Author Topic: income and housing multiplier  (Read 14160 times)

LAL

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income and housing multiplier
« on: April 30, 2016, 09:59:17 PM »
If you were asked what would you suggest for a housing multiplier?  2-3x gross income for housing purchase?  How high would you consider reasonable? 

PhysicianOnFIRE

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Re: income and housing multiplier
« Reply #1 on: April 30, 2016, 10:07:03 PM »
It depends on the cost of housing where you live. In some places, you can get a pretty nice place for $150k to $200k.  In other places, a dog house goes for half-a-million.

Ideally, you would like to keep it at 3x or less, but there are some places (and incomes) where that may not be feasible. Maybe an indication to consider renting?

tobitonic

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Re: income and housing multiplier
« Reply #2 on: April 30, 2016, 10:10:35 PM »
Ideally, <1x. I originally wanted to buy in cash. DW convinced me to take on a mortgage. We bought at ~3x but knew our income would soon rise, so it was really more like ~2x. Income kept rising, and paid it off in a few years. Last year, our income was greater than our house, and that's where I'd be most comfortable if we were doing it again. However, I'd be willing to go up to 2x in general; you can pay off a 2x house in a few years if you're frugal and lucky (no unexpected expenses, accidents, unemployment, etc). I'd stay away from anything higher than that; I just remember how we never struggled to pay the mortgage, ever, at that ratio. It was just a question of how much additional money we'd put into retirement accounts.

Oh, and if I couldn't find something within 2x, I'd rent and save...or move.

alsoknownasDean

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Re: income and housing multiplier
« Reply #3 on: April 30, 2016, 10:16:29 PM »
Yeah, it depends on your market.

I'm looking at spending about 4.5-5x next year, and that will struggle to get a house unless it's way out in woop-woop (often 40km+ from the CBD), so I'll be looking at two bedroom units instead.

But yeah, Australian housing in general is screwed. It's either pay a fortune for housing in a capital city and speculate on the value increasing, or live in some backwater town with little employment prospects.

mxt0133

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Re: income and housing multiplier
« Reply #4 on: April 30, 2016, 11:23:53 PM »
In SF with 20% down I can qualify for 5x gross income.  I was always against owning in SF but doing the math it doesn't seem all the crazy if I can rent out a room or AirBnB it.

I would have never thought to go that high for a house.

hodor

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Re: income and housing multiplier
« Reply #5 on: May 01, 2016, 02:00:46 AM »
Yeah, it depends on your market.

I'm looking at spending about 4.5-5x next year, and that will struggle to get a house unless it's way out in woop-woop (often 40km+ from the CBD), so I'll be looking at two bedroom units instead.

But yeah, Australian housing in general is screwed. It's either pay a fortune for housing in a capital city and speculate on the value increasing, or live in some backwater town with little employment prospects.

Income to mortgage repayment ratios in Australia remain pretty much (+/-5 to 7%) where they have been for the past 40 years (as far back as I have looked). Not sure why you believe the housing market to be screwed, listening to the media too much perhaps. Sure a big interest rate hike or numerous other events would cause havoc, but really as it stands, it's steady as the ship has sailed for the past 40 years.
Good luck with your house purchase and I hope you find something you like.

My house was purchased at ~3.5 times gross household income

alsoknownasDean

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Re: income and housing multiplier
« Reply #6 on: May 01, 2016, 02:09:09 AM »
Yeah, it depends on your market.

I'm looking at spending about 4.5-5x next year, and that will struggle to get a house unless it's way out in woop-woop (often 40km+ from the CBD), so I'll be looking at two bedroom units instead.

But yeah, Australian housing in general is screwed. It's either pay a fortune for housing in a capital city and speculate on the value increasing, or live in some backwater town with little employment prospects.

Income to mortgage repayment ratios in Australia remain pretty much (+/-5 to 7%) where they have been for the past 40 years (as far back as I have looked). Not sure why you believe the housing market to be screwed, listening to the media too much perhaps. Sure a big interest rate hike or numerous other events would cause havoc, but really as it stands, it's steady as the ship has sailed for the past 40 years.
Good luck with your house purchase and I hope you find something you like.

My house was purchased at ~3.5 times gross household income

Try and find something for 3.5x the median salary within cooee of a capital (or even larger regional) city these days. It's fine if there's two full time incomes in the mix, but a fair bit harder for a single person, especially if one doesn't want to commute 90min each way to work :)

Anyone on less than $50K or so is stuffed.
« Last Edit: May 01, 2016, 02:14:31 AM by alsoknownasDean »

hodor

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Re: income and housing multiplier
« Reply #7 on: May 01, 2016, 02:50:10 AM »

Try and find something for 3.5x the median salary within cooee of a capital (or even larger regional) city these days. It's fine if there's two full time incomes in the mix, but a fair bit harder for a single person, especially if one doesn't want to commute 90min each way to work :)

Anyone on less than $50K or so is stuffed.

