A mortgage at 5 x salary ~ now the rates are rising!

[samuel23]

Anyone want to hazard a guess at what level the latest interest rate rises will reach before it causes another property price crash? With some lenders offering up to 5 times salary what is the effect going to be on those with a mortgage of say �150,000 (coz lets face it - at 5 x salary that means they only earn �30,000pa)

[kwicky]

The problem with the property jungle is that it is self perpetuating. People who own property, which must be about 60% of the population, wish to see the value of their home increase in value. It is only the first time buyers who are trying to step onto this treadmill that create demand so the ludicrous offers of 5 times salary. Once this group realises the futility of owning their home we will see the pack of cards come tumbling down. With the bank rate changed today at 5% I predict that this situation may come very soon!

[Oneeyedvic]

Firslty, the 5x salary offered by Abbey earlier this week is only being offered to those earninga dual income of over �50,000 with a _perfect_ credit score (a small minority) and generally not first time buyers.

With regard the increase in property values, mister Jo Bloggs _should_ NOT actually want his house price to increase (unless he needs to raise capital) as if his price increases, so does the next house he wants to buy (and although they generally increase on the same percentage terms - in cold hard cash it is far more - ie if you have a property worth �100,000 and it goes up by 10%, it is now worth �110,000 - great! Not so great is the house that you want to buy next has gone up from �150,000 to �165,000 (again 10% increase), but in real terms it has gone from a �50,000 increase in spend to a �55,000 increase in spend!

[Pippa68]

Panic selling won't help either!

[kwicky]

If your house is the only major asset you have, it is natural that you wish for it to increase in value if only to make the mortgage a lower percentage of its value.

[Oneeyedvic]

If you think that is a sensible attitude (even after the above explanation) that is up to you.

[kwicky]

Oneeyedvic You are finding it hard to equate wishful thinking with reality. We would all like to move up the ladder but price inflation is fuelled by owners asking unrealistic prices and setting a trend. I suppose this is better than negative equity!

[Hammer]

The rises are not fuelled by sellers asking for high prices, they are fuelled by buying paying the high prices. If buyers don't play ball then the prices will drop.

And Vic, I agree with you - I want prices to fall by 90%, then I can sell my house for �20k and buy one twice as big for �40k. Bargain! Trouble is people don't see it that way.

There's no point in wanting your house price to increase unless you are going to sell it and live in a cardboard box.

[kwicky]

There again Hammer, wishful thinking! You WANT prices to drop so that you can buy at a cheaper price. In the real world it doesn't happen like that.

[honest_joe]

I bought my house 25 years ago for �9000. When I got near to retirement I sold up for �200,000. We downsized to a smaller property but still had a nice nest egg. If the prices had remained low as Hammer would like this would not have been possible. Therefore it works both ways..It must be every householders dream to cash in their asset at a later stage...I can recommend it.

[PFA]

Hi Samuel23,

A property price crash is inevitable - when is the question you should be asking. One of the fundamentals of economics is the crest and troughs of the market. To put it simply - what goes up must come down and what goes down, with propery market stimulation will go up. With regards to property - because this is not a fluid commodity it takes longer for the effect to permeate throughout the market. Intrest rates - inflation - GDP - market confidence - consumer confidence all play a part. All crashes if not most (in the property market) are / is realised in hindsight. That is how slow it takes for the market to realise that there has been a crash - EG:- 1990's crash - it took almost 6 years for the crash-recover cycle. At todays market conditions - inflation about 2.4% - and properties being overvalued by almost 30 - 40% in some cases a crash is inveitable. How far reaching an effect it might have is debatable. If consumer spending remains high and consumer borrowing remain high - while wages does not grow inline with this then you are looking at a deadly mix there. On the flip side if the inflation goes through the roof that is not a good thing either. The BOE is trying to reign things in - and from what forcasters say - the interest might have to go up in the new year (BY ABOUT 0.25 TO ABOUT 0.50 PERCENT by late 2007). Inevitabley people who have mega overvalued properties will see their property price index fall - meaning they will be left with negative equity. When this starts to happen, you can say the crash is well and truly here!!!*

*The answer provided herein is not to be utilised for financial / investment or advice.

[samuel23]

Thanks to you all for your answers. I suppose the reading I did last weekend (all about the property price collapse in the late 80s, it's effects on the economy, and the interest rates reaching 16%) put the willies up me a bit. As a young homeowner - and that's a misnomer if ever there was one!!! I understand the basic economics behind the proeprty/wages/inflation cycle. I just found it scary to think that someone could borrow up to 5 x salary. If the rates ever went to the level they reached in the late '80s there would be a glut of repossessions. People with money would then buy up the repossession houses at vastly reduced prices and the families losing out would be caught in an increasing spiral of debt they would never escape from. Makes me shudder to contemplate the outcome.