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Financing the market for existing housing : an alternate source of funds Eger, Albert Frederic 1976

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c  .  \  FINANCING THE MARKET FOR EXISTING HOUSING: AN ALTERNATIVE SOURCE OF FUNDS  by  ALBERT FREDERIC EGER B.S.F.  University  of B r i t i s h  Columbia  M . B . A . Oregon S t a t e U n i v e r s i t y  1964  1969  A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE  REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY  i n the  Faculty of.  Commerce and Business  We accept t h i s required  THE  thesis  Administration  as conforming to  standard  UNIVERSITY  OF BRITISH COLUMBIA  September,  1976  Albert Frederic Eger, 1976  the  In p r e s e n t i n g t h i s  thesis  an advanced degree at  further  fulfilment  of  the  requirements  the U n i v e r s i t y of B r i t i s h Columbia, I agree  the L i b r a r y s h a l l make it I  in p a r t i a l  freely  available  for  agree t h a t p e r m i s s i o n f o r e x t e n s i v e copying o f  of  representatives.  this thesis for  It  financial  this  thesis  The  of  g a i n s h a l l not be allowed without my  Commerce & Business A d m i n i s t r a t i o n  U n i v e r s i t y o f B r i t i s h Columbia  2075 Wesbrook Place Vancouver, Canada V6T 1W5  Date  February 3, 1977  or  i s understood that copying or p u b l i c a t i o n  written permission.  Department  that  reference and study.  f o r s c h o l a r l y purposes may be granted by the Head of my Department by h i s  for  to the s p i r i t of running and mother and dad.  free  Chairman:  P r o f e s s o r S t a n l e y W. Hamilton  1  Abstract  Guttentag demonstrated t h a t the demand f o r mortgages was related  to the demand f o r bonds.  creasing interest more r a p i d l y  rates,  He reasoned t h a t d u r i n g p e r i o d s o f  in-  t h a t mortgages are r a t i o n e d from the c a p i t a l  thaiii bonds because o f s h o r t run i n e l a s t i c i t y  and because of the h i g h l y e l a s t i c demand o f mortgagors. mortgage market was i d e n t i f i e d lack of a v a i l a b l e  negatively  of business firms T h i s behaviour o f  as a c o u n t e r c y c l i c a l h y p o t h e s i s .  mortgage  for  o f demand.  markets,  t h a t the p r i c e o f housing would f a l l  market. rationing  i n response to  rates.  T h i s c o n f l i c t o f theory  and  o b s e r v a t i o n suggests t h a t the study o f housing p r i c e behaviour i n r e l a t i o n mortgage market  f o r e x i s t i n g housing i s one worthy o f  In o r d e r to e s t a b l i s h a framework  market  lack  The evidence by Hamilton i n d i c a t e s t h a t the p r i c e o f housing c o n t i n u e d  to r i s e i n p e r i o d s o f i n c r e a s i n g i n t e r e s t  market,  the  existing  The c o u n t e r c y c l i c a l h y p o t h e s i s would suggest t h a t d u r i n g p e r i o d s o f i n the c a p i t a l  the  Because o f  d a t a , Guttentag assumed t h a t the mortgage market  housing r e a c t e d i n a manner s i m i l a r t o the i n s t i t u t i o n a l  markets  examination.  sources o f f i n a n c i n g to types o f housing  Research to date has c e n t e r e d on the new housing market  the l e n d e r s who f i n a n c e the mortgages to support t h a t housing market. c a t i o n o f the mortgage market institutional  and  Specifi-  as a consequence has d e a l t with two s e c t i o n s , the  l e n d e r s and government a g e n c i e s .  Complete s p e c i f i c a t i o n o f  mortgage market must i n c l u d e the n o n - i n s t i t u t i o n a l  (private)  the  lenders.  A d e s c r i p t i v e a n a l y s i s o f the e x i s t i n g housing market by c l a s s i f i c a t i o n not o n l y g i v e s dimension to a market cyclical,  seasonal and s u b s t i t u t i o n a l  p e r i o d s o f changing i n t e r e s t  the  f o r a n a l y s i s o f the e x i s t i n g housing  a c l a s s i f i c a t i o n system r e l a t i n g is devised.  to  rates  p r e v i o u s l y u n c h a r t e d , but the impact effects  are c o n t r a s t e d by type  and v a r i a n c e s i n vacancy r a t e s .  demand and s u p p l y model i s developed to determine  the e f f e c t  of  of  during A derived  substitution  type,  ii  by the  components of the mortgage market  housing.  f o r e x i s t i n g housing on the  Proper s p e c i f i c a t i o n o f the c r e d i t  rationing variable  price  of  is crucial  to  the t e s t i n g o f the model because o f the problem o f measuring changes i n rates  i n the mortgage market.  interest  A s p e c i a l chapter i s devoted to e x p l a i n i n g  the  impact t h a t the s u b s t i t u t i o n o f mortgages funds has on the measurement o f  the  mortgage  rate.  Several specifies well  c o n c l u s i o n s are n o t e d .  the t o t a l  F i r s t , a c l a s s i f i c a t i o n system which  mortgage market  i n terms o f new and e x i s t i n g housing as  as source and purpose o f f i n a n c i n g has been e s t a b l i s h e d .  This  classifi-  c a t i o n system completes the s p e c i f i c a t i o n o f the mortgage and housing m a r k e t s . Future r e s e a r c h can be undertaken the mortgage market the p r i v a t e fifty  from t h i s  mortgage funds f o r  p r o v i d e an important  lack of exploration  has been due to the f a c t  over a p e r i o d o f t i m e .  the p r i v a t e  mortgage market the  conclusion is  unexplored.  t h a t data on the above type  title  search of i n d i v i d u a l  i n c r e a s e a b s o l u t e l y and r e l a t i v e l y .  l e n d e r s are r a t i o n e d  markets  from the mortgage market.  This  i n the housing market.  i n the excess housing s u p p l y p e r i o d from  d e s c r i p t i v e e v i d e n c e , although s t a t i s t i c a l  validation  i s not p o s s i b l e .  o f the d e s c r i p t i v e e v i d e n c e , i n d i c a t e s t h a t the s u b s t i t u t i o n o f the f o r - s e c t o r occurred when i n s t i t u t i o n a l t  interest  f i n a n c i n g when mortgages  v a l i d when excess demand c o n d i t i o n s e x i s t  c o n c l u s i o n can be i n f e r r e d  of  the  Consequently these  p r i c e of housing by p r o v i d i n g s u b s t i t u t e  The  residential  T h i r d , during'periods of i n c r e a s i n g  vendor f i n a n c i n g and a s s i g n e d mortgage s e c t o r s of  s u p p l i e d by c o n v e n t i o n a l  A similar  total,  f i n a n c i n g new and e x i s t i n g h o u s i n g .  s o u r c e o f funds h i t h e r t o  mortgage must come from a l a b o r i n t e n s i v e  stabilize  In  vendor f i n a n c e and a s s i g n e d mortgage s e c t o r s account f o r more than  The above markets  rates,  S e c o n d , two segments o f  f o r e x i s t i n g housing prove to be s i g n i f i c a n t .  percent o f the t o t a l  properties  basis.  funds were s h i f t e d to the  Review  agreement-  refinance  i i i  market  d u r i n g the excess supply p e r i o d .  Inasmuch as the  s a l e s e c t o r remained as the major source o f f u n d s , i t  agreement-for-  can be i n f e r r e d  that  t h i s market s t a b i l i z e d housing p r i c e s d u r i n g the excess s u p p l y p e r i o d i n s p i t e o f the f a c t the study p e r i o d . p r i c e s i n 1961 Finally,  that i n t e r e s t  rates  Greater v o l a t i l i t y  and 1962  if  d e c l i n e d d u r i n g the l a t t e r p a r t  c o u l d have been expected i n housing  the a g r e e m e n t - f o r - s a l e s e c t o r had been a b s e n t .  the s u b s t i t u t i o n o f mortgage f i n a n c i n g during, p e r i o d s o f i n -  creasing interest mortgage r a t e s .  rates  c o u l d account f o r the reduced amplitude o f observed  The narrow amplitude o f mortgage r a t e s  s i d e r e d as a s i g n o f i n e f f i c i e n t  s h o u l d not be c o n -  mortgage markets.  During p e r i o d s o f excess housing demand, the use o f the c r e d i t variable  r  m  -  r^ proves to be a s t a t i s t i c a l l y  i n the mortgage markets. i s not adequate.  In  market.  rationing  s i g n i f i c a n t measure o f  a p e r i o d o f excess housing s u p p l y , t h i s  The measure f a i l s  i n funds i n the mortgage  R.A. Restrepo  of  rationing measure  to account f o r i n f r a - i n s t i t u t i o n a l  shifts  iv  TABLE OF CONTENTS Page CHAPTER I.  INTRODUCTION..... 1.1 1.2 1.3  II.  III.  IV.  Statement o f the Problem Purpose o f Study Overview  1 ......  2 3 4  BACKGROUND LITERATURE SURVEY 2 1 2.1 Summary o f L i t e r a t u r e Review 2.2 Housing and Mortgage S p e c i f i c a t i o n : A N a t i o n a l View 2.2.1 C o u n t e r c y c l i c a l Hypothesis and Demand C o n d i t i o n s 2.2.2 C o u n t e r c y c l i c a l Hypothesis and Supply C o n d i t i o n s 2.3 Regional Housing and Mortgage Market S p e c i f i c a t i o n 2.3.1 Mortgage Market S t r u c t u r e 2.3.2 Regional Risk F a c t o r s ...  7  ....  8 9 9 13 17 1718  CLASSIFICATION OF TOTAL MORTGAGE MARKET  23  3.1 3.2  24 25 26 27  C l a s s i f i c a t i o n System o f Mortgage Sub-Markets D e f i n i t i o n s o f the Mortgage Market 3.2.1 D e f i n i t i o n o f P r i v a t e Vendor F i n a n c i n g 3.2.2 D e f i n i t i o n o f A s s i g n e d Mortgage F i n a n c i n g  HISTORIC PROFILE OF EXTENDED MORTGAGE MARKET ON EXISTING IN GREATER VANCOUVER REGIONAL DISTRICT (1954-1963) 4.1 4.2  4.3 4.4 4.5  4.6  4.7  HOUSING  Summary ...... Introduction 4.2.1 The Data Bases and P e r i o d o f Study 4.2.2 Regional Comparison .... • T o t a l Extended Mortgage Market ... 4.3.1 C y c l i c a l Nature o f the Mortgage Market Extended Mortgage Market f o r E x i s t i n g Housing P r i v a t e Vendor F i n a n c i n g ........ ...... 4.5.1 C y c l i c a l Nature .... 4.5.2 Secular Variation 4.5.3 Seasonal V a r i a t i o n ............ 4.5.4 Vacancy i n Housing Market 4.5.5 R e l a t i o n s h i p t o Conventional Lenders A s s i g n e d Mortgage F i n a n c i n g 4.6.1 Gyelvirca<I Nature . 4.6.2 Secular Variation 4.6.3 Seasonal V a r i a t i o n 4.6.4 Conventional Lender R e l a t i o n s h i p Conventional Lender F i n a n c i n g  30 31 31 31 32 34 37 38 42 42 42 44 45 45 51 51 53 55 55 59  V  Page CHAPTER V.  