Re: Libdems' plan to surtax houses worth over £1 mn

Andy Pandy wrote:

"Tim" <me@xxxxxxx> wrote in message
news:eZ6dnSsPeIWwiyfXnZ2dnUVZ8l2dnZ2d@xxxxxxxxx
"Mark" wrote
... Anyway it's a myth that rising house prices make it
easier to move up the ladder. It actually makes it harder...

Not necessarily!! Let's suppose you can only get a
mortgage upto 90%, and have (say) a £10K deposit...

You buy a £100K house with a £90K mortgage.
Let's say house prices now go up by 20%, so that you now have a
£120K house with (lets say still) a £90K mortgage (£30K equity).

You can now get a £300K house with a £270K mortgage.
There - the rising house prices *did* make it easier to move up the
ladder!

Yeah right, so what income do you need to get a £270k mortgage? Probably
at least £60k. If you had an income of £60k and a mortgage of £90k, but
could afford a mortgage of £270k, it would take you no time at all to save
up the extra £20k deposit.

Would it? What's a typical mortgage interest rate? Let's say 4%.
So if you could afford 4% on an extra £180k, you could afford to save
£7200 per year, so it would take you a bit over 3 years to save £20k.

That's not an unreasonable amount of time, but it can't really be
described as "no time at all". If your net income went up by £7200 to
whatever's left from £60k after tax, and you had aspirations to move
upmarket, it's not obvious that you would have the patience to save
for 3 years, you'd probably end up resigning yourself to staying
put, and spending the extra money on something else.

So if house prices hadn't risen you could get a
20% better house for the £270k mortgage.

Indeed, only you mis-spelled "200%".

You really do have warped logic. It's blatently obvious that if things
become more expensive, they are harder to afford.

You don't understand his logic, so you just call it warped. :-)

He didn't argue that rising prices would make a better house easier
to afford, just that they would make it easier to move up the ladder
into a house which you could in some sense *already* afford.

The problem is that affordability, in the context of mortgages,
has 3 components which must all be independently satisfied:

(1) Your before-tax income must meet the lender's income-multiple
formula.

(2) Your after-tax income must be enough, after considering the cost
of maintaining your lifestyle, to make the mortgage payments (this
becomes a problem when interest rates rise when people went for a loan
they could only just afford when rates were low -- and satisfying (1)
doesn't always guarantee that you will also satisfy (2)).

(3) You must have enough of a deposit.

What you've overlooked in Tim's logic is that he started from the
position where you've *already* somehow managed to tick boxes (1) and
(2), but have still to tick box (3). He simply pointed out that
rising prices can help you overcome this final hurdle.

Specifically, you could afford a 150% better house in perhaps two
years, which in effect is moving up the ladder at *faster* speed than
getting a 200% better house in three years.

What's more, his two years started when prices started to rise, and if
this was 2 years before your income went up, you could in fact move as
soon as your income rose. But without the rising prices, your three
years don't start until after your income rises.

.

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  • Re: Libdems plan to surtax houses worth over =?ISO-8859-1?Q?=A31?= mn
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