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Sceptacled Bear

Mortgage Payments As A Proportion Of Income

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I don't know if this has been discussed elsewhere but I was wondering about mortgage repayments as a proportion of average income from the early 90s compared to now. When interest rates were at the fabled 15% (and presumably houses were more "affordable" as a multiple of income) what was the proportion of income taken up?

How does this compare with the current lower interest rates and higher house prices? I'm thinking that there's just no way we would need to see really high rates in order to fundamentally 'break' the HPI system.

I know that this makes discussions along the lines of 'interest rates remain historically low' somewhat moot but then surely that's the point - we are operating with an entirely different model and, as seen with the Northern Rock fiasco, markets run themselves despite the belief of VIs that they's all under control.

Anyway if anyone has some rough figures I think it would be useful (I know there's an earnings/prices graph on the site).

Hate to get all conspiracy theory but if they're about the same I think the whole country has been done by the banks - "we dont like the idea of interest rates going up and down....we know, we'll make prices higher so we guarantee our income and stop all the government (ahem...BoE) interference.

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ahh affordability, very favorably, were currently at 30% of household income... 12% interest rates would push us to 60-70% as seen at the previous peak. The graph also shows just how damaging the removal of MIRAS was, doubling the cost of your mortgage overnight....

2_25nw.jpg

post-552-1190886677_thumb.jpg

Edited by moosetea

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These discussions of interest payments as a percentage of income miss an important point -- incomes are growing much, much more slowly now than they were during the previous housing bubble in the 80's/90's. What this means is that any first time buyer will see high interest payments eating up a large proportion of income for a much longer period of time as they wait for inflation to erode the burden of their mortgage.

To compare fairly, you need to look at the total cost of ownership over the life of a mortgage and compare that to what you expect your income to be over that same period. In 1990, incomes were growing at about 10% a year. They're now growing at about 3% a year. This makes a huge difference in what your total income will be over the life of a mortgage. Further, if payments as a percentage of current income are now equivalent to what they were in 1990, this really means that a mortgage is going to take up roughly double your income over the life of the loan when you compare the current situation to what happened during the last boom.

I posted a write-up on this a couple of months ago. Here is is for reference:

http://www.housepricecrash.co.uk/forum/ind...mp;#entry592589

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ahh affordability, very favorably, were currently at 30% of household income... 12% interest rates would push us to 60-70% as seen at the previous peak. The graph also shows just how damaging the removal of MIRAS was, doubling the cost of your mortgage overnight....

(I think this is the reply I best understood - with thanks though to all respondants, even the one about Brown who I don't actually pay much attention to because my 7 year old says "he's scary"!)

Ok presumably this is based on all mortgage repayments as an average.

For anyone new to the market (lets say £150k mortgage, averageish joint earnings of about 50k) repayments as a proportion must be much higher than 30% of net (at least the 1k+ it looks like every time I think about buying worries me!). I guess that has ever been the case that at the start you pay proportionally more but at what point does the actual cost of living (ie other expenses) make it impossible/just plain dumb to buy?

If current mortgages repayment levels were really so favourable few of us would be here, surely, we'd all be sipping bubbly in our whirlpools?

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ahh affordability, very favorably, were currently at 30% of household income... 12% interest rates would push us to 60-70% as seen at the previous peak. The graph also shows just how damaging the removal of MIRAS was, doubling the cost of your mortgage overnight....

I can't even begin to interpret that graph, must be having a right thicko day...

However, I can say that the removal of MIRAS was relatively trivial, nothing like doubled the cost. From memory, my mortgage at that time went from around 500pm to 550pm on a 52K interest-only (endowment backed, remember those?) mortgage. The higher the mortgage was, the smaller the percentage rise due to MIRAS-withdrawal (because was limited to 30K or 60K if 2 joint mortgagees).

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Also checkout chart 23, page 14, on some research and analysis conducted by ABN AMRO in April 07:

http://www.housepricecrash.co.uk/pdf/abn-a...hs-04042007.pdf

Shows a graph of UK debt servicing costs as a % of disposable income. Of course interest rates have increased since April, so the trend upwards would continue till present.

Ok so my reading of this (and Rich's post) is that proportions are rising...

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ahh affordability, very favorably, were currently at 30% of household income... 12% interest rates would push us to 60-70% as seen at the previous peak. The graph also shows just how damaging the removal of MIRAS was, doubling the cost of your mortgage overnight....

Interesting graph Mr Tea, where did you get it from?

Certainly if interest rates did ever climb to double figures there's no way I could handle my mortgage, it can go up a bit from where it is without me being in trouble though even with a high income multiple.

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Ok so my reading of this (and Rich's post) is that proportions are rising...

Yes, the first year cash flow (if an FTB) cost is rising, and is almost at record. It's basically similar to 1988. There's still some "slack" in the system however... The overall mortgage payment graph presented commonly by bulls neatly illustrates the generational gap. Unusually, those that were able to buy early massively offset today's FTB mega mortgages with practically no mortgages (and hefty equity). This is thus the story of BTL.

