning around 3k a month to make the first statement true. Personally I cant see many joint incomes being around this 45 to 50k a year mark. The percentage is more like 35 to 40%.

20%, christ how much do these people earn? is that pre-tax monthly...

Oh, the CML, ahem

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20% of income!!! Yeah right

I'm not even going to bother doing the math.

What was the figure 10 years ago?

less then 1.5%...

Its the made up rubbish...

"Although house prices have trebbled modern mortgage technology has resulted in the cost actually dropping " spouts the CML executive.

Is this some internal CML competition to come up with the most outragous lie...?

"Guess what we are going to say next...?"

"You will never get away with it"

"stick some figures in there, spin it a little.. there is no lack of cretins in the UK"

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