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The Questions The Journalists Should Be Asking


Dylan
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What are you on about? Where does security of tenure enter into this?

Why shouldn't I be allowed to borrow 6 times my earnings if I can afford to service the debt?

At it's simplest form. If me and the bloke next door lead identical lives - fincially speaking - with the sole difference that he has the full Sky telly package but I have freeview then I can afford mortgage payments larger by the equivilent of the Sky subscription (£50?) then he can.

If I want to spend that on my mortgage then why should I not be allowed to?

Because, Interest rates have for the last 8-10 years been below the historical average. A mortgage is generally for 25 years, so loading yourself up with debt to the point where £50 a month becomes important (I speak in terms of the example given, £50 is a lot of money to a lot of people) then you are over exposed to any upward movements in interest rates or downward movements of house prices. You can easily cancel the Sky package if your circumstances change, you can't cancel a mortgage so easily and be guaranteed to be able to pay off the debt.

Any bank that allows itself to become over exposed to borrowers who are unable to service debts could be in a lot of trouble.. which is where we are now.

Edited last sentence for clarity

Edited by ReggiePerrin
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Because, Interest rates have for the last 8-10 years been below the historical average. A mortgage is generally for 25 years, so loading yourself up with debt to the point where £50 a month becomes important (I speak in terms of the example given, £50 is a lot of money to a lot of people) then you are over exposed to any upward movements in interest rates or downward movements of house prices. You can easily cancel the Sky package if your circumstances change, you can't cancel a mortgage so easily and be guaranteed to be able to pay off the debt.

Any bank that allows itself to become over exposed to borrowers who are unable to service debts could be in a lot of trouble.. which is where we are now.

Edited last sentence for clarity

But you can't say that someone with, for example, lots of credit card debt they never pay off, car finance and three kids to look after (all stuff you can't just pay off or get rid of) is just as easily able to service a given amount of debt as someone who has none of that. If they can service a three times earnings multiple then the person without all that can clearly afford to servce a larger debt quite easily as long as both have enough built in breathing space for rate rises, etc.

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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.

It puzzles me why almost all the people on here seem to so desperately want a property market collapse and are quite gleefull about it. I understand why they may think it's coming but to actually want it is rather sick to my way of thinking. The fall out from it will be absolutely horrendous and all of us are going to end up paying for it through state benefits to the huge number of newly homeless, jobless tradesmen, suicides, business crashes, etc.

People who have recently bought their own homes by stretching themselves and sacrificing do not deserve that. Do any here actually remember what things were like in the early 90's? It was ******in horrible, quite honestly.

You lot on here chirp on about how these nastly BTL'ers and "fools, morons, idiots, etc, etc" who've paid big prices and have artificially inflated prices in some cases to make profit. Yet everyone wants the market to go tits-up so they can get something artificially cheap. You are all exactly the same as the BTL'ers in that you want a market advantageous to your own situation at the expense of others. Only in the case of people here you aren't prepared to risk large sums of your own cash or acrifice your lifestyles.

Apart from feeling you are on the wrong forum (Perhaps you ought to be on "http://www.krusty'srightandeveryoneelseiswrongyarboosucks.com" ), you seem to have not absorbed some of the more critical aspects of this bloody awful mess!

The UK residential house market only zoomed into an insane self-destructive tail spin, because Eddy George and his idiot compatriots at the B of E, decided to ward off an economic recession by synthetically lowering interest rates to a 50 year low, knowing full well that this would trip both a personal debt ballon and precisely the same Boom to Bust economy as 1973/4 and 19879/93. as well as causing insane house price escalation above truly affordable thresholds.

Additionally, competitive banks chased each other into disaster by vying to be the mortgage lender with the biggest portfolio of - eventually - non-performing debt and evaporated asset values, simply by constantly increasing both LTVs ratios to zero or even zero + up to 30% and income multiples that were so far outside reality, they were going into orbit!

Perhaps worst of all, by last year, residential house value had exceeded 60% of the WHOLE capital value of Britain!

The key word here is "Affordability".

Now way back when mortgage lenders were truly prudent, maximum terms were 15 years: then later, 17 years. If base rates rose, then the lender increased the tenor (length of mortgage) by say two years and kept payments the same: when rates dropped, then the tenor reverted to its original timespan.

Hard to extend many of the last few year's mortgages by much unless borrowers plan to will the balances to their kids!

Perhaps most worrying of all is a government that is so divorced from reality, it has predicated its whole economic strategy on house price increase, people churning their mortgages and constantly moving, whilst extracting equity to buy imported Big Ticket crap, whilst they purchased smaller items on credit cards, assisting Britain's person debt bubble to become the worst anywhere!

And you apparently think all the above os pretty good stuff.

You aren't Yvette Cooper are you, using one of your aliases?

Edited by Prescience
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Why shouldn't I be allowed to borrow 6 times my earnings if I can afford to service the debt?

At it's simplest form. If me and the bloke next door lead identical lives - fincially speaking - with the sole difference that he has the full Sky telly package but I have freeview then I can afford mortgage payments larger by the equivilent of the Sky subscription (£50?) then he can.