However, RichC's comment is the most important one. Multi-year cash flow costs as a proportion of salary are at ALL TIME HIGHS as soon as you look beyond year 3.

That has huge consequences for anyone that has bought, is thinking of buying, or trading up. Basically the rungs on the property ladder have moved apart.

This has social impact (can't trade up) and long term financial ones (more of your life's wages will go to furnishing debt than any other generation).

It also means that the system stays "wound up" (as there is little relief due to wage inflation with time) so the actions of today will still be relevant for longer than before.

Think of it as an anaconda, slowly constricting the economy. As the economy breathes in and out (interest rates up and down), the anaconda tightens on every breath out (debt), until eventually it kills it.

There is no way out. Either we have major social ramifications (return to Victorian living) or house prices adjust in real terms.

I'm bear or bull? because I don't know which way it will go.

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ahh affordability, very favorably, were currently at 30% of household income... 12% interest rates would push us to 60-70% as seen at the previous peak. The graph also shows just how damaging the removal of MIRAS was, doubling the cost of your mortgage overnight....

When MIRAS was abolished it was 10% of the first 30k of a loan.

Not sure that equates to doubling.

Were you talking about something else here MT?

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When MIRAS was abolished it was 10% of the first 30k of a loan.

Not sure that equates to doubling.

Were you talking about something else here MT?

I'm not sure how MIRAS worked historically (my googling hasn't been that fruitful), but from what i could find I got the impression that MIRAS had been scaled down significantly until it was only 10%.

I was under the impression that at the time of the last crash the first 60k of mortgage interest was effectively free if you were a big enough tax payer, but I'd love someone who actually knows what they're talking about to fill in the gaps on how it used to work :)

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That has huge consequences for anyone that has bought, is thinking of buying, or trading up. Basically the rungs on the property ladder have moved apart.

This has social impact (can't trade up) and long term financial ones (more of your life's wages will go to furnishing debt than any other generation).

Which is what a lot of my owner friends are saying. It's also reflected where I live since the FTB houses, always limited in a smallish village, are now effectively unlikely to become available unless a) rungs close up or B) they all get repo'd (not that I buy into that supply guff mind - I remember the same tosh being spouted last time round). Leaves my locality looking like a private geriatric ward.

As for the bull or bear thing - be a bear, on the butterfly effect principle the person who crashes the market by talking about it could be you!

edit - terrible spelling!

Edited by Sceptacled Bear

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At the moment GB can truthfully (I think) say that costs as a proportion of income are lower now than they were across ALL owner occupiers. But for this to continue to be the case, prices must fall as every property in the country is eventually transacted.

e.g. if a house now comes on the market which was last sold in 1970's, the ratios take a huge hit. Every time.

GB knows this, and with his policies to increase affordable housing, when prices do fall he can take the credit for that too! This will coincide with the demographic shift in voter power. You have to watch that man carefully.

(not my clearest post, but I hope the point is understood.)

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there are a couple of earlier posts on this on this forum. Basically my earlier graph shows the amount of joint income is required for FTBers to service the interest on an average mortgage. At the last peak this was 70% of joint income, today it is 30->40%

The economist has another graph for the average homeowner, which shows a more harrowing picture....

http://www.economist.com/world/britain/dis...tory_id=9410631

I am going to PM spline to see if he can put together data on his site...

Edited by moosetea

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Miras- you got tax releif on the interest on the first 30,000 of your loan, and it was per person, then reduced to per family- It wasnt worth a great deal in terms of monthly payments at the end- i get the impression people think you got tax releif on the whole £60,000- not true.

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I put this together to give an idea of the real cost of mortgages, that is the a repayment mortgage as a proportion of the salary over the life time of the mortgage. All based of average property prices and average income. The forecast assumes no inflation in house prices (the talked about soft landing) and a 4% wage inflation versus a 6% interest rate.

As you can see any one who buys now is screwed unless they decide to inflate the UK out of this problem, and then they will be screwed as well.

Time to move abroad?

Repayment_cost.jpg

post-6211-1190896443_thumb.jpg

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I put this together to give an idea of the real cost of mortgages, that is the a repayment mortgage as a proportion of the salary over the life time of the mortgage. All based of average property prices and average income. The forecast assumes no inflation in house prices (the talked about soft landing) and a 4% wage inflation versus a 6% interest rate.

As you can see any one who buys now is screwed unless they decide to inflate the UK out of this problem, and then they will be screwed as well.

Time to move abroad?

Ouch!

Time to move all the baby boomers into "park homes" I reckon!

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I don't know if this has been discussed elsewhere but I was wondering about mortgage repayments as a proportion of average income from the early 90s compared to now. When interest rates were at the fabled 15% (and presumably houses were more "affordable" as a multiple of income) what was the proportion of income taken up?

Hi,

Going back to the first post in the thread, I would have thought that the 2 key variables relating to this question are:

1) Number of multiples of income that is being borrowed,

and

2) Prevailing interest rate.

It doesn't matter what the earnings or house prices are / were - outgoings in terms of % of earnings are fully determined by the above 2 things. [i think].

