The Questions The Journalists Should Be Asking

[6538]

But if they lose their income they won't have it. Only a debt. And an asset with a debt secured against it. Which is likely as not also depreciating. There's an expression, something about chickens, eggs, and numerology.

So what? That's true of any house purchase by either of the two families. No family is running any greater risk than another as they will both be equally as stuffed as the other if they loose their jobs. If that were the lending criteria then no one woudl ever get a mortgage.

[Guest Mr Parry]

What on earth are you talking about?

Why is everyone having such a problem understanding the concept that if you don't spend on one thing then you have more money to spend on something else?

You are correct here. As Fred Harrison points out, an excess money finds a home, usually land. Thus land/house prices rise.

[ParticleMan]

So what? That's true of any house purchase by either of the two families. No family is running any greater risk than another as they will both be equally as stuffed as the other if they loose their jobs. If that were the lending criteria then no one woudl ever get a mortgage.

The household that has higher discretionary spend is more able to manoeuvre.

I don't have my specs on today. Which one are you again, Black, or Scholes?

[6538]

Why are you failing to grasp the concept that you do not have money you've had to borrow?

Of course you do. Both families have to borrow but the family without the credit card debt and the car loan can afford a bigger mortgage than the other family. To say that each family is equally able to afford 3x, 4x or 10x muliple of income is ridiculous because one can clearly afford to pay larger mortgage installments than the other.

[Bloo Loo]

Of course you do. Both families have to borrow but the family without the credit card debt and the car loan can afford a bigger mortgage than the other family. To say that each family is equally able to afford 3x, 4x or 10x muliple of income is ridiculous because one can clearly afford to pay larger mortgage installments than the other.

so your point was that 10X income is a reasonable mortgage? forcing up prices for all? utlimately leading to defaults and a crash- which was your original point, why do we look forward to a crash.

Well, we arent, we didnt, and we pleaded for the boom not to be pushed to new heights.

[macfarlan]

Again you are missing the point. I'm not talking about 120% LTV's, nor very large lending multiples.

When did i miss the point the first time? It's the first time I've ever responded to your posts. Are assume you're not responding to me but to the forum in general? The forum where individuals post individual replies. Sorry to be pedantic.

I'm talking about actual, real world affordability. The fact is that if both the families in the above example have to have that same one third of income as a buffer against future unknowns then the fact is that the family that has fewer financial commitments can afford a larger mortgage for no additional risk to either themselves or the lender. The value of the house is then determined by the level of debt that a prudent buyer can actually afford, rather than sticking rigidly to some income multiplier that may be ridiculously low for one family and ridiculously high for others.

I'm sorry but I don't get this. Do you?

All other things being equal. If you and me earn the same yet you are paying £100 a week in car finance and I'm not then I can comfortably service a bigger debt then you.

Fine, go and get the biggest debt you are offered, but if a particular kind of loan isn't available, you can't accept it can you.

[ParticleMan]

Of course you do. Both families have to borrow but the family without the credit card debt and the car loan can afford a bigger mortgage than the other family. To say that each family is equally able to afford 3x, 4x or 10x muliple of income is ridiculous because one can clearly afford to pay larger mortgage installments than the other.

Why stop at 10x? If you throw risk right out the window, we can all afford a hundred, no a thousand, no twentington times our own weight in troy ounces, and gear this up a bazillionfold on an interest-only product (only the family with higher discretionary spend, can afford just a little bit less).

Hell's bells man. Can't you see how ridiculous the proposition is, that increased leverage does not bring increased levels of future risk into the present? You seriously need to go spend some quality time with an actuary - before you blow one of your own legs off, economically.

Edited April 23, 2008 by ParticleMan

[6538]

The household that has higher discretionary spend is more able to manoeuvre.

I don't have my specs on today. Which one are you again, Black, or Scholes?

Yes, that's precisely my point. A families discretionary spend.

If one family decides not to spend on credicard debt, car loans, pets, etc then they have the discretion to spend it else where. If they chose to spend it getting a larger mortgage when why shoudl they not be allowed to? There is no more risk to them or the lender.

Don't understand the second comment.

[ParticleMan]

There is no more risk to them or the lender.

Don't understand the second comment.

Oh my aching sides.

No. More. Risk. To the lender.

Oh deary deary me.

