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Comment by ab_testing | Hacker News Reader

Canada already did #2. Average home prices in almost all metro areas are around 10x yearly income. There is no blood on the streets and it is still considered a destination country.

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it's human nature and backed by human history. blood on the streets will come, maybe tomorrow, 10 years from now or 50 years from now. in the face of inequality, it's either war or fascism. no two ways about it.

My Canadian friend mentioned this but then followed it up by saying no one in Canada cares what the Bank of Canada does and all eyes are on the US. Could that be one reason there wasn't a significant effect?

Also, there's quite a bit of cash in savings accounts now, and rates are still low by historical standards. We'll see what happens when mortgages are above 5% again.

10x isn't terrible, though, is it? Assuming 20% down on a mortgage, if you're frugal, you can save for a down payment in 4 or 5 years or so. Not ideal, of course, but not impossible. In some places in the US folks could save for a decade or more and still not be able to afford a down payment.

The rule of thumb I have heard is 3x.

If you buy a house 10x your income and put 20% down, your monthly payments are 40-45% of your income before tax. That's a lot

3x is based on early-80s interest rates (12%). I did out the math [1] for someone on Reddit and it turns out that if you buy 3x your income @ 3% interest, you'll only be spending about 12% of your income on housing. To get to 30% of gross on housing (the other common rule of thumb), house prices need to be about 7x income.

[1] https://www.reddit.com/r/investing/comments/oawyqu/is_there_...

3x is not based on 80s interest rates. And the mortgage is only part of your expenses, you need to budget for home repair, taxes, and insurance. Plus any other savings that are needed, like putting yoyr kids through college or retirement.

I did out the math in the Reddit comment, and you can run the numbers by Googling [mortgage calculator] and plugging them in. 12% is the equilibrium interest rate where the "home price = 3x income" and "housing expenses should be no more than 30% of gross" rules of thumb are both true. At 3% interest rates, a 3x home will cost you about 12% of monthly gross, and 30% of gross will get you 7.5x income. Those two rules of thumb cannot both be true at 3% interest rates.

With taxes and insurance, those numbers change to 3x = 17% of gross and 30% of gross = 5.4x, assuming California tax rates. Things like emergency funds, retirement savings, etc. are included in the "housing should cost no more than 30% of gross" rule of thumb.

Housing expenses should be no more than 30% gross isn't a rule of thumb, it's a maximum amount lenders will traditionally lend you. It's called the front end ratio.

  Quoting investopedia "Lenders prefer the front-end ratio to be no more than 28% for most loans and no more than 31% for FHA loans."

Lenders don't care if you can retire or if your kids can go to college, they care if you are likely to default on your loan. So I wouldn't take the front end ratio as personal finance advice.

The 3x income housing advise in not related to the front end ratio. 3x income is the max you should borrow (according to the advise givers, you are of course free to disagree), the front end ratio is what you can borrow.

There literally doesn't exist a 3x property where I'm from in Europe. I make almost triple what the average salary is, and shitty old properties start at 5-6x.

What? Save 2x (20% of 10x) your annual income in 5 years? What planet are you on where you think people can save 40% of their net income, let alone gross

And even if by some miracle you save 2x for a 20% deposit, what bank will lend you 8x income for the rest ?

Complete fantasy

Yeah, the situation in Canada is getting bad. Look for the blood on the streets soon.

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