100% mortgages? Not a problem!

Over and over again I hear people claiming that a big part of the current crisis was that banks were giving people 100% mortgages... but I think they are missing the point. I think it should have been no problem at all to have given people 120% mortgages - if their income was high and the house was cheap. The vastly more important thing to measure is the income multiplier! Having a high income multiplier is dangerous because that's what really tells you the chances of default in the long term. Having a high income multiplier for your mortgage is like living on the edge of a cliff - the slightest rise in interest rates and suddenly you're in trouble.

Now had people all been talking about income multipliers instead of the erroneous "100% mortgages", then they may have noticed that in the long term the income multiplier has historically been around 3 to 3.5. And it only rises above that in bubbles.

According to the Halifax, the typical income multiplier for houses sold recently in the UK is 4.42, so if anyone asks me how much more the UK house prices will go down, I would say down in the ratio 4.42 to 3.25-ish... so that's about 25% more to go from where it is today.

Finally - I just had a quick look at the Halifax historical data and saw that the multiplier reached 5.84 in July 2007. How on earth did any economist or banker not know that this was a massive speculative bubble?

Below is a chart showing what percentage of your income would be required just to pay the interest on your loan, given a 5.84 income multiplier, should the mortgage rates become the values in the left hand column.