(say, you really do need to go spend some quality time with an actuary - they'll tell you all about personal risks, and while it might scare the bejesus out of you if you're really 6x leveraged in a falling market, it just might scare some commonsense in, too)

[Bloo Loo]

Yes, that's precisely my point. A families discretionary spend.

If one family decides not to spend on credicard debt, car loans, pets, etc then they have the discretion to spend it else where. If they chose to spend it getting a larger mortgage when why shoudl they not be allowed to? There is no more risk to them or the lender.

Don't understand the second comment.

Maybe you havent noticed, but people following your credo are getting caught out by higher mortgage costs.

[auk]

Why stop at 10x? If you throw risk right out the window, we can all afford a hundred, no a thousand, no twentington times our own weight in troy ounces, and gear this up a bazillionfold on an interest-only product (only the family with higher discretionary spend, can afford just a little bit less).

Hell's bells man. Can't you see how ridiculous the proposition is, that increased leverage does not bring increased levels of future risk into the present? You seriously need to go spend some quality time with an actuary - before you blow one of your own legs off, economically.

Surely though 6538's (not particularly insightful) point is correct. Someone with fewer other commitments can afford to pay more for a mortgage. Whether this is a good thing, or whether the mutliple they are paying is sustainable when applied to other participants in the market is another matter altogether.

[garybug]

Yes, that's precisely my point. A families discretionary spend.

If one family decides not to spend on credicard debt, car loans, pets, etc then they have the discretion to spend it else where. If they chose to spend it getting a larger mortgage when why shoudl they not be allowed to? There is no more risk to them or the lender.

I have no problem with the 'affordability' model per se, provided it still comes out to X times disposable income (where X can be 3.5). After that, if they have that spare capacity, then let them 'overpay' to reduce the principal.

[ParticleMan]

Surely though 6538's (not particularly insightful) point is correct. Someone with fewer other commitments can afford to pay more for a mortgage. Whether this is a good thing, or whether the mutliple they are paying is sustainable when applied to other participants in the market is another matter altogether.

It's the bits you leave out that make it more fun.

He's left out the temporal aspect. Sucking up 6x your own weight over a 25 year term is insane. Totally bonkers.

That is what makes the reference to options pricing all the more funny. Any outlier event over the full term, and you're completely screwed. As is your lender.

The lower the leverage, the greater the amplitude of (economic) shock required to tip you on your back. But at 6x, you're going to be really lucky to escape unscathed.

Go check your numbers again after you've added in two or three stints of unemployment of say (both) three and six month duration each. How about an immobilising injury? Two or three years off to raise an unexpected child?

Affordability.

That one always cracks me up.

Edited April 23, 2008 by ParticleMan

[macfarlan]

Yes, that's precisely my point. A families discretionary spend.

If one family decides not to spend on credicard debt, car loans, pets, etc then they have the discretion to spend it else where. If they chose to spend it getting a larger mortgage when why shoudl they not be allowed to? There is no more risk to them or the lender.

Don't understand the second comment.

6538.

I think the system you are advocating is actually the one in place isn't it? Banks/mortgage brokers etc decide what they think you can afford based on your disposable income. If you have more disposable income than someone else, you will be offered more as a mortgage.

I really am missing the point now.

[auk]

It's the bits you leave out that make it more fun.

He's left out the temporal aspect. Sucking up 6x your own weight over a 25 year term is insane. Totally bonkers.

That is what makes the reference to options pricing all the more funny. Any outlier event over the full term, and you're completely screwed. As is your lender.

The lower the leverage, the greater the amplitude of (economic) shock required to tip you on your back. But at 6x, you're going to be really lucky to escape unscathed.

Go check your numbers again after you've added in two or three stints of unemployment at say (both) three and six month stretches.

Affordability.

That one always cracks me up.

I fully understand this, I'm just saying that slagging off the guy for making what is basically a formal logic statement (if X = Y - Z, then if Y is constant and Z decreases, X must increase) seems a tad unfair.

I for one am greatly looking forward to the impact of huge levels of leverage on the downturn, both in the residential and private equity market. Let's see how those fancy excel models stack up when there's no earnings, suckers :-)

[6538]

Maybe you havent noticed, but people following your credo are getting caught out by higher mortgage costs.

N, people who are following the credo of borrowing as much as they possibly can with no regard to whether they can actually sensibly afford to service the debt are getting caught. Even if you are borring 1.5x income if you don't have any money left at the end of the month then you cant afford the loan and you shouldn't have been given it to begin with.