STABILIZING EFFECT OF PRIVATE VENDOR FINANCING AND ASSIGNED MORTGAGES ON HOUSING PRICES: THE MODEL AND METHODOLOGY 5.1 5.2  5.3 5.4  5.5 5.6  VI.  68 68 68 70 71 72 73 77 78 79 80 80 81 81 81 82  STABILIZING EFFECT OF PRIVATE VENDOR FINANCING AND ASSIGNED MORTGAGES OM HOUSING PRICES: EMPIRICAL RESULTS 6.1 6.2 6.3  6.4  6.5  VII.  Introduction Sources o f Funds 5.2.1 P r i v a t e Vendor F i n a n c i n g 5.2.2 A s s i g n e d Mortgage Model . , . Expected Demand R e l a t i o n s h i p s 5.4.1 Credit Rationing 5.4.2 Income E f f e c t 5.4.3 Rental Market S u b s t i t u t i o n 5.4.4a A l t e r n a t i v e Investment Expected Supply R e l a t i o n s h i p s 5.5.1 Vacancy Rate Complete Model and Methodology 5.6.1 Complete Model 5.6.2 E s t i m a t i n g Technique 5.6.3 Methodology  Summary Introduction Empirical Results: Excess Demand i n the Housing Market 6.3.1 Price Rationing Variable 6.3.2 Rental Market S u b s t i t u t i o n 6.3.3 Income V a r i a b l e 6.3.4 S u b s t i t u t e Investment Empirical Results: Excess Supply i n the Housing Market 6.4.1 Mortgage Demand Equations 6.4.1.1 Vacancy Rate V a r i a b l e 6.4.1.2 I n s t i t u t i o n R e f i n a n c i n g o f Mortgages 6.4.2 Mortgage Supply Equations 6.4.2.1 A l t e r n a t e Measures and A g g r e g a t i o n S i g n i f i c a n c e to Hypothesis 6.5.1 Credit Rationing Variable  ...  ...  IMPACT OF PRIVATE VENDOR FINANCING AND ASSIGNMENT OF MORTGAGES ON THE NARROW AMPLITUDE OF MORTGAGE RATES 7.1 7.2 7.3  Summary Introduction Background L i t e r a t u r e Survey on the Narrow o f Mortgage Rates 7.3.1 P r i c i n g Arguments 7.3.2 Commitment Procedure 7.3.3 I n s t i t u t i o n a l Factors  89 90 93 93 95 97, 98 100 100 100 104 107 109 109 Ill  114 115 115  Amplitude 115 115 117 118  vi  CHAPTER  Page r  7.4 7.5 7.6 VIII.  Mortgage Rate Amplitude H y p o t h e s i s T e s t o f the Hypothesis 7.5.1 Substitution Effect I m p l i c a t i o n s f o r F u r t h e r Research  118 120 120 121  IMPLICATIONS FOR FURTHER STUDY  125  8.1 8.2  126 128  F u r t h e r S t u d i e s and P o l i c y I m p l i c a t i o n s Comments on the Use o f More A c c u r a t e Data  vii  LIST OF TABLES  TABLE  Page  3.1  C l a s s i f i c a t i o n System o f Mortgages  4.1  Composite T a b l e o f R e g i o n a l , N a t i o n a l Mortgage Market V a r i a b l e s  4.2  4.3.1  4.3.2  4.4  4.5  4.6  4.7  25 Housing and 33  Gross Mortgage Flows by liender.and T r a n s a c t i o n im "the ' G r e a t e r Vancouver Regional D i s t r i c t ( G . V . R . D . ) C o u n t e r c y c l i c a l Components o f the f o r E x i s t i n g Housing  Extended Mortgage  : . 36  Market 39  A s s i g n e d Mortgages and P r i v a t e Vendor F i n a n c i n g i n Extended Mortgage Market f o r E x i s t i n g Housing  the  R e l a t i v e R a t i o s o f Sub-Markets w i t h i n the Market on E x i s t i n g Housing  Mortgage  Extended  A g r e e m e n t - f o r - s a l e on E x i s t i n g Housing R e l a t i v e Loans on E x i s t i n g Housing  40  41 to  Conventional 51  A s s i g n e d Mortgages and P r i v a t e Vendor F i n a n c i n g i n the Mortgage Market f o r E x i s t i n g Housing  Extended 52  C o u n t e r c y c l i c a l Components o f Extended Mortgage Market on E x i s t i n g Housing  60  6.1  Definition  90  6.2  Demand Equations o f C y c l i c a l Components i n the Mortgage Market E x i s t i n g Housing under Excess Demand C o n d i t i o n s  6.3  6.4  6.5  6.6  o f Dependant  Variables  i n Demand and Supply Model  E l a s t i c i t i e s o f Demand f o r C y c l i c a l Components o f Mortgage f o r E x i s t i n g Housing Average Loan to Value R a t i o and Average D o l l a r E x i s t i n g Mortgage Market  92  Market 94  Loan i n New and 96  Demand Equations o f C y c l i c a l Components o f Mortgage Market E x i s t i n g Housing d u r i n g Excess Housing Supply  for 99  S e l e c t e d Demand Equations o f C y c l i c a l Components o f Mortgage f o r E x i s t i n g Housing d u r i n g Excess Housing Supply  6.7  Supply Equations of C y c l i c a l Components o f Mortgage Market E x i s t i n g Housing Under Excess Supply C o n d i t i o n s  7.1  R e g r e s s i o n o f D i f f e r e n c e between Observed Mortgage Rate ( r - r^) and Bond Rate (r^) m  for  Market  for  102 108  Rate and Bond 119  viii  TABLE 7.2  7.3  Page E l a s t i c i t i e s o f Demand f o r C y c l i c a l Components o f Market f o r E x i s t i n g Housing Average Mortgage  Rates by Type o f Mortgage  Mortgage 120 122  ix  LIST OF FIGURES Page FIGURE 2.1  Countercyclical  2.2  A l l o c a t i o n of  4.1 4.2  4.3  4.4  4.5  4.6  4.7  4.8  4.9  4.10  4.11  4.12  Nature of Mortgage  Market  Funds between Mortgages  GrcGvjoss Q u a r t e r l y  Flows of T o t a l  .  and Bonds  Extended Mortgage  Gross Q u a r t e r l y Flows of P r i v a t e Mortgage Market  11 Market  35  Vendor F i n a n c i n g and Extended ,  P r i c e of Housing and R a t i o of U n o c c u p i e d , but Completed to T o t a l Housing Stock  43  Housing 46  Percent of P r i v a t e Vendor F i n a n c i n g to Conventional Lending on E x i s t i n g Housing as well as New and E x i s t i n g Housing  47  Percent of P r i v a t e Vendor F i n a n c i n g Compared to New Conventional Mortgage on New or E x i s t i n g Housing  48  Percent of P r i v a t e Vendor F i n a n c i n g Compared to T o t a l on New or E x i s t i n g Housing • ..........  New Mortgages 49  Gross Q u a r t e r l y Flows of A s s i g n e d Mortgage Mortgage Market on E x i s t i n g Housing  Extended  S e c t o r and  54  Percent of T o t a l A s s i g n e d Mortgage S e c t o r R e l a t i v e t o Conventional Lending on E x i s t i n g Housing as w e l l as New and E x i s t i n g Housing  56  Percent of T o t a l Assigned Mortgages on-New o r E x i s t i n g Housing  to New Conventional  57  Percent o f T o t a l A s s i g n e d Mortgages New or E x i s t i n g Housing  to Total  Lending  New Mortgages  on ,.58  Percent of New Conventional Mortgages Compared to Extended Market i n E x i s t i n g Housing Market Percentoof  Refinanced Mortgages  Compared to  Extended  Mortgage 61  Mortgage  Market i n E x i s t i n g Housing Market 5.1.1  Simplified  5.1.2  Complete System of Flow of Funds  5.2  Effect  5.3  Marginal  5.4  10  63  System of Flow of Funds  ...  69  of an Increase i n I n t e r e s t Rates on Mortgage Return t o C a p i t a l  Schedule  69-  Lending  ,  •" Observed PPHeeaa-ridQQaanitJy i im PReriidds eof LExeess DDemarid f>arid Excess Supply  71 75  8  3  X  FIGURE 6.1  Page Percent of P r i v a t e Vendor F i n a n c i n g Compared to New Conventional Mortgage on New o r E x i s t i n g Housing  106  Appendices  Appendix I II  Data Source and Correlation  Derivation  Coefficients  •  ACKNOWLEDGEMENTS  An idea i s b o r n .  A dissertation  i s completed.  Between these events  a long t a n g l e d path f o r which many persons deserve c r e d i t . thank  the chairman of my d i s s e r t a t i o n committee,  for his insights into Without  the f u n c t i o n i n g of the  I would l i k e  P r o f e s s o r S t a n l e y W.  housing and mortgage  markets.  these b a s e s , t h i s d i s s e r t a t i o n would not have been p o s s i b l e .  His a b i l i t y  to s y n t h e s i z e concepts i s g r a t e f u l l y  Robert W. White proved extremely  helpful  procedures and problem d e f i n i t i o n .  Professor  His a b i l i t y  have improved the f i n a l Financial as well  acknowledged.  Professor to  t o s i m p l i f y a problem on more  P r o f e s s o r s C r a i g H. Davis and Carl E . Sarndal d r a f t of the d i s s e r t a t i o n .  dis-  i n making s u g g e s t i o n s with r e s p e c t  than one o c c a s i o n , p r o v i d e d the necessary impetus to  preliminary  to  Hamilton  Micheal A . Goldberg provided generous encouragement as w e l l as time f o r cussion.  lie  continue.  provided aid during  T h e i r comments on the f i n a l  the  draft  copy.  support r e c e i v e d from the  B r i t i s h Columbia Real E s t a t e C o u n c i l  as The Canada C o u n c i l i s hereby acknowledged.  necessary component of the  T h i s support i s a most  dissertation.  As a graduate student at the U n i v e r s i t y of B r i t i s h Columbia, I was f o r t u n a t e t o meet P r o f e s s o r s Micheal J . Brennan and Eduardo S . Schwartz. h i s s t r o n g moral  support and the  p e r i o d of graudate  study w i l l  Fred G. Pennance w i l l hypotheses.  The former  l a t t e r with h i s f r i e n d s h i p borne d u r i n g  long be remembered.  Finally,  stay a l i v e as I c o n t i n u e to t r a v e l  with  the  the memory of P r o f e s s o r  the marketplace  for  1  CHAPTER  I  INTRODUCTION  1.1  STATEMENT OF THE PROBLEM  1.2  PURPOSE OF THE STUDY  1.3  OVERVIEW  2  1 .1  STATEMENT OF THE PROBLEM Guttentag^  related  demonstrated t h a t the demand f o r mortgages was  to the demand f o r bonds.  interest rapidly  rates,  He reasoned t h a t d u r i n g p e r i o d s o f i n c r e a s i n g  t h a t mortgages are r a t i o n e d from the c a p i t a l  than bonds because o f . s h o r t  periods of decreasing i n t e r e s t  negatively  run i n e l a s t i c i t y  markets  more  of business f i r m s . .  During  r a t e s , when business demand can be expected  d e c l i n e , he h y p o t h e s i z e d t h a t mortgage demand .would i n c r e a s e , because o f highly e l a s t i c to r e a c t  demand e x h i b i t e d by mortgagors.  nature  o f the mortgage market.  data., the b e h a v i o u r o f the mortgage market Guttentag,  to r e a c t  the  Mortgage demand i s c o n s i d e r e d  i n a c o u n t e r c y c l i c a l manner i n comparison to the bond market,  o f the r e s i d u a l  to  Because of the  because  lack o f  available  f o r existrimg housing was assumed by  i n a s i m i l a r manner to t h a t o f the i n s t i t u t i o n a l  mortgage  2 market. The c o u n t e r c y c l i c a l h y p o t h e s i s would suggest t h a t d u r i n g p e r i o d s o f i n the c a p i t a l  markets,  t h a t the p r i c e o f housing would f a l l  rationing  i n response to  the  3 l a c k o f demand.  Evidence by Hamilton  indicates  t h a t the p r i c e o f housing c o n -  t i n u e d to r i s e d u r i n g p e r i o d s o f i n c r e a s i n g i n t e r e s t  This c o n f l i c t  of  theory a n d . o b s e r v a t i o n suggests t h a t the study o f housing p r i c e s b e h a v i o u r  in  relation  to the mortgage market  f o r e x i s t i n g housing i s one worthy o f  The s u b j e c t matter i s important housing-mortgage l i t e r a t u r e , capital history,  to the mortgage the mortgage  rates.  