If I want to spend that on my mortgage then why should I not be allowed to?

I think there is another point though. You shouldn't have needed to borrow 6 times your earnings to buy your house. You should have been able to get it on sensible income multiples.

Furthermore, I think that there are many people who have borrowed 6/7 times their income because they feel they can service the debt but what about when other factors like fuel and food increases come into play. Where do you start to cut back?

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But you can't say that someone with, for example, lots of credit card debt they never pay off, car finance and three kids to look after (all stuff you can't just pay off or get rid of) is just as easily able to service a given amount of debt as someone who has none of that. If they can service a three times earnings multiple then the person without all that can clearly afford to servce a larger debt quite easily as long as both have enough built in breathing space for rate rises, etc.

But the example you used originally to justify income mulitipliers greater than normal is different to the argument you make in your post above.

The problem is people who go for high mulitpliers are doing it right up to the limit of affordibility, they rely:-

  • On HPI to reduce the LTV when they remortgage.

  • Wage inflation to reduce the size of the replayments.

  • Low interest rates to keep replayments small

  • Inflation generally to reduce the "size" of the debt, e.g. £20,000 20 years ago bought a lot more than it does now

  • And worst of all, credit cards and unsecured loans to pay for everyday stuff and/or emergencies, e.g. the wheels fall off the car, because they'll MEW later.

If one or more of these fails to happen then the individual is in for trouble.

As this hasn't worked out very well for a lot of people the economy is in crisis because of lax lending, and this has nothing to do with what we write here, that's why the banks have to go back to the tried and trusted methods for determining the maximum they should lend. I thank my god that we didn't go down this route to financial disaster.

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My 2 cents.

1) Bubbles are unsustainable. They inevitably burst, reducing asset values to rationale and sustainable levels. You can't stop a bubble bursting. You can only postpone the inevitable. Postponing this corrrection is a bad thing, since it will usually make the fall, when it does come, worse, and in the interim you have a distorted market.

2) When looking at whether people win or lose in a bubble there are essentially four categories of people

a) People who purchased at the trough and sold at the peak. They win

B ) People who purchased at the trough and sold at the next trough. They are neutral

c) People who never entered the market. They are neutral

d) People who purchased at the peak and sold at the next trough. They lose.

Net net, the effect of the bubble is neutral. For every loser there is a winner.

3) This does not mean that we should be indifferent to booms and busts. On the contrary. From a social point of view it is far better for everyone to be neutral than to have some big winners and some big losers. The reasons are obvious. Booms and bust increase inequality, and the state usually has to pick up the tab for the big losers.

4) Having said this, once you are at the peak of a bubble, the bursting of this bubble is inevitably harmful. In the period from the peak to the trough there are no winners, only losers. People think that a house price crash benefits people who "can't get on the housing ladder". This is because people confuse the crash of the asset bubble, which simply makes housing a better investment, and the reduction in the price of a unit of security of tenure, which makes having a home of your own cheaper. In reality, the two are intertwined, i.e. you can't reduce the price of security of tenure without bursting the asset bubble. However, in itself, the asset crash is not a good thing for anyone.

5) Bubbles are due to human nature. People don't know when to stop. In the housing bubble this has been true for both lenders and borrowers.

6) In a market economy, this foolish behaviour is theoretically discouraged and punished by the fact that people are not protected against the losses they may incur. I.e. that foolish borrowers and lenders go bust. In reality, the disincentive is clearly insufficient. Therefore bubbles happen.

7) You can stop this via regulation. This requires you to believe, essentially, that the benefit of stopping people being idiots outweighs the cost of distorting the market.

8) If you regulate, you essentially have to regulate for everyone. This may mean that sophisticated sensible investors lose out, e.g. do not have access to funding that they can afford, and the risks of which they understand. This is unfortunate but inevitable. A good interim step is to have discriminating regulation. E.g. 2nd homes must have higher deposits than primary homes. Self employed people must have higher deposits than salaried workers.

9) A house price fall reduces the cost of a unit of security of tenure. This is a good thing.

Edited by auk
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Guest pioneer31
You lot on here chirp on about how these nastly BTL'ers and "fools, morons, idiots, etc, etc" who've paid big prices and have artificially inflated prices in some cases to make profit. Yet everyone wants the market to go tits-up so they can get something artificially cheap.

No, we want a home to live in at or around the historical 3.5 x average annual earnings - ie the long term average.

What greedy sods we are, not wanting to buy at record price levels. Tut, Tut :rolleyes:

.....and define what 'artificially cheap' is - a meaningless phrase if there ever was.

Edited by pioneer31
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Guest pioneer31
But you aren't looking at the bigger pucture.

Mr & Mrs Renter want to buy a house but can't afford it. Along comes a massive crash bringing property prices to a level which they can afford. However, Mr Renter works at B&Q which has had to lay him off because their business has gone to b0llocks due to no one building or renovating houses and Mrs Renter, who works in a call centre of a large bank selling finance, has been sacked because no one is taking loans.