However, if you have a mortgage of 4.5x income yet have, say, a third of your income left every month then that seems pretty affordable to me.

[macfarlan]

I fully understand this, I'm just saying that slagging off the guy for making what is basically a formal logic statement (if X = Y - Z, then if Y is constant and Z decreases, X must increase) seems a tad unfair.

I can appreciate that, but I don't think it was quite that simple.

Fair enough.

[ParticleMan]

I fully understand this, I'm just saying that slagging off the guy for making what is basically a formal logic statement (if X = Y - Z, then if Y is constant and Z decreases, X must increase) seems a tad unfair.

Yeah but no but.

Your equation is missing a term for "capital costs going all power-law on your sorry butt as leverage rises". Once you add that fella in, you'll find you get a fairly different answer when you solve for "affordability". And you'll probably find, that at a given income level, you can either gear large amounts of debt by a small factor, or small amounts of debt by a large factor - but either way, the same sum will be advanced.

The fact that nobody has done this - well now you're describing what mustard we used in the pickle.

I wouldn't go on assuming they'll continue to make this mistake though. Particularly not, as you put it, once their Excel worksheets start exploding.

[yawnIHateSundays]

Isn't it self explanitary? It's because a massive crash will be far, far worse than the alternative of a small backwards correction or stagnation for a few years.

Regardless of how much you may deny it or get angry about it, the housing bubble is bursting. Lenders can no longer offer liar loans, money has become scarcer and more expensive, inflation in food and energy is reducing people's ability to pay. There is only one way that prices are going, and that is down until they are affordable under the new financial environment. And that means a 50% drop, assuming the recession that is also likely to happen due to the collapse of consumer spending doesn't make it even worse.

I'm not gleeful about there being a crash, quite the opposite, but its been possible to see it coming for years and this government has done nothing to try and prevent the bubble escalating to dangerous proportions. Those that are trying to put off the inevitable are deluding themselves and the vulnerable.

[6538]

6538.

I think the system you are advocating is actually the one in place isn't it? Banks/mortgage brokers etc decide what they think you can afford based on your disposable income. If you have more disposable income than someone else, you will be offered more as a mortgage.

I really am missing the point now.

Not it not. The system at the moment is one whereby banks are lending people amounts of money that they clearly can barely pay back even in times of low rates. This is what has caused house prices to go into orbit and what is so dangerous for lenders and home owners. If you struggle to py it back in the good times then it takes nothing, or very little, for you to be roylaly screwed.

If I can afford to service a loan of 4.5 times my income and still have one third income spare each month then I can clearly afford the loan. Far better than someone who borrows 1.5 times his income but struggles because he's got a new Audi TT on finance and 20k on credit cards.

[auk]

Yeah but no but.

Your equation is missing a term for "capital costs going all power-law on your sorry butt as leverage rises". Once you add that fella in, you'll find you get a fairly different answer when you solve for "affordability". And you'll probably find, that at a given income level, you can either gear large amounts of debt by a small factor, or small amounts of debt by a large factor - but either way, the same sum will be advanced.

The fact that nobody has done this - well now you're describing what mustard we used in the pickle.

I wouldn't go on assuming they'll continue to make this mistake though. Particularly not, as you put it, once their Excel worksheets start exploding.

Agreed. IAs you say, the real screw up was made by the lenders by not charging a sufficient risk premium for someone borrowing large multiples of earnings/large LTV/borrowing on no proof of income/all of the above. Clearly they thought that the risk premium they needed to charge for this was Y while in fact, in retrospect it was far higher than Y. People reacted rationally to this by gearing up to a stupid extent.

[ParticleMan]

If I can afford to service a loan of 4.5 times my income and still have one third income spare each month then I can clearly afford the loan. Far better than someone who borrows 1.5 times his income but struggles because he's got a new Audi TT on finance and 20k on credit cards.

You still don't get it.

It's not about your risk profile when the loan's agreed.

It's about your worst risk profile over the full term.

And you don't get to choose that in advance. Really, you don't. Canute needs to show you the thing with the waves - should put your mind easy on that score, about things you can, and can't control.

(hey, I left "getting done in by the divorce courts" off my list before, that's a good'un too - and becoming more prevalent)

Edited April 23, 2008 by ParticleMan