not only because i t  but because the need today  f i n a n c e area i s c r u c i a l .  funds s u p p l i e d to the market  fills  examination.  a void in  (1976) to s u p p l y  For the f i r s t have exceeded  time i n  the additional contemporary  (absolutely)  4  5 the requirements  o f the bond market.  the need to meet t h i s  Such demands are expected to c o n t i n u e and  demand e f f i c i e n t l y  will  be the c e n t r e o f f u t u r e  political  -  3  institutional  dilemmas.  Hence the s u b j e c t matter i s not o n l y t i m e l y  from a  t  contemporary need v i e w p o i n t ,  but i t  i s unique to the housing-mortgage  market  literature.  PURPOSE OF STUDY  1.2  The purpose of t h i s d i s s e r t a t i o n w i l l  be to model the mortgage l e n d i n g  w i t h i n the market f o r e x i s t i n g housing and note the e f f e c t Such a study w i l l as n a t i o n a l ,  and in a d d i t i o n the study w i l l  housing markets. role  n e c e s s i t a t e examination of c a p i t a l  Research to date  on the p r i c e of h o u s i n g .  markets which are r e g i o n a l , as wel  examine the r e g i o n a l  nature of  stitutional  has d e a l t with two sources of f u n d s , the  lenders and government a g e n c i e s .  the complete mortgage market must i n c l u d e the The f i r s t  The s p e c i f i c a t i o n  (private)  Virtually  in-  However, complete s p e c i f i c a t i o n of (private) non-institutional  step in the development of the model t h e n , i s to s p e c i f y a l l  the t o t a l mortgage  the  has centered on the new housing market and the  of lenders who f i n a n c e the mortgages to support t h i s market.^  of t h i s mortgage market  relationship  lenders.  subsets of  market.  no r e s e a r c h  7  has been d i r e c t e d to d e s c r i b i n g the r e a c t i o n of  e x i s t i n g housing market to changes i n vacancy r a t e s  the  and changes i n i n t e r e s t  rates.  Because of the l a c k of r e c o r d e d r e s e a r c h i n mortgage market f o r e x i s t i n g h o u s i n g , it  i s necessary to e s t a b l i s h b a s i c d i m e n s i o n s , v a r i a t i o n  effects  i n the market f o r e x i s t i n g h o u s i n g .  and p o s s i b l e s u b s t i t u t i o n  A second step i n the development  the model then r e q u i r e s a d e s c r i p t i o n of the components o f the mortgage  of  market  f o r e x i s t i n g housing to the above f o r c e s . The d e r i v e d demand and s u p p l y model developed to model the flow of mortgage Q  funds i n the market f o r e x i s t i n g housing i s patterned Clauretie.9 market  The e f f e c t  i s noted.  a f t e r t h a t of Muth  and  on housing p r i c e s due to s u b s t i t u t i o n i n the above  Proper s p e c i f i c a t i o n of the c r e d i t  rationing variable  is  4  crucial  to the t e s t i n g o f the model b e c a u s e . o f the problem o f measuring changes i n  interest refers  rates  to the  i n the mortgage market. r a t i o n i n g by p r i c e , i . e . ,  price rationing  refers  to-value, ratios .  Price rationing  in t h i s  the mortgage i n t e r e s t  dissertation  r a t e ; whereas non-  to r a t i o n i n g by p r i c e and n o n - p r i c e f a c t o r s  A s p e c i a l purpose o f t h i s  impact on the measurement.of the mortgage  dissertation will  r a t e by funds flow  such as l o a n -  be to note  the  i n t h e market  for  existing housing.  1.3  OVERVIEW The o r g a n i z a t i o n  just  outlined.  nature  of this  The s t y l e  dissertation, follows  Chapter III  Chapter II  develops a c l a s s i f i c a t i o n system which d e l i n e a t e s  system, a d e s c r i p t i v e exploration  Chapter  the  p r o v i d e s a survey o f the background  o f the mortgage market f o r both new and e x i s t i n g h o u s i n g .  o f gross mortgage flows  from the purposes  o f the d i s s e r t a t i o n has been adapted t o r e f l e c t  of the problem p r e s e n t e d .  literature.  directly  From t h i s  o f the d i m e n s i o n , v a r i a b i l i t y  and  subsets  classification substitutability  i n the market f o r e x i s t i n g l i h o u s i n g i s made p o s s i b l e i n  IV.  The d e r i v e d demand and supply model f o r mortgage  f i n a n c i n g i n the market  f o r e x i s t i n g housing developed i n Chapter V i n c o r p o r a t e s the observed s h i p s o f Chapter IV  into  types o f housing markets  the model.  The model i s t e s t e d e m p i r i c a l l y  i n Chapter V I .  relationin  two  Excess demand p e r i o d s i n the housing  market are denoted as p e r i o d s i n which housing p r i c e s i n c r e a s e d ; whereas the excess s u p p l y p e r i o d s are denoted by d e c r e a s i n g housing p r i c e s . Chapter VII  notes the impact t h a t the s o u r c e s o f funds o f the market  e x i s t i n g housing have on the narrow amplitude VIII p o l i c y i m p l i c a t i o n s  and f u r t h e r  o f mortgage r a t e s .  avenues o f study are  In  outlined.  for  Chapter  5  Footnote References - Chapter  I  1.  J . Guttentag. "The Short C y c l e i n R e s i d e n t i a l Economic Review, June 1961, pp. 275-98.  2.  Authors who have suggested t h a t the t o t a l mortgage market r e a c t s i n a comparable manner to the new housing market i n c l u d e : "Disequilibrium pp. 207.-230.  C o n s t r u c t i o n , " American  (a)  R.C. F a i r . A p r i l 1972,  (b)  R . C . F a i r and D.M. J a f f e e . "Methods o f E s t i m a t i o n f o r Markets i n D i s e q u i l i b r i u m , " E c o n o m e t r i c a , V o l . 40, No. 3 , May 1972, pp. 497-514.  (c)  Guttentag,  (d)  D. Huang. "The Hort-Run Flows of Nonfarm R e s i d e n t i a l E c o n o m e t r i c a , A p r i l 1966, pp. 433-59.  op. c i t . ,  p.  i n Housing M o d e l s , " J o u r n a l o f  Finance,  276. Mortgage  Credit,"  •'3.;.  S.W. H a m i l t o n . "Housing P r i c e Index P a p e r , " Unpublished p a p e r , U n i v e r s i t y of B r i t i s h C o l u m b i a , 1974), pp. 1-33.  4.  J . Evans. "The R e s i d e n t i a l Mortgage Market i n Canada: Market S t r u c t u r e I n s t i t u t i o n a l B e h a v i o u r , " Unpublished p a p e r , (Vancouver: U n i v e r s i t y of B r i t i s h Columbia, 1974), p. 19.  5.  T h i s phenomena in context i s not s u r p r i s i n g g i v e n t h a t now (1976) a l a r g e number of r e q u i r e d r e f i n a n c i n g of the f i v e y e a r c a l l s i n t r o d u c e d by l e n d e r s i n the l a t e 1960's has o c c u r r e d . Second, the p r i c e of housing has i n c r e a s e d r a p i d l y i n the past f i v e y e a r s so as to r e q u i r e g r e a t e r amounts of c a p i t a l f o r r e f i n a n c i n g and i n i t i a l m o r t g a g i n g .  6.  Authors who have d e a l t  with the  (Vancouver:  and  new housing market i n c l u d e :  (a)  W. A l b e r t s . "Business C y c l e s , R e s i d e n t i a l Mortgage M a r k e t , " The J o u r n a l of P o l i t i c a l 263-81.  (b)  T.M. Clauretie. " I n t e r e s t R a t e s , The Business Demand f o r Funds and the R e s i d e n t i a l Mortgage Market: A S e c t o r i a l Econometric S t u d y , " Journal of F i n a n c e , Dec. 1973, pp. 1313-1326.  (c)  M. Evans. "Investment i n R e s i d e n t i a l C o n s t r u c t i o n , " Macroeconomic A c t i v i t y , (New York: Harper and Row, 1969), C h . 7.  <(i'dy • J t ' - G u ' M e n t a g . "Credit A v a i l a b i l i t y , Southern Economic J o u r n a l , 1960, pp. (e)  L . B . Smith.  C o n s t r u c t i o n C y c l e s and the Economy, June 1962, pp.  I n t e r e s t Rates and Monetary 219-28.  Policy,"  "A Model of Canadian Housing and Mortgage M a r k e t , " J o u r n a l  6  of P o l i t i c a l (f)  7.  8.  Economy, September - October 1969,  L . B . Smith and G.R. S p a r k s . "The I n t e r e s t S e n s i t i v i t y of Canadian Mortgage F l o w s , " The Canadian J o u r n a l of Economics, V o l . 3 , August 1970, pp. 407-21.  S t u d i e s and estimates o f the s i z e of the e x i s t i n g housing markets can be found i n : (a)  A . F . Eger. "Lending P a t t e r n s of F i n a n c i a l I n s t i t u t i o n s of G r e a t e r Vancouver Regional D i s t r i c t , " P r e l i m i n a r y working p a p e r , (Vancouver: U n i v e r s i t y of B r i t i s h C o l u m b i a , 1974).  (b)  R.M. F i s h e r . "Monetary P o l i c y " : Its r e l a t i o n to Mortgage Lending and Land Economics," Land Economics, V o l . 45, November 1969, pp. 418-24.  (c)  J . Poapst. R e s i d e n t i a l Mortgage Market'. Working paper prepared by the Royal Commission of Banking and Finance Ottawa, 1962.  R. Muth. "The Demand f o r Non-Farm H o u s i n g , " i n the Demand f o r Durable Goods, e d . by A . H a r b e r g e r . ( C h i c a g o : The U n i v e r s i t y of Chicago P r e s s ,  T960T, pp. 29-56. 9.  pp. 795-816.  C l a u r e t i e , op. c i t . ,  p.  22.  7  CHAPTER  II  BACKGROUND LITERATURE SURVEY  2.1  SUMMARY OF LITERATURE REVIEW  2.2  HOUSING AND MORTGAGE MARKET SPECIFICATION: 2.2.1  2.2.2  2.3  Countercyclical  Hypothesis and Demand C o n d i t i o n s  2.2.1.1  Business Demand  2.2.1.2  Stable  Countercyclical  A NATIONAL VIEW  Inelasticity  Demographic  Conditions  Hypothesis and Supply C o n d i t i o n s  2.2.2.1  Institutional  Mortgage  Lending Behaviour  2.2.2.2  Institutional  C o n s t r u c t i o n Lending Behaviour  2.2.2.3  Non-Institutional  2.2.2.4  E x i s t i n g Housing Market Response  Lending Behaviour  HOUSING AMD MORTGAGE MARKET SPECIFICATION: 2.3.1  Mortgage Market  2.3.2  Regional  Risk  Structure  Factors  A REGIONAL VIEW  8  2.1  SUMMARY OF LITERATURE REVIEW Review of the  literature  i n d i c a t e s t h a t c o n c l u s i o n s r e g a r d i n g mortgage and  housing c y c l e s depend upon the of types of l e n d e r s aggregation  s p e c i f i c a t i o n of the mortgage market  (institutional  (national,  r e g i o n a l , or l o c a l ) .  response by the mortgage market market  or n o n - i n s t i t u t i o n a l )  (Guttentag  being s p e c i f i e d as i n s t i t u t i o n a l  aggregated d a t a .  If  regional  sector is s u f f i c i e n t l y  large,  basis.  