Wednesday, November 01, 2006

Cause or effect?

I see that Abbey is now offering to loan 5 times joint salary for a mortgage, which implies an interest payment alone of about 25% of gross salary (and that at historically low interest rates of about 5% pa) before anyone even starts to think about repaying the capital.

Way back in pre-history, AIUI loans were typically limited to something like 2.5 times a single salary (ie typically the man's salary), which morphed to 3x the larger plus 1.5x the smaller, then more recently 3.5x the total household income.

Abbey claims that even larger loans are necessary to enable people to buy houses: I claim that the increasing size of loan multipliers is directly fuelling house price rises, since ultimately this multiplier is what puts a ceiling on the amount people can pay (of course this is not an original idea).

A few years of 10% interest rates (let alone the 15% reached around Black Wednesday) would be interesting to see, not that I would wish that fate on anyone. Back in the era of high inflation, a large debt would rapidly erode in real terms, but today's house buyers will have this risk hanging over them for a long time to come.

In Japan, it seems that loans of 6.5x salary are available (that's just from clicking buttons on a bank's web site, I don't know if this is a general rule). However, the site I looked at does seem to limit this to a single salary (workforce participation of married women is amazingly low), and there are also long-term fixed rates of about 3% available which limits the risk.


EliRabett said...

There is a lot more radioactive waste out there in US mortgage land.

James Annan said...

Wow. That's pretty amazing. A variety of low-start (discounted rate for 2-5 years) mortgages have been around in the UK for some time but negative amortization is a whole new kettle of fish. In a high inflation environment with near-guaranteed large salary rises, it might make some sort of sense, but it's hard to see how someone who is strapped for cash now can expect to be able to double their repayments in as few as 5 years.