Well the 3.5x income had been a standard for a while but recently that had increased somewhat and has been a major factor to why we are in the position we are in. However if you consider that if banks maintained a 1x income then effectively homes could only rise at the rate of inflation (I know there are a few other factors but I am keeping it simple) simply if earnings were maintained at inflation rates then house would ultimately be pegged to inflation for them to be affordable. So in order to improve the attractiveness of house buying banks have to progressively loosen the rules under which they lend so that house prices increase at rates above inflation and thus encourage more mortgage's. Increasing earning ratios, lengthening the period of the mortgage, dropping capital repayment plans etc etc. I know what you are thinking eventually there is only so much loosening banks can do to maintain this "attractiveness" of home buying, well you would be right but banks still push further until the band eventually snaps and a crash occurs and we end up where we are now going through a stage of "correction" for the cycle to rinse and repeat.
The problem is people view their home as an asset and the problem is, it is an asset but what they do not realise that its the banks asset if its mortgaged (it produces a cash flow to the bank) and at best a security if its not mortgaged. And before this gets peoples backs up claiming businesses put their premises down as a fixed asset let me explain that a fixed asset is "a fixed asset that is purchased for the objective of producing profit" You purchase your home to live in or at least you should do. Your home to you is a liability as it costs you money to own. Just like your car is a liability to you but an asset to a business on its balance sheet, just because you expect it to be worth more than you paid for something does not make it an asset.
We learn how to perform quadratic equations at school but finance, understanding fundamental home budgeting and personal balance sheets are not considered essential education for our children. Something tells me the powers that be want a nation of bad debtors.
/rant over
The problem is people view their home as an asset and the problem is, it is an asset but what they do not realise that its the banks asset if its mortgaged (it produces a cash flow to the bank) and at best a security if its not mortgaged. And before this gets peoples backs up claiming businesses put their premises down as a fixed asset let me explain that a fixed asset is "a fixed asset that is purchased for the objective of producing profit" You purchase your home to live in or at least you should do. Your home to you is a liability as it costs you money to own. Just like your car is a liability to you but an asset to a business on its balance sheet, just because you expect it to be worth more than you paid for something does not make it an asset.
We learn how to perform quadratic equations at school but finance, understanding fundamental home budgeting and personal balance sheets are not considered essential education for our children. Something tells me the powers that be want a nation of bad debtors.
/rant over
I agree with you... I take it you read rich dad / poor dad by the sound of the post...
BUT
I prefer to look at my home like an instrument to be traded just like a stock / currency.. with the exeception that you cannot take a true short position for direct profit. Whilst this has caused me some personal discomfort over the years as I have moved a fair bit.. BUT.. I sold my house begining of 2008 therfore realising the true asset value in the instrument (i.e. the equity) which now pays me to live in the sun whilst waiting to re-enter the trade when the market is suitable.
My trading style is the same, I only enter the market in the trend direction, and never hold against the trend.
I bet many good traders on this site are losing more money in equity on their homes than they are taking from the markets... IT's madness
You are correct 100% your home is a liability just as your car, and your flat screen TV, but you can make it into a paying asset if you try hard enough.
I had read rich dad poor dad many years ago and the philosophy has stuck. It help me recognise assets an liabilities for what they are. Like you I suppose I trade in house "liabilities" just like you should trade markets. There are plenty of fundamentals that can signal a the end of a bear housing market and also see the end of a bull market. I remember watching a documentary in the UK regards housing and there was talk of houses changing hands in pubs in Burnley for the change in your pocket but the thing that stuck out to me was an indicator used in the program which effectively calculated the house pricing based on the cost of mortgage against income and it had been the lowest in years something like 12%, in the last boom it was above 40%. It appeared a very good time to buy to me so I did. Although I did miss the opportunity to go drinking in Burnley buying houses.
Its interesting that Banking system has suffered a major crisis that was greed led in each of the last four decades now. 70's Third world debt - 80's Savings and loans, 90's commercial loans crisis, 00's - sub prime, anyone out there predicting the name of the next one?
Its interesting that Banking system has suffered a major crisis that was greed led in each of the last four decades now. 70's Third world debt - 80's Savings and loans, 90's commercial loans crisis, 00's - sub prime, anyone out there predicting the name of the next one?
Probably something like Chinese / Indian Debt obligations I would say
The greed will just move on to the next market...