as being based on  differences exist  Virtually  and i f  A secondary focus of t h i s  for existing  infers  institutional  t h a t n e a r - b a n k s , who are not r e g u l a t e d  in a pattern  simply d e s c r i b i n g reaction.  l e n d i n g r o l e of the rates.  Whereas the  banks and counter-  l e n d e r s , the Gurley-Shaw h y p o t h e s i s  by monetary a u t h o r i t i e s Significantly  may lend  different  of the near-banks were not evidenced i n a review of the  corded e x p e r i e n c e s i n Canada and the United S t a t e s . eliminated  as a p o s s i b l e reason why the  existing  indicates,  from t h a t recorded on a n a t i o n a l  i n c o n s i s t e n t with t h a t of the banks;  lending patterns  non-institutional  h o u s i n g , nor t h e i r  review examines the  response i s based on a l l  mortgage  of the Canadian mortgage data  near-banks d u r i n g p e r i o d s of i n c r e a s i n g i n t e r e s t cyclical  of  nationally  the p r i v a t e  no r e s e a r c h has been undertaken  the magnitude o f r e g i o n a l markets  as by l e v e l  h y p o t h e s i s ) depends on the  then the response of the housing market may d i f f e r institutional  terms  The concept of a c o u n t e r c y c l i c a l  as well  as a review  as w e l l  in  re-  The near-banks can be  housing market does not  react,  i n a manner s i m i l a r to the new housing market. As demand f o r the mortgages i s a d e r i v e d demand, the f o c u s e s on requirements  l i t e r a t u r e review  from the demand s i d e t h a t c o n d i t i o n s the  to r e a c t on a c o u n t e r c y c l i c a l b a s i s .  S t a b l e growth  and income are the n e c e s s a r y p r e r e q u i s i t e s  housing market  in p o p u l a t i o n ,  f o r such a r e s p o n s e .  also  migration,  9  2.2  HOUSING AND MORTGAGE SPECIFICATION:  A NATIONAL VIEW  The l i t e r a t u r e survey on the c y c l i c a l behaviour of the mortgage begins at a n a t i o n a l  level.  C o n d i t i o n s necessary f o r the c o u n t e r c y c l i c a l  phenomena of the mortgage market are reviewed. the s u r v e y .  markets  In approaching the review  A regional  overview completes  i n t h i s manner, the e f f e c t  of  aggregation  may be i s o l a t e d . 2.2.1  C o u n t e r c y c l i c a l Hypothesis and Demand C o n d i t i o n s  Guttentag^ institutional  e s t a b l i s h e d the h y p o t h e s i s t h a t mortgage c r e d i t lender  (banks,  life  i s s u e d by  i n s u r a n c e companies and t r u s t s )  is a residual.  Guttentag assumed a f i x e d supply of funds to be a l l o c a t e d between mortgages and 2  bonds.  He reasoned t h a t because of economies of s c a l e , b u s i n e s s demand was  satisfied,  then mortgagors obtained what was l e f t .  Guttentag  mortgage borrowing was c o u n t e r c y c l i c a l to b u s i n e s s l e n d i n g . on the f a c t  first  then concluded t h a t He based his c o n c l u s i o n  that:  "movements i n the net increment to mortgage debt and to c o r p o r a t e s e c u r i t i e s ( i n c l u d i n g e q u i t i e s ) o u t s t a n d i n g . . . are v i r t u a l l y m i r r o r images of each other. We can r e j e c t out o f hand the p o s s i b i l i t y t h a t demands f o r i n v e s t a b l e funds by c o r p o r a t i o n s and by mortgage borrowers are s u b j e c t to independent i n f l u e n c e s which happen t o be o p p o s i t e in t h e i r e f f e c t s . The c h a r t suggests i n s t e a d an o r g a n i c i n t e r c o n n e c t i o n between the p r o c e s s e s of f i n a n c i a l c o r p o r a t i o n s through s e c u r i t y i s s u e s and f i n a n c i n g home purchases through the c r e a t i o n of mortgage debt."3 The s t r o n g n e g a t i v e r e l a t i o n s h i p between the flows of new mortgages and c o r p o r a t e bond i s s u e s formed the b a s i s of the c o u n t e r c y c l i c a l t h e o r y . rates  i n c r e a s e d , mortgage l e n d i n g d e c r e a s e d .  countercyclical relationship more  As  Mortgage l e n d i n g was s a i d to be  because of the above r e l a t i o n s h i p .  Evans^ presented  the  between mortgage investment and the business c y c l e (Graph  definitively.  interest  2.1)  10 Total credit available  s  G.N.P. r e f e r e n c e  cycle  B u s i n e s s investment demand  Mortgage investment  C  i n c r e a s i n g //A | /intere'st rates y l /  decreasing ''/// interest rates I ' / . , Time  Graph 2 1  2.2.1.1  C o u n t e r c y c l i c a l n a t u r e o f mortgage i n v e s t m e n t r e l a t i v e t o a Gross N a t i o n a l P r o d u c t r e f e r e n c e c y c l e and b u s i n e s s c y c l e .  B u s i n e s s Demand I n e l a s t i c i t y  The f i x e d s u p p l y o f funds was assumed by G u t t e n t a g t o be a l l o c a t e d between mortgages  and bonds.  Demand f o r mortgages was assumed t o be h i g h l y e l a s t i c t o  changes i n i n t e r e s t r a t e s , whereas demand f o r bonds was assumed t o be i n e l a s t i c . B u s i n e s s demand was deemed t o be i n s e n s i t i v e t o i n c r e a s e d b o r r o w i n g c o s t s because of r e l a t i v e l y minor p r o p o r t i o n o f b o r r o w i n g t o t o t a l  c o s t s , t h e s h o r t term  o f t h e b o r r o w i n g and l a s t l y the a b i l i t y o f b u s i n e s s t o f r e q u e n t l y on t o t h e consumer. of p o s t - w a r  nature  pass t h e c o s t s  S p a r k s 0 i l l u s t r a t e d t h e same c o n c e p t i n h i s i n v e s t i g a t i o n  i n t e r m e d i a r i e s as can be seen i n Graph 2 . 2 . A r i s e i n income causes  both s c h e d u l e s t o s h i f t upward from ( 1 ) t o ( 2 ) . c o r p o r a t e demand.  The g r e a t e r e f f e c t  i s f e l t on  The r e s u l t i s a s h i f t away from mortgages t o t h e bond  market.  n  (2)  Credit terms  (1 )  (2) (I)  Total Supply C o r p o r a t e bonds  Graph 2.2  Alberts  6  A l l o c a t i o n of  indirectly  mortgage f l o w s .  Mortgage funds  Funds between Mortgages and Bonds.  e x p l a i n e d the  c o u n t e r c y c l i c a l phenomenon by o b s e r v i n g  He noted t h a t t h e r e was a high c r o s s e l a s t i c i t y  mortgages w i t h r e s p e c t to y i e l d s on competing investments Alberts' inflows  evidence r e l i e d  on s e v e r a l data s e r i e s :  by l i f e  i n s u r a n c e companies.  and commitments r o s e i n r e l a t i o n  percentage of  7  between r e t a i n e d  He noted t h i s  over a p e r i o d o f t i m e .  committed t o f u n d i n g a p r o j e c t  r e q u e s t s and applications  of b u s i n e s s demand difference  i n the near f u t u r e of non-  b u s i n e s s demand may not be i n e l a s t i c from the r e s u l t o f u s i n g committed  Clauretie  suggested t h a t i f  l e s s s e n s i t i v e to  for lines  b u s i n e s s demand was  (both on a s h o r t and long term f i n a n c i n g  b u s i n e s s s e c t o r would appear  These  t h e s i s of a c o u n t e r c y c l i c a l mortgage market.  e a r n i n g s and expected e x p e n d i t u r e s  businesses.  institutional  He measured b u s i n e s s demand by the  reasons suggested by S p a r k s , but r a t h e r of c r e d i t  flows,  u s i n g an e c o n o m e t r i c approach noted the e f f e c t  on the a l l o c a t i o n o f mortgage f u n d s .  financial  Institutional  lenders.  to an i n c r e a s i n g mortgage t o bond y i e l d .  p r o v i d e d the b a s i s f o r A l b e r t s '  Clauretie  then the  on the p a r t of  i n v e s t e d i n home mortgages; FHA a p p l i c a t i o n s and a p p r a i s a l  new commitments  results  the  o f demand f o r  increases in  basis)  interest  12  rates.  T h i s l a t e r evidence would appear not to change the behaviour  earlier  by Sparks and G u t t e n t a g ,  the  inelasticity  of b u s i n e s s demand.  as t o the c o u n t e r c y c l i c a l market s u b j e c t  suggests a d i f f e r e n t  nature  reason as t o  should be noted t h a t these  observations  o f the mortgage market were observed i n a mortgage R e s t r i c t i o n s on s a v i n g s and loan companies  s a v i n g s banks t o lend o n l y on r e s i d e n t i a l  caused the c o u n t e r c y c l i c a l  noted by G u t t e n t a g .  property  c o u l d have  Subsequent r e s e a r c h by  g  o 0  nature  It  to d e p o s i t r a t e c e i l i n g s .  as w e l l as mutual  Smith  but r a t h e r  observed  and Brady , r e v e a l  conflicting  r e s u l t s as to the e f f e c t  of the  interest  rate c e i l i n g s . 2.2.1.2  S t a b l e Demographic C o n d i t i o n s  The i n e l a s t i c i t y  of b u s i n e s s demand assumes t h a t the mortgage demand s c h e d u l e  f o r funds i s s t a b l e . relatively  A l b e r t s ^ noted t h a t the demand schedule f o r  s t a b l e over the c o u r s e of each r e c e s s i o n and r e c o v e r y .  commonly accepted t h a t demand v a r i a b l e s (and i n the case of r e g i o n a l these v a r i a b l e s post-war  funds was  models, migration)  have no e f f e c t  decades i t  such as m a r r i a g e s ,  has become common p r a c t i c e  household  change r e l a t i v e l y  from a r e g r e s s i o n v i e w p o i n t .  It  is formation  slowly.  In f a c t  Often  during  the  to i g n o r e the demand f a c t o r s  and  s i m p l y r e l y on the supply r e s p o n s e . ^ 12 However, example, a trend  t h e r e i s , a grave danger i n t h i s  i n h i s review  type o f a p p r o a c h .  of the h o m e - b u i l d i n g e x p e r i e n c e ,  l i n e t o o b t a i n a remarkably  predictive  ex p o s t , he was a b l e t o apply i n p r e d i c t i n g  relied  Swan  significantly  s e r i e s o f housing s t a r t s  the 1966  credit  crunch.  of the same r e g r e s s i o n t o a subsequent r e c e s s i o n (1969) r e q u i r e d adjustment  to the s e r i e s before s u f f i c i e n t  cannot always  be assumed to be  elastic.^  3  for  predictabilityrwould  on  which,  Application  a mechanical occur.  Demand  13  2.2.2  C o u n t e r c y c l i c a l Hypothesis and Supply C o n d i t i o n s  2.2.2.1  Institutional  In r e v i e w i n g hypothesis  the  Mortgage Lending Behaviour  supply c o n d i t i o n s , i t  implies that f i n a n c i a l  increasing interest  rates.  