On top of that their council tax has gone up due to the local authority having to spend a fortune putting up repossessed familes in B&B's, which they will have to do with Mr & Mrs R in a few months when the bailiffs come calling to change the locks.

same old tired, flawed, argument - House Price Crash will cause everyone to lose job, so no better off.

*yawn*

This can be pinned next to the "BTL will hoover up the bargains if prices slide" load of cobblers

Edited by pioneer31
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But the example you used originally to justify income mulitipliers greater than normal is different to the argument you make in your post above.

Yeah, ok. The Sky telly was a bad example to give but I thought people could at least see the point I was making. That being that someone with more financial commitments is less able to afford a particular mortgage than someone who has less.

Peoples financial lives are very different from the time 50 years ago when banks and building societies stuck rigidly to 3x multipes for everyone. At that time most peoples financial outgoings was very much the same as each others. There was less to buy, less credit, no expensive foreign holidays and such like. A straight income multiplier accross the board worked becaise it actually did represent affordability.

Today that isn't the case because you can have two identically earning families with vastly different expenditures.

As a very simple example. Two families earn £300 each. All mortgage companies insist that you have at least one third of income as a buffer against rate rises and other unforseen circumstances. Each family has fixed expenses of £100 for food, utility bills, council tax, insurance and such like. So both families have £100 left to service their mortgage. However, if one family is spending £50 on credit card debt, car loan, two kids and a dog and the other isn't then one family can quite sensibly spend £100 servicing their mortgage and the other only £50. Both families are still carrying the same built in buffer of £100 so why should one family be penalised by not being able to borrow a perfectly affordable sum? Why should the more prudent family be artificially forced into a lower standard of housing when they can clearly affod better?

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Why should the more prudent family be artificially forced into a lower standard of housing when they can clearly affod better?

Surely the prudent family would be able to afford better by SAVING for a bigger deposit?

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Surely the prudent family would be able to afford better by SAVING for a bigger deposit?

Exactly.

We have had a period of lax lending. A direct result of this is that lending is currently tightening.

If you aren't given a 120% mortgage at 6 times your salary it means that despite your lack of credit card debts and Sky tv package, you actually can't afford it.

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Why should they have to if the house they want has come up for sale now and they've decided that that is the way they wish to spend their money?

Spend who's money?

Editted to add; My apologies also to OP for going off topic.

For what it's worth, I'd ask what our financial leaders are currently investing in.

Edited by macfarlan
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Why should they have to if the house they want has come up for sale now and they've decided that that is the way they wish to spend their money?

CREDIT CRUNCH

You are 12 years old and I claim my $3 Injin

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Exactly.

We have had a period of lax lending. A direct result of this is that lending is currently tightening.

If you aren't given a 120% mortgage at 6 times your salary it means that despite your lack of credit card debts and Sky tv package, you actually can't afford it.

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

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.

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 mortgage debt then you.

Edited by 6538
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CREDIT CRUNCH

You are 12 years old and I claim my $3 Injin

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?

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Their money. The disposable income they have over and above what the other family have due to having fewer other financial commitments such as credit cards and car loans.

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.

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Guest Mr Parry
Yeah, ok. The Sky telly was a bad example to give but I thought people could at least see the point I was making. That being that someone with more financial commitments is less able to afford a particular mortgage than someone who has less.

Peoples financial lives are very different from the time 50 years ago when banks and building societies stuck rigidly to 3x multipes for everyone. At that time most peoples financial outgoings was very much the same as each others. There was less to buy, less credit, no expensive foreign holidays and such like. A straight income multiplier accross the board worked becaise it actually did represent affordability.

Today that isn't the case because you can have two identically earning families with vastly different expenditures.

As a very simple example. Two families earn £300 each. All mortgage companies insist that you have at least one third of income as a buffer against rate rises and other unforseen circumstances. Each family has fixed expenses of £100 for food, utility bills, council tax, insurance and such like. So both families have £100 left to service their mortgage. However, if one family is spending £50 on credit card debt, car loan, two kids and a dog and the other isn't then one family can quite sensibly spend £100 servicing their mortgage and the other only £50. Both families are still carrying the same built in buffer of £100 so why should one family be penalised by not being able to borrow a perfectly affordable sum? Why should the more prudent family be artificially forced into a lower standard of housing when they can clearly affod better?

My old gran bought a 7 bed, 5 storey house over looking Bristol in the late 50's. She was a teacher. She paid the thing off in four and a half years! Paid £2000 for it.

She also travelled. Switzerland, Austria, Sweden, Egypt, America, Crete . . . used to bore me senseless with endless slide shows when I was 7.

She also brought up two children. Also ran a car.

Okay there were periods of incredible frugality, but those houses would be up for £600,000 these days, so a teacher would have to be on around £170,000+ a year now by comparison at 3.5 times income.

Materially the markets offer far more diversity these days, advancement in technology, production, globalisation etc. But looking at basics, such as shelter, people are far poorer these days.

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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?

resistance is futile

Edited by Bloo Loo
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