I don't think it is anymore difficult than it has been in the past, maybe people are less willing to sacrifice - not wanting to live a MMM type lifestyle to save and want holidays, mod cons etc etc. Listen to some old timers of what they scarified just to buy an empty block and live in a shed while they paid it down and saved to build. Multiples of income aren't as relevant in such a low interest rate environment either, though it makes it more difficult to pay off your house in a speedy fashion.

Low income earners will always struggle, still on $50k they could pick up a 2 bed unit in areas around Sunshine for just over 4x earnings, only 10-15km from the CBD. Not the best area, but it is somewhere to start. Someone has to live in the bottom quartile of residences and traditionally it is the bottom quartile of earners.

I saved for my first house on a wage of ~$40k and got a small place in a non preferred area as my wage approached $50k @ 6.5x earnings, not easy but can be done, as a single person. Now I have a place in my ideal location that needs some TLC, baby steps.

Not saying it is easy, just things are still following the standard line and aren't infact "stuffed".


Cyaphas

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Re: income and housing multiplier
« Reply #8 on: May 01, 2016, 04:02:02 AM »
Here in DFW it's feasible to pay .5 x income. If you'd like to find a nicer family home 1.5 x income can land you something quite practical. I left Seattle because of how expensive it is there. I was at 3.5x. That was a terrible decision. One I learned drastically from.

VaCPA

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Re: income and housing multiplier
« Reply #9 on: May 01, 2016, 05:28:08 AM »
Definitely depends where you live and also depends on your down payment. Someone with 20% down is probably comfortable purchasing more than someone with a small down payment. We spend about 4x in HCOL area but we're on the conservative side. Lots of people here spend more. Interest rate could factor in to home affordability. I think a more useful metric is mortgage payment as a % of take home pay. I think we're at about 30% there.


chasesfish

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Re: income and housing multiplier
« Reply #10 on: May 01, 2016, 06:20:56 AM »
This is an interesting debate, especially on a MMM forum.

Personally, I've stretched at bit on my most recent house (just over 3x) in exchange for a less than 3 mile commute.  I didn't have a choice because the price I paid was just a hair over lot value, where builders purchase these nice little houses and tear them down to put a 5,000sqft new house on in Dallas.

It also depends on the geography and (not to get too political) the development policies of the area you live in.  Housing is about supply and demand and if you live in an area that never approves any new development (SF Bay Area, college towns), you end up having to pay a lot more for housing, but have a restriction on any new supply hurting your asset.

I lived on both sides of this, in two college towns and I also bought outside of Atlanta in 2007.  Builders could add inventory in all four directions and massively overbuilt and my house was eventually only worth 60% of its original cost to build.




libertarian4321

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Re: income and housing multiplier
« Reply #11 on: May 07, 2016, 08:29:39 AM »
Our house cost less than one year's income.


ender

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Re: income and housing multiplier
« Reply #12 on: May 07, 2016, 08:33:59 AM »
We pretty much set an upper bound for our first home which is a bit over 2x income. But that does not include at least 20% down, so the financed amount will be about 1.7x at most (and it goes down every month we don't buy and save more! :) ).

Another Reader

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Re: income and housing multiplier
« Reply #13 on: May 07, 2016, 09:00:01 AM »
I don't think this is a relevant question.  It's what the market thinks is reasonable to pay, not what one buyer thinks is reasonable to spend.  In the competitive markets, either you make the sacrifice and buy or you rent.  Or you move to an area with lower housing prices and likely fewer employment opportunities.  Only you can decide how much of a financial sacrifice you are willing to make to own in your preferred location.

Bucksandreds

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Re: income and housing multiplier
« Reply #14 on: May 07, 2016, 09:24:59 AM »
We spent exactly 2x pretax income.  We have 2900 sq feet in maybe the best suburb of Columbus, OH. Ohio is cheap as hell. We could have gotten a house where I work (below average area) in decent shape at 2000sq ft for about .4x our yearly income.  Central Ohio is very friendly to FIREing. As long as you are in a nice neighborhood and can get away a couple of weeks every winter to the south, it's a very nice place to live.

The Happy Philosopher

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Re: income and housing multiplier
« Reply #15 on: May 07, 2016, 09:45:58 AM »
I think cash flow and total monthly cost matters more than price. A simple price multiplier does not completely factor in:

Interest rates
Commuting costs
School quality or convenience
Taxes

Sometimes it may be cheaper to buy a more expensive house...

2Birds1Stone

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Re: income and housing multiplier
« Reply #16 on: May 07, 2016, 11:29:15 AM »
I always look at these things in terms of cash flow.

My housing related expenses including utilities, internet, landscaping, maintenance, taxes........drumroll.......10% of our gross household income.

I would feel comfortable up to 20% of gross income on housing.