should be noted t h a t the c o u n t e r c y c l i c a l  institutions  react  i n a manner s i m i l a r  The G u r l e y - S h a w ^ hypothesis r e j e c t s  The Gurley-Shaw h y p o t h e s i s was developed as an e x p l a n a t i o n of monetary p o l i c y a d m i n i s t e r e d hypothesis i s important that t h i s  through the  near-banks.  by the monetary a u t h o r i t i e s , The reduced l i q u i d i t y  The Gurley-Shaw  the  impact of t h i s  of the  l e n d i n g area f o r the  banks m a n i f e s t s  in their  banks.  l e n d e r s i n t o two g r o u p s ,  t h a t when c r e d i t  restriction  marginal  itself areas.  Because of t h e i r  on the mortgage s u p p l y i s s i g n i f i c a n t and i n t e r e s t  rates  reduced.  p a r t of the c r e d i t  restriction  As mortgage and bond r a t e s  Mortgage  on mortgages  a b l e to r a i s e t h e i r  deposit rates  (absolutely),  to a t t r a c t f u n d s .  long term d e b e n t u r e s , then the near-banks  which to make new mortgage  loans.  Hence i t  The i m p l i c a t i o n  of  lending the  is  impact  increase.  is  are  not  the near-banks  are  They i s s u e debentures  for  If  •  the d e p o s i t s  have a secure source of funds on  i s p o s s i b l e t h a t near-banks can be  i s s u i n g new mortgages in p e r i o d s o f i n c r e a s i n g i n t e r e s t f o r c e d to withdraw.  by the  Because they  liquidity  cash and use the funds to f i n a n c e mortgages and bond i n v e s t m e n t s . are  restricted  in a reduction  s i z e however,  process, their  increase  is  is f e l t f i r s t  The n e a r - b a n k s , Gurley-Shaw h y p o t h e s i z e , r e a c t d i f f e r e n t l y . not a d i r e c t  impact  f o r e x i s t i n g housing  institutional  This hypothesis states  l e n d i n g by the banks, p a r t i c u l a r l y a marginal  ineffectiveness  lenders.  The Gurley-Shaw h y p o t h e s i s breaks the the banks and the  t h i s assumption.  to the c o u n t e r c y c l i c a l argument because of the  h y p o t h e s i s may have on the mortgage market  f i n a n c e d by c o n v e n t i o n a l  banks.  banking system.  of the  to  r a t e s when the banks  here i s t h a t the c o u n t e r c y c l i c a l nature  are of  the  14  mortgage market i s e i t h e r cyclical  reduced in amplitude or s h i f t e d from a s t r i c t  p a t t e r n because of the  Evidence suggests t h a t the the s t r i c t  lending patterns  of the  near-banks.  impact o f the Gurley-Shaw h y p o t h e s i s i s minimal  context of the f i n a n c i a l  institutional  setting.  funds.  mortgages never o c c u r s .  i n a Canadian r e g i o n a l  t a n t i a t e s Boorman and P e t e r s o n . ( G . V . R . D . ) , d u r i n g the  commit  Hence the expected s h i f t  E x p l i c i t examination o f c o n v e n t i o n a l  mortgage l e n d i n g p a t t e r n s  institutional  to  (institutional) mortgage  In the G r e a t e r Vancouver Regional  subs-  District,  1957 p e r i o d of c r e d i t r e s t r a i n t , near-banks evidenced 1g  r e d u c t i o n i n l e n d i n g comparable to t h a t of the banks. t h a t the near-banks w i l l  Hence i t  can be expected  lend i n a manner comparable to the banks, although  magnitude o f the change may vary because of the nature Institutional  A related  decision,  the mortgagor i s p r i c e d out  of the market because o f i n e l a s t i c b u s i n e s s demand.  2.2.2.2  lend-long  i n savings must occur before a mortgage manager w i l l  Before these s h i f t s can become s i g n i f i c a n t ,  in  Boorman and P e t e r s o n ^  argue t h a t because near-banks are f a c e d with a b o r r o w - s h o r t , significant shifts  counter-  of the  institutionJ  the 7  C o n s t r u c t i o n Lending Behaviour  i s s u e , which i n v o l v e s the near-banks and banks, because of  l e n d i n g p r e f e r e n c e s concerns the w r i t i n g i n the l a t e f i f t i e s ,  their  supply of s h o r t term c o n s t r u c t i o n c r e d i t .  Klaman  noted:  " . . . d e s p i t e the i n t e r d e p e n d e n t r e l a t i o n s h i p between c o n s t r u c t i o n and permanent f i n a n c i n g , the s u p p l i e r s of each type of c r e d i t operate i n f i n a n c i a l markets with d i f f e r e n t c h a r a c t e r i s t i c s . The d i s p a r i t y can lead to l a c k of s h o r t - t e r m c o n s t r u c t i o n f i n a n c i n g even when permanent t a k e - o u t commitments have been n e g o t i a t e d . . Such a s i t u a t i o n u s u a l l y occurs d u r i n g p e r i o d s o f heavy demands f o r s h o r t - t e r m commercial bank credit." 1 8  Fisher ^, 1  however, noted t h a t g e n e r a l l y  s h o r t term f i n a n c i n g was a v a i l a b l e  long term f i n a n c i n g .  However the concept i s not to be d i s m i s s e d l i g h t l y .  so o f t e n the c a s e ,  i s some unique u n d e r l y i n g supply f a c t o r ,  it  be i t  the  with  As i s l a c k of  15  s h o r t term f i n a n c i n g or whatever,  t h a t c o n s t r a i n s the c o u n t e r c y c l i c a l  Knowledge of the s p e c i f i c c o n s t r a i n t  is important.  Unique f a c t o r s ^  the c o u n t e r c y c l i c a l response on s p e c i f i c o c c a s i o n s , several  reaction.  rather  may  restrict  than c o n t i n u a l l y  over  cycles.  2.2.2.3  Non-Institutional  Guttentag's institutional  Lending Behaviour  countercyclical  hypothesis implies  (implicitly)  sources of funds i n the mortgage market r e a c t  to t h a t of the  institutions.  Reference to the  l i t e r a t u r e i s fragmentary.  to the  Royal Commission on Banking and Finance i n 1962  b a s i s ) t h a t the  was 47% of the t o t a l . ^ to 1972  percent of the t o t a l  personal  provincial  percent of t o t a l  provincial  they do i n d i c a t e  that a large  sources of  Poapst in h i s  indicated the  49.0,  (on a gross  s e c t o r and 4 2 . 1 , While the f i g u r e s  and  33.9,  flow  market 1970  43.8 and  are not  volume of mortgages are f i n a n c e d o u t s i d e  31.7  comparable, the  sector. data  in this  important  o f housing p r i c e s to changing i n t e r e s t  Hence movement of t h i s  rates  s e c t o r , estimates  of  remain very much i n  l a r g e uncharted market, which c o u l d be c o n t r a r y  to  c o n t i n u e d to r i s e d u r i n g p e r i o d s of r a t i o n i n g  i n the c a p i t a l  that  markets.  E x i s t i n g Housing Market Response  A second i m p l i c i t  assumption i s found i n G u t t e n t a g ' s  theory.  Guttentag  assumed t h a t : "the e x i s t i n g mortgage a c t i v i t y residential construction  ...  moves i n the  same d i r e c t i o n as new  the  doubt.  commonly assumed, c o u l d p r o v i d e c l u e s as t o reasons why the p r i c e of housing  2.2.2.4  funds  report  t o t a l mortgage  sector.providing 56.7,  sector.  similar  Mortgage Loans R e p o r t s ^ from  conventional  N.H.A.  Given t h a t t h e r e i s l i m i t e d reaction  source of funds f o r  The O n t a r i o R e a l t y  i n c l u s i v e , s h o w the  institutional  In a Canadian c o n t e x t ,  non-institutional  i n a manner  non-institutional  i n the  t h a t non-  16  In t h i s  area as i n the preceding s e c t i o n , l i t t l e  to the movement of  c o n c r e t e evidence e x i s t s as  the mortgage market of e x i s t i n g h o u s i n g .  Either  Guttentag's  assumptions must be accepted o r fragmentary e v i d e n c e must be r e l i e d upon. C l a u r e t i e ^ and J a f f e e ^ 6 a l l  d e a l t with the t o t a l  which p r e d i c t mortgage flows from a v a r i e t y  Huang^;  mortgage market i n t h e i r models  of aggregated bases.  The impact of  a mortgage market on e x i s t i n g housing being p o s t i v e l y c o r r e l a t e d t o i n t e r e s t was not e x p l o r e d .  The p o s s i b i l i t y then of a c y c l i c a l mortgage market r e a c t i n g  on a c o n t r a r y b a s i s to the c o u n t e r c y c l i c a l h y p o t h e s i s was not c o n s i d e r e d . e x i s t i n g market i s assumed to move i n the manner Guttentag s u g g e s t e d . r e c o g n i t i o n of the e x i s t i n g housing market (on a r e g i o n a l H a m i l t o n , Mao e t a l . ^ related  it  definite the f i r s t  7  housing markets,  i.e.,  Here e x p l i c i t  The  Direct  b a s i s ) was noted by  These authors i n t r o d u c e d the concept of t u r n o v e r ^  to the business c y c l e .  explicit  rates  8  and  r e c o g n i t i o n was given to two  the new and the o l d .  The above paper marks  3  attempt to i n c o r p o r a t e the response of two d i s t i n c t ,  yet  •3(1  r e l a t e d markets. turnover housing.  Schaaf  i n d i r e c t l y examined the concept of r e g i o n a l  i n h i s examination of changes i n housing p r i c e s i n both new and e x i s t i n g S c h a a f ' s a t t e n t i o n was devoted to p r i c e change and o n l y a general  of turnover  i n the e x i s t i n g housing market i s  Fragmentary evidence i s f u r t h e r basis).  housing  idea  obtained.  given by F i s h e r  F i s h e r r e p o r t i n g over the p e r i o d 1960 -  3 1  (on an aggregated  national  1966 noted t h a t the r a t i o  of  e x i s t i n g housing to t o t a l  housing ranged from 65 p e r c e n t in 1960 to a maximum  of 72% i n 1962 and 1965.  More casual r e f e r e n c e s can be found in Winger who  estimated  that:  "20 - 25 percent of the demand f o r mortgage funds (are deemed) to come from the demand f o r funds i n the e x i s t i n g housing market."32 In f a c t  F i s h e r ' s f i g u r e s , i n d i c a t e Winger's e s t i m a t e s to be i n c o r r e c t .  Reference  could have been made to P o a p s t , S c h a a f ^ who g i v e somewhat more a c c u r a t e  estimates.  3 3  3  17  However the obvious p o i n t here i s t h a t the area of the e x i s t i n g housing market i s so p o o r l y d e v e l o p e d , t h a t general c o n t e x t s are of l i t t l e  value.  statements of magnitude, based on s p e c i f i c  No framework  e x i s t s which would p r o v i d e f o r a  b a s i s of a n a l y s i s of the mortgage market f o r e x i s t i n g h o u s i n g .  2.3  3 5  REGIONAL HOUSING AND MORTGAGE MARKET SPECIFICATION Much of the background r e s e a r c h i n c l u d e d i n t h i s  n a t i o n a l l y aggregated d a t a .  