 Continuing price rises have made mortgages at their most expensive since the last home prices crash about 16 years ago.
This is nothing new. The BBC reported that the risks were growing for first time buyers back in November 2006. House prices have been growing much larger than incomes. In the ten years from 1996 to 2006, house prices rose an average of 10% per year. This is much more than salaries have been growing.
As many would-be home buyers feel a sense of urgency with growth like that, they ignore the warning signs and take on every growing mortgage commitments to be able to get onto the property ladder.
Official salary multiples are nothing to go by as that number is being brought down by people who already have a house, are on very high incomes or who have other sources. Mortgages that are closer to five times annual salary are fast becoming the norm.
This is what is meant by the affordability crisis. In London, it is not uncommon to spend up to 70% of net income on housing costs. This is based on a repayment mortgage over 20 years. For example: A person earning GBP80,000 (gross) per year, will routinely be offered a mortgage of GBP400,000. Even in 2005, this was already GBP350,000. This should be enough to buy at least a city pad in the capital.
The repayment: GBP2751,00 per month. Now let's analyse this.
| Net Income |
4,300 |
| Mortgage Repayment (at 5.5%) |
2,751 |
| Council Tax (random council in London) |
257 |
| Typical utilities |
300 |
| Total |
3308 |
| % of Net income |
76% |
All numbers in GBP.
This is in sharp contrast to the usually quoted number of just 19%. That number seems to indicate that all is well with prices and that there still is room to grow. Worldwide, the accepted figure is 36% of income that can be safely spent on housing payments. That is 36% of net income... In other words, a person should have to be making 3,308 x 3 = 9,924 net per month to be able to safely afford this mortgage. Yet a person earning less than half this, will in many cases be offered this mortgage. of course newspapers are now belatedly stating that people have difficulty in meeting their debt payments.
Even if you allow for an Interest only mortgage the numbers don't add up because guess what: you still need to make the payments into the endowment fund. The correct amount to pay is the exact balance between the repayment mortgage and the interest only mortgage.
The point of an endowment mortgage is not that you end up paying less each month, but rather the gamble that the endowment fund will outperform the required growth to pay off the principal amount at the end of the trip.
| Net Income |
4,300 |
| Mortgage Repayment (at 5.5%) |
1,833 |
| Council Tax (random council in London) |
257 |
| Typical utilities |
300 |
| Capital reconstitution fund payments |
918 |
| Total |
2,390 |
|
% of Net income
|
76 %
|
All numbers in GBP.
In 2007, the average salary is around GBP35,000. A quick look on most real estate websites reveals that not much can be found for an "affordable" house with a mortgage of 105000
| Net Income |
1944 |
| Mortgage Repayment (at 5.5%) |
723 |
| Council Tax (random council in London) |
151 |
| Typical utilities |
300 |
|
|
| Total |
1,174 |
|
% of Net income
|
60 %
|
All numbers in GBP.
Oops. Not really affordable either.
These rough calculations are based on an interest rate of 5.5%. They assume downpayments of 20% to achieve the best possible rate. At the time of writing, interest rates are poised to rise to 6% and possibly beyond by the end of 2007.
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