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House price falls of 20%, unemployment of 12.4% forecast 
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Homeowners are taking on as much debt as they did before the financial crisis, leaving them and the financial system vulnerable to any rise in interest rates, the Financial Services Authority has warned.

FSA chairman Lord Turner said that 28% of mortgages taken out in 2010 were for amounts of more than 3.5 times the borrowers' income, levels last seen in 2007. This equates to some 176,000 borrowers. Turner said such debt levels "create a vulnerability".

The City regulator also used its Prudential Risk Outlook to reveal that the UK's biggest banks have been told they must have enough capital to withstand a plunge back into recession in the next four years. They must also consider the impact of a possible restructuring of sovereign debt in the eurozone, a scenario other regulators have not asked banks to countenance. Details of a Europe-wide stress test of banks are expected to be published on Friday.

The FSA devoted a chapter of its risk outlook to historically low interest rates – which have been at 0.5% for two years – and warned that borrowers who had taken out a base-rate tracker home loan in the last two years would be "particularly vulnerable" when rates rise.

Banks must already evaluate changes of as much as two percentage points to interest rates on their business and also consider the impact regionally, with borrowers in the north-east, Northern Ireland and Wales among those hardest hit. But Turner said the "most tricky" challenge was commercial property, where more than 20% of outstanding UK loans are in breach of their financial covenants or in default. "Banks need to think about workable exit strategies," he added.

He noted that banks had "a hidden element of losses" to mortgage and property customers because of the leniency shown to customers: "The picture may change, particularly when interest rates rise."

The stress tests for 2011 require banks to consider a peak-to-trough fall in gross domestic product of 4.3% between 2011 and 2015. In 2010, the test was for a peak-to-trough fall of 2.3% in the four years to 2014. The tests require banks to assume house prices fall 20% over the four years and unemployment peaking at 12.4%. This compares with the 23% fall in house prices and the 13.4% peak in unemployment that the 2010 stress tests considered.

Turner also warned the banks needed to reduce targets for return on equity – noting HSBC recently cut its targets to 12-15% – because of the extra capital they must hold and that banks setting high targets would be watched closely to ensure they were not taking on too much risk. "Banks that seek to maintain unchanged return-on-equity targets will only be able to achieve these if they can increase return on risk-weighted assets, and may be tempted to do so by taking increased risk or by underestimating risk ... These points highlight the importance of taking a prudent approach towards dividend payout ratios and remuneration to conserve capital within firms," the FSA said.

The stress tests for banks also require the imposition of worst-case scenarios for those with exposures to eurozone economies such as Ireland and Spain – where UK banks are most exposed to borrowers.

http://www.guardian.co.uk/business/2011 ... sk-outlook
...

http://www.youtube.com/watch?v=jHPOzQzk9Qo

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Thu Mar 17, 2011 9:40 pm
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I guess they still haven't learned anything then.....except where to take the begging tray when things go wrong.

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Fri Mar 18, 2011 12:34 pm
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The fact that the stress tests are based on worse outcomes than last year means that they probably expect the coalitions policies to fail. I still think that house prices have even further to fall than a mere 20%. I think that they are still over optimistic. Though I think that prices will fall further but over a long period possibly a decade. It all depends on government policies.

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Sat Mar 19, 2011 9:25 pm
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* Gets calculator *

My mortgae is 2.97 times my income.
I don't think I could afford any more than that, especially now I have a son.
People who go over x3.5 are either insane, or never plan to have children.

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Sat Mar 19, 2011 11:39 pm
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l3v1ck wrote:
* Gets calculator *

My mortgae is 2.97 times my income.
I don't think I could afford any more than that, especially now I have a son.
People who go over x3.5 are either insane, or never plan to have children.

Is that your combined income? It used to be 2.5 times combined income, and three times single income. Even so it excludes millions from the market. Higher deposits are essential even before the crash, that is why the banks were in such a mess. They were allowed to play the system to the maximum extent knowing that they were too important to be allowed to collapse. The banks are still way too large and need to be cut down and penalties applied to any bank that is in such a position.

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Sun Mar 20, 2011 3:33 pm
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My mortgage is less than my income. Seriously. I paid less for my house (back when I did, which was some time ago) than I currently earn in a year. However were I to buy my house today, it would be roughly 2.5 times my current income. Just shows you timing is everything :).