Emphasis on a r e g i o n a l  because p r i o r reasoning suggests t h a t r e g i o n a l rejection  review has r e s u l t e d housing market  is  evidence supports the n o t i o n t h a t r e g i o n a l mortgage markets do a c t institutional  of one r e g i o n compared to 2.3.1  Mortgage Market  Structure He reviewed the case of  c o n s t r u c t i o n responses to changes in n a t i o n a l  had g r e a t e r  local  mortgage c r e d i t r a t i o n i n g .  h i s h y p o t h e s i s t h a t areas s u p p l i e d by n a t i o n a l  variation  He mortgage  i n housing c o n s t r u c t i o n than those areas s u p p l i e d  mainly by a l o c a l or r e g i o n a l l y based mortgage markets. further  differently  another.  3  credit  Limited  predominance or the p e r c e i v e d r i s k by l e n d e r s  D i l b e c k ^ examined mortgage s t r u c t u r e .  was able to s u b s t a n t i a t e  important  v a r i a t i o n c o u l d account f o r a  of the c o u n t e r c y c l i c a l h y p o t h e s i s suggested by G u t t e n t a g .  depending on t h e i r  from  Gi11es and C u r t i s  examined the s t r u c t u r e of l o c a l mortgage markets and the e f f e c t  ment housing and f i n a n c e on r e g i o n a l  areas.  They concluded t h a t a l l  not share e q u a l l y i n F . H . A . and V . A . mortgages because of market  3 7  of g o v e r n -  r e g i o n s do  structure.  "People . . . l i v i n g i n areas dominated by s a v i n g s and loan a s s o c i a t i o n s w i l l not be a b l e to o b t a i n F . H . A . i n s u r e d loans as e a s i l y as people l i v i n g in areas where the bulk of l e n d i n g i s done by banks."38 From the above, i t i s important  can noted t h a t the s t r u c t u r e of r e g i o n a l mortgage markets  t o both the c o n s t r u c t i o n c y c l e and the mortgage  market.  18  2.3.2  Regional Risk F a c t o r s  Study of the v a r i a t i o n  in regional  For example B r a d y ^ examined c y c l i c a l 3  found t h a t r e g i o n a l He i n f e r r e d  mortgage markets variation  has been  of r e g i o n a l  initiated.  mortgage markets  imbalances p e r s i s t e d i n the housing c y c l e of 1956 and  the need f o r f u r t h e r  and  1957.  r e s e a r c h by c o n c l u d i n g t h a t :  " t h i s study has not attempted t o e v a l u a t e a l l o f the important f a c t o r s which go i n t o the a n a l y s i s o f r e g i o n a l housing c y c l e s and cannot be c o n s i d e r e d a complete s t u d y . ^ Regional  imbalances were analyzed by S c h a a f ^ who noted t h a t r e g i o n a l  in r e s i d e n t i a l  mortgage market  interest  i m p e r f e c t mortgage market may r e s u l t another.  rather  than being the r e s u l t  can occur because of v a r y i n g degrees of r i s k  Hence not o n l y market  r e g i o n a l markets  of an  from higher l e n d i n g r i s k s i n one r e g i o n  W i n g e r ^ concluded along a s i m i l a r v e i n and suggested t h a t  growth d i s p a r i t i e s regions.  rates,  differences  structure,  in  regional  different  but v a r y i n g degrees of r i s k g i v e  unique r e a c t i o n to changing i n t e r e s t  rates  W i n g e r ' s remarks are a p p r o p r i a t e as they set the stage f o r  i n the c a p i t a l  the markets.  the development of a  c l a s s i f i c a t i o n system of mortgages based on v a r y i n g degrees of r i s k as s h a l l d e s c r i b e d i n Chapter  III.  than  be  19  Footnote References - Chapter  "The Short C y c l e in R e s i d e n t i a l  II  1.  Guttentag,  2.  A . R . Winger. "An Economic Analyses o f Mortgages During P e r i o d s of Monetary Restraint: C h a r a c t e r i s t i c s and A c q u i s i t i o n s by L e n d e r s , " i n Ways to Moderate F l u c t u a t i o n s i n Housing C o n s t r u c t i o n . Board of G o v e r n o r s . Federal Reserve System, 1972, pp. 456-487.  3.  Guttentag,  "The Short C y c l e i n R e s i d e n t i a l  4.  M. Evans.  "Investment in R e s i d e n t i a l  5.  G. S p a r k s . "Economic A n a l y s i s of the Role of F i n a n c i a l I n t e r m e d i a r i e s in the Post-war R e s i d e n t i a l C y c l e , " Determinants o f Investment B e h a v i o u r , (New York: Columbia U n i v e r s i t y P r e s s , 1967), pp. 301-332.  6.  A l b e r t s , "Business C y c l e s , M a r k e t , " pp. 263-281.  7.  C l a u r e t i e , " I n t e r e s t R a t e s , The Business Demand f o r Mortgage M a r k e t , " pp. 1313-1325.  8.  L . B . Smith. "On the Economic I m p l i c a t i o n s on the Y i e l d C e i l i n g on Government Insured M o r t g a g e s , " The Canadian J o u r n a l of Economics, V o l . 33, August 1967, pp. 420-431.  9.  E . Brady. "A S e c t o r a l Econometric Study of the Postwar R e s i d e n t i a l M a r k e t , " The J o u r n a l o f P o l i t i c a l Economy, A p r i l 1967, pp. 147-58.  Residential  C o n s t r u c t i o n , " pp.  C o n s t r u c t i o n , " p.  C o n s t r u c t i o n , " p.  275-98.  279.  189.  C o n s t r u c t i o n C y c l e s and the  Funds and the  C o n s t r u c t i o n C y c l e s and  Mortgage  Residential  Housing  10.  W. A l b e r t s . "Business C y c l e s , R e s i d e n t i a l Mortgage M a r k e t , " pp. 263-281.  11.  Huang, "The Short Run Flows of Non-farm R e s i d e n t i a l pp. 433-59.  12.  C. Swan. "Homebuilding: A Review of the Economic A c t i v i t y . Brookings I n s t i t u t e .  13.  S. M a i s e l . "The R e l a t i o n s h i p of R e s i d e n t i a l F i n a n c i n g and Expenditures on R e s i d e n t i a l C o n s t r u c t i o n , " Conference on Savings and R e s i d e n t i a l F i n a n c i n g . Proceedings of U . S . Savings and Loan League. Chicago. 1965, p. 71.  14.  J . G . Gurley and D. Shaw. Money in a Theory of F i n a n c e . Brookings I n s t i t u t i o n 1960. Washington, D . C . A l s o see L i f e Insurance Companies F i n a n c i a l I n s t i t u t i o n s Commission of Money and C r e d i t . (New York: P r e n t i c e H a l l , 1964), pp. 233-243.  15.  J . T . Boorman and M.0. P e t e r s o n . " I n s t a b i l i t y of Savings Flows and Mortgage Lending by F i n a n c i a l I n t e r m e d i a r i e s , " Southern Economic J o u r n a l . 1973-74, pp. 297-312.  Mortgage  the  Credits,"  E x p e r i e n c e , " Brookings Papers on 1970, pp. 4 9 - 7 6 .  20  16.  E g e r , "Lending Patterns  of F i n a n c i a l  Institutions."  17.  L . B . Smith. The Postwar Canadian Housing and R e s i d e n t i a l Mortgage M a r k e t s . ( T o r o n t o : . U n i v e r s i t y y o f T o r o n t o P r e s s , 1974), p. 111. Smith n o t e s : :  " c o n s i d e r a b l e v a r i a b i l i t y e x i s t s in the i n t e r e s t s e n s i t i v i t y of the investment d e c i s i o n s of these i n s t i t u t i o n s , with c h a r t e r e d banks and l i f e ( i n s u r a n c e ) companies being most s e n s i t i v e , t r u s t companies n e x t , and mortgage loan companies l e a s t s e n s i t i v e . . . The r a n k i n g of these i n s t i t u t i o n s in terms of i n t e r e s t r a t e responsiveness i s not s u r p r i s i n g s i n c e i t i s c o n s i s t e n t with the t r a d i t i o n a l view t h a t i n s t i t u t i o n s w i l l be more r e s p o n s i v e to v a r y i n g economic c o n d i t i o n s , the f r e e r they are from l e g a l , l i q u i d i t y and t r a d i t i o n a l investment c o n s t r a i n t s . " 18.  S . B . Klaman. 'The Postwar R e s i d e n t i a l Mortgage Market." P r i n c e t o n U n i v e r s i t y P r e s s , 1961), p. 177.  19.  R. F i s h e r . " A v a i l a b i l i t y of C o n s t r u c t i o n C r e d i t f o r H o u s i n g , " i n Ways to Moderate F l u c t u a t i o n s i n Housing C o n s t r u c t i o n Board of G o v e r n o r s , Federal Reserve System, 1972, pp. 127-135.  20.  These f a c t o r s can be expanded beyond the i n s t i t u t i o n a l monetary sphere as s i m i l a r comments may be noted with r e s p e c t to l a b o r , m a t e r i a l and s e r v i c e d land i n p u t s . S m i t h , The Postwar Canadian H o u s i n g , p. 41 comments on these supply f a c t o r s .  21.  P o a p s t , R e s i d e n t i a l Mortgage Market, p. 165. Data was based on 1960 aggregate f o r Canada. Source o f data was C M . H . C . S t a t i s t i c s and C a i s s e s P o p u l a i r e s submission t o Royal Commission on Banking and Finance 1962.  22.  R e a l t y Mortgage Loans Newly R e g i s t e r e d in O n t a r i o 1969-72. Ontario Centre. Economic and S t a t i s t i c a l S e r v i c e s D i v i s i o n . Department of and Economics, Toronto 1974.  23.  Guttentag,  24.  D. Huang. "The Short Run Flows of Non-farm R e s i d e n t i a l pp. 433-59.  25.  C l a u r e t i e , " I n t e r e s t R a t e s , The Business Demand f o r Funds and the R e s i d e n t i a l Mortgage Market: A S e c t o r i a l Econometric, ;Study," J o u r n a l of F i n a n c e , Dec. 1973, pp. 1313-1326.  "The Short C y c l e in R e s i d e n t i a l  (Princeton:  C o n s t r u c t i o n , " p.  Statistical Treasury  276.  Mortgage  Credit,"  ;  26.  R . C . F a i r and D.M. J a f f e e . "Methods of E s t i m a t i o n f o r Markets i n D i s e q u i l i b r i u m , " Econometrica V o l . 40 No. 3. May 1972. pp. 497-514.  27.  S.W. Hamilton and J . T . Mao, et a l . "Turnover Rates i n M e t r o p o l i t a n Vancouver," Unpublished paper. (Vancouver: U n i v e r s i t y of B r i t i s h C o l u m b i a , 1971), pp. 1-31.  21  28.  Turnover d e f i n i t i o n T = cT •+ T N  (1 -  e  g  c  29.  = turnover  r a t e of new housing  r a t e of e x i s t i n g  = completions of y e a r t .  as f o l l o w s :  c)  where: T^ = t u r n o v e r T  was d e r i v e d  housing  i n y e a r t as a p e r c e n t of housing s t o c k at  R e c o g n i t i o n of these two markets (a)  end  goes back to b a s i c r e s e a r c h i n d i c a t e d  E.M. F i s h e r and R.M. F i s h e r . H o l t C o . , 1954), p. 210.  Urban Real  Estate.  (New York:  by:  Henry  :(b) v J . S . Duesenberry. Business C y c l e s and Economic Growth. (New York: M c G r a w - H i l l , 1958), pp. 135-165. Duesenberry.notes the dependence of new house c o n s t r u c t i o n on the e x i s t i n g s t o c k i n h i s d i s c u s s i o n of business c y c l e s . However, no e m p i r i c a l r e s e a r c h has been d i r e c t e d to the e x i s t i n g housing market. 30.  