So, for example, if someone is today borrowing a multiple of 6 times their income and the interest rate is 5%, then their outgoings will be exactly the same as someone who borrowed a multiple of 3 times their income in 1991, IF the interest rate was then 10%, ie exactly twice what it is now. And so on.

So the question can be recast as "What was the interest rate at the time you are asking about, and what was the size of the loan being asked for, in terms of multiples of income."

If the income multiple value is now 6 * income and the income multiple value was then 2.5, then the Sub-Prime Minister's comment can only be true if interest rates were then more than 2.4 (6/2.5) times what they are now; so if they're now 5.0%, they would have had to have been 12% then for the outgoings as a % of income to be the more then. That may have been true for a brief period, but it wasn't true for a long time, was it?

regards,

Doc

ps I'm a bit of a newbie here, so I apologise if this offering is a crock.

pps I agree that there is a time component to the question (inflation rate, lifetime cost etc) as explained in earlier posts - I'm just trying to respond to the initial question.

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Hi,

Going back to the first post in the thread, I would have thought that the 2 key variables relating to this question are:

1) Number of multiples of income that is being borrowed,

and

2) Prevailing interest rate.

It doesn't matter what the earnings or house prices are / were - outgoings in terms of % of earnings are fully determined by the above 2 things. [i think].

So, for example, if someone is today borrowing a multiple of 6 times their income and the interest rate is 5%, then their outgoings will be exactly the same as someone who borrowed a multiple of 3 times their income in 1991, IF the interest rate was then 10%, ie exactly twice what it is now. And so on.

So the question can be recast as "What was the interest rate at the time you are asking about, and what was the size of the loan being asked for, in terms of multiples of income."

If the income multiple value is now 6 * income and the income multiple value was then 2.5, then the Sub-Prime Minister's comment can only be true if interest rates were then more than 2.4 (6/2.5) times what they are now; so if they're now 5.0%, they would have had to have been 12% then for the outgoings as a % of income to be the more then. That may have been true for a brief period, but it wasn't true for a long time, was it?

regards,

Doc

ps I'm a bit of a newbie here, so I apologise if this offering is a crock.

pps I agree that there is a time component to the question (inflation rate, lifetime cost etc) as explained in earlier posts - I'm just trying to respond to the initial question.

I think this is right and another look at the point I was originally aiming for - I was (I think) looking at 'affordability' and whether high rates low loan was the same as low rates high loan. Essentially a different gearing (but a bit more precarious the current way round). I think the reason I'm probably asking this question is because a lot of owners I meet feel that things have always been difficult for FTBs, my feeling (and it seems to be born out by some of the stats on the thread) it's now harder (and a worse idea) than ever to buy.

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Hi,

Going back to the first post in the thread, I would have thought that the 2 key variables relating to this question are:

1) Number of multiples of income that is being borrowed,

and

2) Prevailing interest rate.

It doesn't matter what the earnings or house prices are / were - outgoings in terms of % of earnings are fully determined by the above 2 things. [i think].

So, for example, if someone is today borrowing a multiple of 6 times their income and the interest rate is 5%, then their outgoings will be exactly the same as someone who borrowed a multiple of 3 times their income in 1991, IF the interest rate was then 10%, ie exactly twice what it is now. And so on.

So the question can be recast as "What was the interest rate at the time you are asking about, and what was the size of the loan being asked for, in terms of multiples of income."

If the income multiple value is now 6 * income and the income multiple value was then 2.5, then the Sub-Prime Minister's comment can only be true if interest rates were then more than 2.4 (6/2.5) times what they are now; so if they're now 5.0%, they would have had to have been 12% then for the outgoings as a % of income to be the more then. That may have been true for a brief period, but it wasn't true for a long time, was it?

regards,

Doc

ps I'm a bit of a newbie here, so I apologise if this offering is a crock.

pps I agree that there is a time component to the question (inflation rate, lifetime cost etc) as explained in earlier posts - I'm just trying to respond to the initial question.

Doc I think you are right with this - and I recall that rates did jump from 10% to 15% just as the last crash happened. THey were then cut rapidly to little effect.

The other point re time component is that low (real) interest rates mean that mortgages are relatively easier to manage up front, but are much more onerous over a period of time.

So perhaps it is / has been easier to become an FTB than it was in the past but it is now much harder to be a youngish homeowner with a big mortgage because we don't have inflation to help out.

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For your original question, the Council of Mortgage Lenders compiles data showing mortgage payments as a proportion of income for first time buyers. The data is down at the bottom of the page on this link:

http://www.cml.org.uk/cml/media/press/1250

Lies, damn lies and statistics!

According to this the median income of an FTB has doubled since 1995 from £17k to nearly £34k in 2006 (probably about £36k by now based on the trend). And the advance (loan?) has gone from £38k to £109k.

So has the average FTB gone from one stay at home partner to two full time mortgage slaves in 12 years?

They could start by measuring income net of income and property taxes and then admit that this file you more about what the crazy housing market has done to FTBs than it does about anybody elses 'affordability'.

Might also have been useful to show the average deposit too...

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