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Sun Mar 20, 2011 4:36 pm
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jonbwfc wrote:
My mortgage is less than my income. Seriously. I paid less for my house (back when I did, which was some time ago) than I currently earn in a year. However were I to buy my house today, it would be roughly 2.5 times my current income. Just shows you timing is everything :).

Jon

Yes timing is crucial. I know a number of people who have not benefited at all from the booms, even if they own.

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Sun Mar 20, 2011 6:10 pm
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3 times my income would leave me a hundred grand short of my current residence. I'm guessing it's value, but the landlady's having it valued tomorrow, so I'll see if the valuer will tell me.

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Sun Mar 20, 2011 6:10 pm
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Amnesia10 wrote:
Is that your combined income?
My wife works two days a week, but almost all her wages are used to pay for transport to/from work and child care for when she's at work. She does it to keep her mind active and keep her job open for when he goes to school next year.
So it is 2.97 times just my income, but effectively my wife doesn't have any income.

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Sun Mar 20, 2011 7:42 pm
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l3v1ck wrote:
Amnesia10 wrote:
Is that your combined income?
My wife works two days a week, but almost all her wages are used to pay for transport to/from work and child care for when she's at work. She does it to keep her mind active and keep her job open for when he goes to school next year.
So it is 2.97 times just my income, but effectively my wife doesn't have any income.

Well that is sensible. If it was based on your combined income then you could have trouble in future. Longer term I do not see house prices getting into another bubble unless of course the government go mental again.

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Sun Mar 20, 2011 8:31 pm
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The crappiest thing is that (afaik) it doesn't take into account future earning potential. My current wage in five years' time (provided I'm still in a job) be double what it is now and potentially triple or quadruple depending on where I get a job and at what position.

It's still frustrating that in all probability I probably won't be able to get on to the property ladder until the age of 35 maybe 40.

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Sun Mar 20, 2011 11:04 pm
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cloaked_wolf wrote:
The crappiest thing is that (afaik) it doesn't take into account future earning potential. My current wage in five years' time (provided I'm still in a job) be double what it is now and potentially triple or quadruple depending on where I get a job and at what position.

It's still frustrating that in all probability I probably won't be able to get on to the property ladder until the age of 35 maybe 40.

Yes but for most people they will not have an increase like that unless we have a serious bout of inflation. Also property has been in a bubble for much of the last fifty years. It has driven up wages, that has ended now. Also as a doctor you can expect to be moving around for awhile even acting as a locum for some years before you settle anywhere. So for banks to include earnings potential would be a disaster. Banks estimated that prices would never fall but failed to consider that earnings failed to keep up thus fail to provide support for them. Also as a doctor you will also be pretty loaded with student debt and so might actually be considered a poor risk, add in high medical insurance which will take a serious dent out of your income you will have much less disposable income than some one else at the same income level, again representing a poor risk. What would suit you is flat property prices and the possibility that you can save enough to get a huge deposits so that your income will allow you to get a place. Then consider that banks are extremely risk averse right now, and so you would need that deposit anyway. Property will not prove to be a great investment over the next century so don't get so het up about owning.

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Sun Mar 20, 2011 11:51 pm
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I borrowed about 2.5x my salary, having saved furiously for a deposit while living in a cardboard box for 10 years.

That was now 13 years ago. My salary is still about the same, but the house is now worth about twice as much. Needless to say, I would not have been able to afford a mortgage of 5x my salary...

The value of my house doesn't really effect me. I'm using it right now, so it's not for sale. If I was looking to move, it could be a problem.

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Mon Mar 21, 2011 12:02 am
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JJW009 wrote:
I borrowed about 2.5x my salary, having saved furiously for a deposit while living in a cardboard box for 10 years.

That was now 13 years ago. My salary is still about the same, but the house is now worth about twice as much. Needless to say, I would not have been able to afford a mortgage of 5x my salary...

The value of my house doesn't really effect me. I'm using it right now, so it's not for sale. If I was looking to move, it could be a problem.

Actually it has given you stability for those years, plus as house prices fall you will not suffer as much as those who keep extending their mortgages.

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Mon Mar 21, 2011 12:27 am
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