A . H . Schaaf. " E f f e c t of Federal Mortgage I n t e r e s t Rate P o l i c y and Supply of FHA-VA C r e d i t , " Review of Economics and S t a t i s t i c s , X L , November 1958. pp. 384-89.  31.  Fisher,  32.  A . R . Winger. of F i n a n c e .  33.  J . Poapst.  34.  A . H . Schaaf. " P r i c e Behaviour in E x i s t i n g House Markets A p p r a i s a l J o u r n a l , V o l . 37 ( A p r i l 1969), pp. 289-95.  35.  In an area r e l a t e d to the study of e x i s t i n g housing and mortgage markets s e v e r a l authors examine the use o f mortgage debt f o r n o n - r e a l p u r p o s e s . The most s i g n i f i c a n t c o n t r i b u t i o n s to t h i s area of study can be found i n :  36.  "Monetary  P o l i c y " , p.  421.  "Regional Growth D i s p a r i t i e s 1969, pp. 659-662. Residential  and the Mortgage M a r k e t , " J o u r n a l  Mortgage M a r k e t , Chapter  3. 1961-1966,"  (a)  A . I . Sommers and S . H . R h i n e . The New Dimension i n Mortgage Debt. T e c h n i c a l Paper No. 15. (New York: N a t i o n a l Conference B o a r d , 1972), pp. 7-20.  (b)  B.A. Gelb. Mortgage Debt f o r Non-Real E s t a t e P u r p o s e s . Research Report No. 548, (Ottawa: N a t i o n a l Conference B o a r d , 1972), pp. 1-83.  (c)  A.H. Meltzer. " C r e d i t A v a i l a b i l i t y and Economic D e c i s i o n s : Some Evidence from the Mortgage and Housing M a r k e t , " J o u r n a l of Finance 1974, pp. 763-777.  H. D i l b e c k .  "Responses of Local R e s i d e n t i a l  C o n s t r u c t i o n to changes  in  22  National C r e d i t C o n d i t i o n 1953-59," J o u r n a l of B u s i n e s s , V o l . 37, pp. 295-308.  1964,  37.  J . G i l l e s and C. C u r t i s . "The S t r u c t u r e of Local Mortgage Markets and Government Housing Finance Programs," J o u r n a l of F i n a n c e , September 1955, pp. 363-375.  38.  I b i d , p.  39.  E. Brady. "Regional C y c l e s o f R e s i d e n t i a l C o n s t r u c t i o n and the I n t e r r e g i o n a l Mortgage Market. 1954-59," Land Economics, February 1963, pp. 15-30.  40.  I b i d , p.  41.  A . H . Schaaf. "Regional D i f f e r e n c e s in Mortgage of F i n a n c e , V o l . 21, March 1966, pp. 85-94.  42.  A . R . Winger. 659-662.  375.  30.  "Regional  Growth D i s p a r i t i e s  Financing C o s t s , "  Journal  and the Mortgage M a r k e t , " pp.  23  CHAPTER  III  CLASSIFICATION OF TOTAL MORTGAGE MARKET  CLASSIFICATION OF SUB-MARKETS DEFINITIONS OF MORTGAGE MARKET 3.2.1  D e f i n i t i o n of P r i v a t e Vendor  Financing  3.2.2  D e f i n i t i o n of Assigned Mortgage  Financing  24  3.1  CLASSIFICATION SYSTEM OF MORTGAGE SUB-MARKETS The l i t e r a t u r e review has r e v e a l e d t h a t s p e c i f i c a t i o n of the mortgage  market  has been i n terms of c o n v e n t i o n a l l e n d e r s and the r o l e they play i n the new housing market.  C l a s s i f i c a t i o n , c o n s e q u e n t l y has r e f l e c t e d  this  specification.  This  1  c h a p t e r p r o v i d e s a c l a s s i f i c a t i o n system f o r the study of the e x i s t i n g mortgage market.  A c l a s s i f i c a t i o n system must r e f l e c t  species s t u d i e d .  c h a r a c t e r i s t i c s unique t o  the  In a n a l y z i n g the e x i s t i n g mortgage market the c l a s s i f i c a t i o n  system i s developed on the b a s i s of sources and uses of funds a v a i l a b l e mortgage f i n a n c i n g . housing s t r u c t u r e .  T h i s b a s i s of f i n a n c i n g i s then r e l a t e d  for  to the age of  T h i s c l a s s i f i c a t i o n system i s unique and i t  reflects  the  an  2 attempt to e s t a b l i s h a b a s i s from which f u r t h e r The c l a s s i f i c a t i o n system r e f l e c t s i n the term s t r u c t u r e of mortgages.  the r i s k - r e t u r n  loan-to-value  and a m o r t i z a t i o n  mortgages, f i n a n c e d by the  lenders.  are g e n e r a l l y used f o r r e n o v a t i o n and n o n - r e a l  is  explicitly  recognized.  risk-return  f o r example,  c l a s s as the  that  interest  p e r i o d s are l e s s c o s t l y than r e f i n a n c e d  same c o n v e n t i o n a l  source of funds p r o v i d e d by p r i v a t e  r e l a t i o n s h i p evidenced  This series i l l u s t r a t e s  new mortgages on new housing are i n a d i f f e r e n t rate,  r e s e a r c h might be l a u n c h e d .  estate  These l a t t e r purposes.  4  mortgages  Second,  the  vendor f i n a n c i n g and a s s i g n e d mortgages  T h i s type of l e n d e r then i s r e l a t e d  to source of funds  and age of d w e l l i n g . The c l a s s i f i c a t i o n system r e f l e c t s s a l e s and n o n - s a l e s m o t i v a t i o n  the use o f f u n d s .  Mortgages which  are i s o l a t e d and c l a s s i f i e d .  i s one which does not i n c l u d e a t i t l e t r a n s f e r .  reflect  A non-sales motivation  An example of use of funds i n a  n o n - t r a n s f e r case would occur should the mortgagor use the money to renovate a home, r e f i n a n c e a mortgage o r purchase a c a r . hand, r e s u l t s i n a t r a n s f e r  of t i t l e .  A s a l e of p r o p e r t y on the  other  T h i s s a l e s c l a s s i f i c a t i o n may i n v o l v e the  25  use of a s s i g n e d mortgages, c o n v e n t i o n a l Age of d w e l l i n g  is important.  and housing g r e a t e r follows  T a b l e 3.1  illustrates  Classification Number  vendor f i n a n c i n g .  Housing one y e a r o l d i s c o n s i d e r e d new housing  than one y e a r  recognized r i s k - r e t u r n  l e n d e r or p r i v a t e  is identified  patterns  as e x i s t i n g  housing.  This  pattern  noted above.  the type of market and sources of funds f o r each market.  Type of Market  Source of Funds  1  New mortgages on new housing  Conventional  2  New mortgages on new housing  C.M.H.C.  3  New mortgages on e x i s t i n g housing  Conventional  4  New mortgages on e x i s t i n g housing:;  P r i v a t e vendor financing  5  Refinanced mortgages on e x i s t i n g housing  Conventional  6  Assumed mortgages on e x i s t i n g houses  Mortgage debt held by p r e v i o u s mortgagor (iv  lenders  (i)  loans (ii) lenders  (.iii  T a b l e 3.1  3.2  lenders  C l a s s i f i c a t i o n system of mortgages by type of d w e l l i n g , type of f i n a n c i n g and s o u r c e o f f u n d s . Explanation of d e f i n i t i o n s are as f o l l o w s : (i) Conventional l e n d e r s i n c l u d e N.H.A. i n s u r e d mortgages, (ii) During p e r i o d of s t u d y , n e i t h e r N.H.A. or C . M . H . C . loans were a v a i l a b l e on e x i s t i n g h o u s i n g , (iii) N o n - s a l e s m o t i v a t e d , i . e . , r e f i n a n c e mortgages, (iv) Includes both p r i v a t e under f i n a n c i n g , c o n v e n t i o n a l and govern ment l e n d e r s as a p o s s i b l e source of o r i g i n a l f u n d i n g .  DEFINITIONS OF THE MORTGAGE MARKET Definitions  to in the  have been developed i n keeping with concepts commonly  l i t e r a t u r e as much as p o s s i b l e .  The f o l l o w i n g d e f i n i t i o n s  referred  will  be used  26  i n d e s c r i b i n g the mortgage markets throughout the remainder of t h i s 1.  Total  mortgage market  housing well  to new mortgages on new and e x i s t i n g  (source of funds i s both c o n v e n t i o n a l l e n d e r and government)  as r e f i n a n c e d mortgages  plus p r i v a t e 2.  i s equal  dissertation..  (source o f funds i s c o n v e n t i o n a l  as  lenders)  vendor f i n a n c i n g .  Mortgage market f o r e x i s t i n g housing i n c l u d e s a l l existing housing, i . e . ,  p o s s i b l e f i n a n c i n g on  new and r e f i n a n c e d mortgages as w e l l as  private  vendor f i n a n c i n g . 3.  New housing mortgage market (funds from c o n v e n t i o n a l  4.  includes a l l  new mortgages on new housing  l e n d e r s and government).  P r i v a t e vendor f i n a n c i n g a l t e r n a t e l y  i s c a l l e d the  agreement-for-sale  market. 5.  Total  extended mortgage market  i s equal to the t o t a l  mortgage  market  plus a s s i g n e d mortgages on e x i s t i n g h o u s i n g . 6.  Extended mortgage market on e x i s t i n g housing i s equal t o the mortgage market f o r e x i s t i n g housing plus a s s i g n e d mortgages on e x i s t i n g h o u s i n g .  3.2.1  D e f i n i t i o n o f P r i v a t e Vendor F i n a n c i n g  P r i v a t e vendor f i n a n c i n g or an a g r e e m e n t - f o r - s a l e in terms of purpose. i n the t r a n s f e r  i s s i m i l a r to a mortgage  An a g r e e m e n t - f o r - s a l e p r o v i d e s f o r a mechanism of exchange  of r e a l  property.  P r i v a t e vendor f i n a n c i n g i s best  illustrated  by a comparison with mortgage t r a n s a c t i o n . Three p a r t i c i p a n t s are a c t i v e i n a normal mortgage t r a n s a c t i o n i n v o l v i n g a s a l e of p r o p e r t y . f o r the mortgagor  The mortgagee  (conventional  lender)  p r o v i d e s the  financing  (borrower) who i n t u r n uses the f i n a n c i n g to purchase r e a l  p r o p e r t y from a vendor.  T r a n s f e r of t i t l e from vendor to mortgagor completes  27  the t r a n s a c t i o n and the mortgagee p l a c e s a l i e n a g a i n s t the t i t l e p r o p e r t y now i n the hands of the mortgagor.  on the  The vendor i s i n v o l v e d o n l y  until  the conveyancing i s complete. Private  vendor f i n a n c i n g i n v o l v e s two p a r t i c i p a n t s .  mortgagee.  The vendor accepts an a g r e e m e n t - f o r - s a l e  promises to pay the vendor ( i . e . , amortization  period.  the agreement.  the mortgagee)  The vendor i n t h i s  The vendor i s a l s o the  in which the mortgagor  monthly payments f o r a given  case a c t s as a t r u s t e e f o r the l i f e  Conveyancing of the t i t l e to the mortgagor i s f i n a l i z e d  complete payment of the a g r e e m e n t - f o r - s a l e .  Other than t i t l e t r a n s f e r ,  of  with legal  d i f f e r e n c e s between a mortgage and an a g r e e m e n t - f o r - s a l e a r e i n s i g n i f i c a n t  in  o  practise. as r i g h t  There are s e v e r a l  synonyms f o r the term p r i v a t e  to p u r c h a s e , land or p r o p e r t y c o n t r a c t s as w e l l  contracts. 