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


"Ronald Raygun" <no.spam@xxxxxxxxxxxxxxxxxxxxx> wrote in message
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Andy Pandy wrote:

"Ronald Raygun" <no.spam@xxxxxxxxxxxxxxxxxxxxx> wrote in message
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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.

A bit *over* 3 years?? Are you assuming negative interest rates?

Er, just testing. :-) But actually interest rates aren't far off
negative, are they?

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.

Or getting an unsecured loan for the extra £20k.

Not really. That would reduce the size of the mortgage advance you'd get,
unless you lied on the application form and kept quiet about the fact
that your "deposit" actually came from a loan shark.

Not even that. He'll probably have a few credit cards with the total credit
limit over £15k. Apply for the mortgage, with no debts, then use the CC's
for all spending and cash withdrawals, building up a debt of £15k between
the application and completion. In the meantime save all his salary. In a
the few months between the application and completion plough all salary and
CC cash withdrawals into his deposit pot.

Completely crackers, but I'm trying to use Tim logic ;-)

Actually, you'd only need
£15k for the same house assuming stable prices and the same LTV (as the
"£300k house" would only cost £250k and you've got £10k equity).

True, but remember that we've also conveniently forgotten about all the
incidental costs, legal fees, stamp duty, etc.

Good point - the costs will be a hell of a lot more if house prices had gone
up. Stamp duty on a £300k house is £9000, on a £250k house it's £2500. So
that's an extra cost of £6500 if house prices go up 20%. Also other fees are
likely to be higher.

So in the original example, the person moving to the £300k house and using
*his full equity* as deposit, must have saved enough to pay the moving fees,
otherwise he wouldn't be able to use the full equity as deposit on the new
house.

So he must have saved - stamp duty at £9000, estate agent fee, say 1% -
£1200, solicitors/survey/removals etc £1800, total £12000

In the "stable prices" case - stamp duty at £2500, estate agent fee, say
1% - £1000, solicitors/survey/removals etc £1800, total £5300.

So if prices hadn't gone up he's got an extra £6700. Take that off the extra
£15k he needs, he's only £8300 short. Less than the cash limits alone I have
on my 3 credit cards.

Someone
on £60k would almost certainly be able to get an unsecured loan of £15k

See above. Not really an option.

and even allowing for the much higher interest rate it'd be cheaper
overall than getting a £45k larger mortgage.

I take it that's a typo and you meant getting a £15k larger mortgage, at
100% instead of 90%, thus applying a higher interest rate to the whole
loan instead of just to 90% of it. OK, but if you want to be practical
you must recognise that 100% loans have all but disappeared from the
market and are unlikely to return any time soon.

I meant £15k unsecured and £45k less in mortgage.

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

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

I meant a 20% better house than if prices hadn't risen.

OK, fair enough.

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. :-)

I do understand it - and it *is* warped ;-)

*He* may be warped, but there's nothing wrong with his logic. :-)

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.

Which is wrong.

No it isn't. He demonstrated that *if* you could afford the 20% higher
payments to go with a 20% higher 90% loan because the £250k house now
cost £300k, but didn't have a £30k deposit (nor even a £25k deposit),
price inflation could magic one up out of your original £10k deposit.

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.

Which obviously means the cheaper houses are, the more house you get for
your maximum mortgage.

Yes, but that's not the issue. It was assumed that your income had
gone up by enough to let you afford payments on a 150% to 200% bigger
loan, both on criterion (1) and on criterion (2).

(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)).

Same as above.

Yes, but again that's not the issue.

(3) You must have enough of a deposit.

Which doesn't necessarily have to come from current equity, as above.

Well, to be realistic, yes it does. If you're borrowing at the limit of
your salary multiple and your budget, then it's a bad idea to borrow a
deposit. If you admit it on the mortgage application, you'll either be
refused or it wil be taken into account reducing your loan or increasing
your interest rate. If you don't, it would be fraud.

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.

So after 3 years who is further up the ladder? What about 5, or 10? With
rising prices you'll soon hit the salary multiple limit.

Indeed you will. So what? His argument was limited to that small subset
of all the likely real-life scenarios in which people have not yet hit
that limit. That doesn't invalidate the argument or the logic, it simply
limits its applicability.

Yes, that's why it's "warped". You can dream up virtually any situation
where the logical outcome is reversed, SFW? It keeps him amused I guess.

Here's one - if I'm looking to buy a particular telly and find that Curry's
have put the price of that telly up by 20%, that can be good news! It might
put me off buying it, and I might find a better telly for 10% less. So the
fact that the price went up actually benefitted me!!

It was also predicated on a low equity ratio, because the less equity
you have, the more it grows for any given price increase. In his example
a 20% price increase boosts the initial 10% equity by 200% to 25% (the
arithmetic looks a little warped here, but the equity grew from £10k to
£30k) and therefore to move upmarket while staying with a 90% loan, it
means you could afford a 200% better house (in figure terms, 150% better
in real terms), by criterion (3), provided you'd already met criteria (1)
and (2).

But of course if you had had a "safer" equity stake of 20%, a 20% rise
would "only" double your stake instead of tripling it.

Yet if you'd had a 95% loan, your £5k equity would have quintupled to
£25k, and if a 95% loan were available (and affordable), you could then
go for a half million pound house (which is almost where we came in).

If you take a very short term view and totally ignore obvious solutions
to
the "lack of equity" problem, then he might have a point. But that's why
his logic is "warped",

There's nothing wrong with the *logic* of the argument, and that isn't
changed simply by it only being applicable to a minority of situations.
The only thing that's warped is if someone thinks the pre-requirements
stated or implied in the argument are unimportant and that the conclusions
apply universally.

it's not real-world, it's theoretical bullshit
based on assumptions that aren't valid, or are very rarely valid.

That's not the fault of the logic of the argument, just of the person
trying to applying the argument in inappropriate circumstances. It's
a bit like blaming the gun dealer for the murder, rather than the
person who pulled the trigger.

OK fair point - it's the "use of logic" that is warped rather the logic
itself.

But just look at the recent past. It's very much a real-world effect
that house prices have boomed unsustainably. This boom was facilitated
by a number of factors, including salary inflation, probably at a higher
rate than the general cost of living,

Not by much though - about 1-2% over inflation.

allowing people to pour a higher
proportion of their income into housing; and with lower interest rates
they could afford to borrow even more, and so prices rose even more.
But the rising prices also fuelled equity boosts which contributed the
higher deposits which people needed.

You can't deny that in the real world part of what made prices rise
was the price rises themselves. But of course nobody would claim
this to be the only contributing factor.

Yes, but that's not the point. The point was whether it is easier to move
"up the ladder" with rising prices.

--
Andy


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