Thursday, 19 March 2009

Over a third of UK mortgages have an income multiple of 3 or more

Limiting mortgages to income multiples of three or less would have a dramatic effect on house prices. Currently, well over a third of new mortgages have income multiples of greater than three. At least 10 percent have multiples of four or more (mostly to single buyers).

The FSA's plans to limit income multiples would make it much harder for housing bubbles to form in the future. Since mortgage availability would be linked to incomes, house prices would also be anchored by borrower's capacity to repay.

Limiting income multiples could be the first good idea that the FSA has produced.


Mark Wadsworth said...

Hopefully banks will have learned their lesson about high multiples - for the time being, but it might help speed up the crash a bit in the short term.

Anonymous said...

Income multiples need to be lower as taxation increases.

Anonymous said...

@Mark Wadsworth

"for the time being"

Quite. I'm sorry but I don't think this will be anything like strong enough. The last bubble took nearly a decade to pop. If another debt orgy opportunity presents itself, the bankers will find a legal way to wriggle through this proposed safeguard.

I would much prefer to see the banks forced to restructure themselves in such a way as to allow the failed gamblers to become insolvent. Glass-Steagall anybody?

That said, there is a case for speeding up the crash so that the healing can begin.

Electro-Kevin said...

Remember also that the Government is keen to stoke new credit booms too. Whatever they say about reckless bankers they want 2007 back.

Interesting that Peter Oborne states today that it is a mistake to concentrate fire on RBS et al. This is diverting from the real culprit - Gordon Brown.

Just as I said here over a month ago. Sadly I think Nu Lab are doing a half decent job of muddying waters. They've even got the opposition leader to take the blame !

Alas I think the Conservatives will take the poison chalice just as our economy implodes - the hard choices will be taken by the Conservatives and the police will be forced to fight the people... again. Nu Lab will regroup and regain power later and their supporters will say "The Conservatives are the worst Government this country ever had."

This is the Labour MO. They have previous. Thickos where I work still spit "Thatcher !" every time I criticise Brown.

Bob said...

Agree on multiples being enforced, surely the answer is the borrowed amount is based a set formula, capped.

3 x seems low, and 4 x is more correct for single income?

Or am I splitting hairs?

Att 3 x's in alot of cases they would pay more in rent.

Anonymous said...

It is not necessary to have all these stupid, intrusive, and restricting rules.

All that is required is a clear message to the banks: "Proceed as you wish, and at your own risk. There will be no bailouts. If you fail, you fail."

Oh, and at least one bank has to fail properly - shareholders wiped out, bondholders destroyed, management on the streets without bonuses, pensions, or redundancy pay; only the retail deposits protected.

Stop the moral hazard - problem solved!

Anonymous said...

Why should it be necessary to legislate this? Perhaps if the government would make it clear that in the future there will be absolutely no more bailouts, then lenders would return to prudent underwriting.

Anonymous said...

If the 3X salary rule was enforced, then either the housing market would stall completely (because very few would be able to afford them) or sellers would have to halve their asking price... mmmm, I see the rush to sell gathering pace... whilst houses are still worth something !

Electro-Kevin said...

Half the Story:

4 x 23k (average income)

92k should be the price of the average house then. Probably less if there is to be a 10% deposit required.

Oh dear.

Anonymous said...

I think you theory is simplistic and flawed.

What about the California home market specifically? Yes - mortgage/income multiple was higher (7x?) preceding the recent bubble? Was the problem a mortgage problem or a housing problem?

Maybe mortgages were out of line because home prices were "too high". Why?

Does your theory take into account state or local legislation that limits property tax? Read Proposition 13 (Link)

So, to understand your theory - the government is better to regulate an individual mortgage contract (blame banks) - than do its job (overseeing responsible laws).

Okay - let's assume that your plan is implemented. What happens in a high-growth region with flawed legislation.

Your answer is that:
1) the younger generation can't ever own a home - and are renters for life.
2) the younger generation moves to a different region - and the region w/ high economic growth stalls because "they can't find workers" to do the jobs.
3) as younger/lower-income workers relocate, the region must replace them with huge numbers of undocumented workers from Mexico.
4) further - the actual costs of these low-income migrants are hidden in additional eductation, health care, and other public costs which are passed along as general taxes (non-property)

In conclusion, your solution (3x income mortgage) is naive. And just another distraction from the truly simple solution of fair taxation and responsible government which involves fair and responsible taxation (property tax).

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