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dellboy

Apparently 6x Salary Is Still "very" Affordable

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From a property investor email:

Within the UK I would rather pay the surveyors’ value for a property in an area where local affordability is very strong – prices less than 6 times the average salary – as I would see this as under the long term value, than pay 10-15% below a surveyor’s value in an area where prices are 10 times the average salary – as I would see this still as over a true market value.

It's interesting to see how 6x is still classified as locally "very" affordable. I don't want to slag these guys off (and am not naming them) - they've been right about most of the local markets and not always bullish. But the 6x multiple, especially in cheap (locals don't earn much) areas, is about to disappear as the banks tighten up.

Am I missing something here? 6x local salary can only be supported by banks, right?

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From a property investor email:

It's interesting to see how 6x is still classified as locally "very" affordable. I don't want to slag these guys off (and am not naming them) - they've been right about most of the local markets and not always bullish. But the 6x multiple, especially in cheap (locals don't earn much) areas, is about to disappear as the banks tighten up.

Am I missing something here? 6x local salary can only be supported by banks, right?

yes its upto the banks, but if the banks stop lending completely there stuffed.... but the key is interest rates and risk.

At the peak just before the last crash property was ALOT less affordable, caused by the removal of miras. With higher Interest rates at the last property peak, debt was twice as expensive, although the salary multiples were less, the average cost as a percentage of take home after tax was more..

I/0 - x6 salary at 6% is as affordable/costs the same as 3x salary at 12%

Graph is upside down, but we have had more unaffordable property in the past (as a percentage of a couples take home pay). Due to rising IRs we are currently in the area marker danger.

http://www.telegraph.co.uk/money/graphics/...nhouse02big.gif

when we see IRs at 8->12% at current salary levels we will be in the area marked unfordable

Edited by moosetea

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yes its upto the banks, but if the banks stop lending completely there stuffed.... but the key is interest rates and risk.

At the peak just before the last crash property was ALOT less affordable, caused by the removal of miras. With higher Interest rates at the last property peak, debt was twice as expensive, although the salary multiples were less, the average cost as a percentage of take home after tax was more..

I/0 - x6 salary at 6% is as affordable/costs the same as 3x salary at 12%

Graph is upside down, but we have had more unaffordable property in the past (as a percentage of a couples take home pay). Due to rising IRs we are currently in the area marker danger.

http://www.telegraph.co.uk/money/graphics/...nhouse02big.gif

when we see IRs at 8->12% at current salary levels we will be in the area marked unfordable

I think you will find that the historical 3xsalary benchmark is for a single salary.

Whilst the 6x salary benchmark is for shared salaries.

Pftttt goes that theory then.

Edited by geneer

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yes its upto the banks, but if the banks stop lending completely there stuffed.... but the key is interest rates and risk.

At the peak just before the last crash property was ALOT less affordable, caused by the removal of miras. With higher Interest rates at the last property peak, debt was twice as expensive, although the salary multiples were less, the average cost as a percentage of take home after tax was more..

I/0 - x6 salary at 6% is as affordable/costs the same as 3x salary at 12%

when we see IRs at 8->12% at current salary levels we will be in the area marked unfordable

Of course x6 at 6% is only the same as x3 at 12% from that limited IO perspective.

The capital repayment is much more problematic in a low IR environment where inflation erodes the capital less (relative to salary). And unless you're on a long fixed rate the potential exposure to a given IR hike is much greater on the lower % (as all the upcoming resets over the next year will find). :(

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Of course x6 at 6% is only the same as x3 at 12% from that limited IO perspective.

The capital repayment is much more problematic in a low IR environment where inflation erodes the capital less (relative to salary). And unless you're on a long fixed rate the potential exposure to a given IR hike is much greater on the lower % (as all the upcoming resets over the next year will find). :(

and the same can be said for other times in the past. if IRs are at 12% there is a risk they could rise to 24%....

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I think you will find that the historical 3xsalary benchmark is for a single salary.

Whilst the 6x salary benchmark is for shared salaries.

Pftttt goes that theory then.

In fact average house prices are now 11xaverage single salary.

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