I wish people would stop comparing now with the past in terms of interest rates.
Why can people not understand the price of house to earnings ratio has completely changed.
I agree but if we look at it you can see why…
200k at 3% is less per month than 85k at 15% on an 25 year mortgage. The house price is irrelevant. What’s relevant is the ratio of mortgage pounds per month relative to income pounds per month and the reality is a mortgage at around 4-5% over 25 years on 200k isn’t that much different to a 15% mortgage over 25 years for a 85k home. There is however a “but” and that is that wages now are more than double what they were on average back in the early 90s where as houses are more like 3-4x the value so it is harder to get the money to borrow to begin with as it comes with higher risk to the bank and as you’ve mentioned this is a very valid and key point to consider.
If we ignore the risk and look at it purely from a numbers perspective then as mentioned, it isn’t all too different. It does however highlight a few interesting points.
It means you pay about 30% in interest over all payments combined today based on todays typical rates but more like 70% in all payments combined back then when rates hit 15%.
The total value you pay on a typical 4.5x your annual salary borrow is approx 6x your annual at point of mortgage interest total considered against todays rates which as we are all aware is getting worse.
The total you borrowed back in the day was more like 2-2.5x your annual salary (wooo that’s awesome) but you paid back 6-7x your annual salary at point of taking the mortgage interest total considered. This is worse subjectively and objectively however as rates improve the value you pay back per month drops exponentially faster than if you borrowed against a larger value and the risk of having Neg equity although the same with a following crash carries a lesser burden than against house values of today so is a lesser issue to the bank issuing the money to be borrowed. This is why people are struggling to even get a flat as a couple when a singleton could get a home by themselves easily enough back then.
It’s crap now but it was relatively more crap back then, that is a fact. Come September the 1st however we are at a point where you are going to be worse off than when there were issues back in the early 90s and that is what a good chunk of people, mostly the older gen who were affected before and are now mortgage free don’t grasp, my parents included which I find highly frustrating.
That is our reality and it’s only getting worse so I agree with your stance all be it with the odd caveat here and there.
I’m 34, it didn’t affect me in the 90s as I was still playing in the dirt but I’d rather the shafting on rates vs house value now than rates vs house value back then as I’ve been lucky with locking in at a reasonably low rate for a decade a few months back. If I was locking in or facing locking in from September or later then I’d be feeling very anxious as my view would 100% have taken a U-turn leaving me questioning whether it is or will remain viable keeping the home I have. It is already at that tipping point for some (check out right move, the influx of larger more expensive homes added to market recently has boosted significantly) and even more will be in unknown waters as deals end over the next 24-36 months at least and their financial situation gets a severe wake up call. The crash has started, it may not reflect on the price of homes quite yet but it’ll soon follow now the bigger, more expensive homes are going up for sale.
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