3.2.2 Definition  Generally this  a mortgage to a new mortgagor upon s a l e of  transfer  e x i s t i n g mortgage i s l a r g e r e l a t i v e rates  as land or p r o p e r t y  occurs i f  the p r i n c i p a l  real  o u t s t a n d i n g on the  to purchase p r i c e a n d / o r i f  market  interest  have i n c r e a s e d from date o f o r i g i n of the a s s i g n e d mortgage.  In t h i s  the mortgage l i f e o f the e x i s t i n g mortgage would not be terminated  at s a l e ,  would continue to be r e p a i d by the new mortgagor u n t i l  of  amortization take over)  sale  of A s s i g n e d Mortgage F i n a n c i n g  A mortgagor may t r a n s f e r property.  vendor f i n a n c i n g such  or next s a l e o f the p r o p e r t y .  the terms of the o l d mortgagor.  The new mortgagor w i l l  termination  The new mortgagor w i l l  case, but  expected  assume (or  No change of l e n d i n g c o n d i t i o n s o c c u r .  covenant to repay the mortgage t o the mortgagee as d i d g  the o r i g i n a l  mortgagor.  Hence an assignment i s a t r a n s f e r  o b l i g a t i o n from one mortgagor to  another.  of a mortgage payment  28  Footnote References - Chapter  1.  III  V a r i o u s d i s a g g r e g a t i o n systems can be found in the  literature:  (a)  The new housing market has been d i s a g g r e g a t e d on a b a s i s of s i n g l e and m u l t i p l e housing s t a r t s . See L . B . S m i t h , "A B i - S e c t o r a l Housing Market M o d e l , " Canadian J o u r n a l of Economics. 1969, pp. 557-569, as w e l l as L . B . Smith and G. Sparks " S p e c i f i c a t i o n and E s t i m a t i o n of F i n a n c i a l Stock Adjustment M o d e l s , with S p e c i a l Reference t o L i f e Insurance Company Mortgage Investment," I n t e r n a t i o n a l Economic Review, February 1971, pp. 14-26.  (b)  A n a l y s i s by type of c o n v e n t i o n a l l e n d e r i s most prominent and i s found f o r example in L . B . Smith " F i n a n c i a l Intermediary Behaviour i n the P o s t war Canadian Mortgage M a r k e t , " Q u a r t e r l y J o u r n a l of Economics. V o l . 81, August 1971. pp. 493-514 and E. Brady, "A S e c t o r a l Econometric Study of the Postwar R e s i d e n t i a l Housing M a r k e t , " The J o u r n a l of P o l i t i c a l Economy, A p r i l 1967, pp. 147-58.  (c)  Huang, "The Short Run Flows of Non-Farm R e s i d e n t i a l Mortgage C r e d i t , " r e p r e s e n t s those who examine the new housing market on a b a s i s of guarantor. Huang analyzes both the F . H . A . and V . A . mortgages.  (d)  C l a u r e t i e , " I n t e r e s t Rates and the Business Demand f o r Funds " and F a i r and J a f f e e , "Methods of E s t i m a t i o n f o r . M a r k e t s i n D i s e q u i l i b r i u m , " are among those authors who a n a l y z e the t o t a l mortgage market as an entity. Although no mention i s made of the f a c t , by d e f i n i t i o n t h e i r mortgage market a n a l y s i s must i n c l u d e mortgage on new housing and e x i s t i n g h o u s i n g , with r e f i n a n c i n g i n c l u d e d i n the l a t t e r c a s e . No such breakdown i s e v i d e n t .  T h i s system was o r i g i n a t e d by P. White, f o r m e r l y Dean of Commerce and Dr. S. H a m i l t o n , A c t i n g Dean and A s s o c i a t e P r o f e s s o r , Urban Land D i v i s i o n , U n i v e r s i t y of B . C . T h e i r concepts have been expanded upon by the author i n e s t a b l i s h i n g the c r i t e r i a f o r the market d e f i n i t i o n s d e f i n e d i n t h i s chapter. 3.  A . F . Eger. "Mortgage Term S t r u c t u r e , " P r e l i m i n a r y U n i v e r s i t y of B r i t i s h C o l u m b i a , 1974), pp. 1-20.  4.  The p r e s e n t f i v e y e a r c a l l as we know i t today (1976) was not an p a r t of the mortgage l e n d i n g at the time of s t u d y .  5.  See s e c t i o n 3.2.1  6.  A . I . Sommers and S . H . Rhine. The New Dimension of Mortgage D e b t , pp. 7-20 as w e l l as lGe;l'b„ Mortgage Debt f o r Non-Real E s t a t e P u r p o s e s , study use of mortgage debt f o r n o n - r e a l e s t a t e p u r p o s e s .  for  Working Paper,  (Vancouver:  integral  definition.  the  29  7.  Adjustments are made to y e a r end data to r e f l e c t d e l a y s in Land R e g i s t r y system. A mortgage f o r example, may be r e g i s t e r e d a g a i n s t a p r o p e r t y i n December and t i t l e t r a n s f e r would not o c c u r u n t i l the f o l l o w i n g q u a r t e r . T h i s p r o p e r t y would be c l a s s i f i e d as of December, i n t h i s s t u d y .  8.  D. BabaTos. (Vancouver:  9.  The f o l l o w i n g q u o t a t i o n i n d i c a t e s t h a t the o r i g i n a l personal l i a b i l i t y mortgagor i s not terminated with an assignment of a mortgage.  "Study o f A g r e e m e n t - f o r - S a l e , " Unpublished Masters T h e s i s , U n i v e r s i t y of B . C . • 1972), p. 10. of  "The t r a n s f e r by the mortgagor of his e q u i t y of redemption to a t r a n s f e r e e does not r e l i e v e the mortgagor of h i s personal l i a b i l i t y to the mortgagee of h i s personal l i a b i l i t y to the mortgagee on h i s o r i g i n a l covenant to repay the d e b t . Thus the mortgagor may be l i a b l e on h i s covenant many y e a r s a f t e r he has s o l d h i s i n t e r e s t and a f t e r he had c o m p l e t e l y d i s a s s o c i a t e d h i m s e l f w i t h the mortgage property. The mortgagor i s the primary debtor of the loan and i t does not matter than the t r a n s f e r e e has covenanted t o assume o r to repay the mortgage or even t h a t the t r a n s f e r e e has c o n t r a c t e d d i r e c t l y with the mortgagee t o pay the d e b t , under an assumption agreement." Source o f q u o t a t i o n can be found i n A g e n t ' s L i c e n s i n g C o u r s e , E x t e n s i o n D i v i s i o n , F a c u l t y of Commerce, 1975), p. 67.  (Vancouver:  the  30  CHAPTER IV HISTORIC PROFILE OF EXTENDED MORTGAGE MARKET ON EXISTING HOUSING IN GREATER VANCOUVER REGIONAL DISTRICT (1954 - 1963)  4.1 4.2  4.3  SUMMARY INTRODUCTION 4.2.1  Data Base and P e r i o d of  4.2.2  Regional  Study  Comparison  TOTAL EXTENDED MORTGAGE MARKET 4.3.1  C y c l i c a l Nature of the Mortgage  Market  4.4  EXTENDED MORTGAGE MARKET FOR EXISTING HOUSING  4.5  PRIVATE VENDOR FINANCING (AGREEMENT-FOR-SALE)  4.6  4.7  4.5.1  Cyclical  Nature  4.5.2  Secular  Variation  4.5.3  Seasonal  4.5.4  Vacancy i n Housing Market  4.5.5  Relationship  Variation  t o Conventional  Lenders  ASSIGNED MORTGAGE FINANCING 4.6.1  Cyclical  Nature  4.6.2  Secular  Variation  4.6.3  Seasonal V a r i a t i o n  4.6.4  Conventional  Lender  1  Relationships  CONVENTIONAL LENDER FINANCING  31  4.1  SUMMARY T h i s chapter i s noteworthy f o r  several reasons.  F i r s t , dimensions are  p r o v i d e d f o r the mortgage market on e x i s t i n g housing f o r the f i r s t d i m e n s i o n s , as noted in the The a g r e e m e n t - f o r - s a l e larger  l i t e r a t u r e review have been vague or  time.  These  non-existent.  and the a s s i g n e d mortgage s e c t o r , i n d i v i d u a l l y  are  than the c o n v e n t i o n a l l y f i n a n c e d mortgage s e c t o r on new houses or on  e x i s t i n g houses.  Second, the a g r e e m e n t - f o r - s a l e  i n a c y c l i c a l manner.  As i n t e r e s t  rates  and a s s i g n e d mortgage s e c t o r  i n c r e a s e , i n c r e a s i n g p r o p o r t i o n s of  above s e c t o r s are used as sources of funds f o r housing s a l e s . occur.  T h i r d , the a g r e e m e n t - f o r - s a l e  s e c t o r , d u r i n g the p e r i o d under s t u d y , This  probably c o n t i n u e to the e x t e n t t h a t n o n - p r i v a t e sources of f i n a n c i n g  are made a v a i l a b l e t o h o u s e h o l d s . remained r e l a t i v e l y housing.  the  Cyclical substitutions  d e c l i n e d from 25% of extended mortgage market on e x i s t i n g housing to 20%. decline will  react  c o n s t a n t at  The a s s i g n e d mortgage s e c t o r appears to have  27% of the extended mortgage market on e x i s t i n g  F o u r t h , seasonal demand i s s t r o n g e s t i n the second and t h i r d  in both the a g r e e m e n t - f o r - s a l e  s e c t o r and assigned mortgage s e c t o r .  quarters  Finally,  s u b s t i t u t i o n between the a s s i g n e d mortgage s e c t o r and the r e f i n a n c e s e c t o r occurs when i n t e r e s t  4.2  r a t e s remain s t a t i c or d e c r e a s e .  INTRODUCTION T h i s chapter provides a d i s a g g r e g a t e d d e s c r i p t i o n of the mortgage market  the G r e a t e r Vancouver Regional D i s t r i c t  (G.V.R.D.)  of  d u r i n g the p e r i o d 1954-1963.  The d i s a g g r e g a t i o n of the mortgage market by c l a s s i f i c a t i o n type not o n l y r e v e a l s the a b s o l u t e and r e l a t i v e illustrates 4.2.1  changes w i t h i n the G . V . R . D . mortgage market,  s e a s o n a l , c y c l i c a l and mortgage s e c t o r  but  substitutability.  The Data Bases and P e r i o d of Study  In order to observe the  lending patterns  of the n o n - i n s t i t u t i o n a l  lenders,  32  it  was necessary to search i n d i v i d u a l  residences  certificates  of t i t l e  i n the Greater Vancouver Regional D i s t r i c t .  i n B r i t i s h Columbia i s a c e n t r a l i z e d one i n t h a t a l l title  are  kept i n the r e g i o n a l  facilitated  by t h i s  central  registry offices.  of s i n g l e  family  The land r e g i s t r y system  certificates  of  indefeasible  O b t a i n i n g data f o r sampling i s  r e g i s t r y system.^  The data was c o l l e c t e d from the Vancouver and New Westminster Land R e g i s t r y O f f i c e s by a random number search of c e r t i f i c a t e s patterns  of the r e g i o n v a r i e d , a p r o p o r t i o n a l  of t i t l e .  random number s e a r c h was undertaken  which accounted f o r the three major growth p a t t e r n s total  7,500 c e r t i f i c a t e s  Because growth  of t i t l e were o b s e r v e d .  found i n the r e g i o n .  T h i s sample r e p r e s e n t s  In 2.8%  p of a l l  single family housing.  estimation  Sample s i z e  meets the requirements f o r  based on a housing t u r n o v e r of every 10 y e a r s f o r a l l  total  single  family  residences. The base y e a r of 1954 was s e l e c t e d f o r two r e a s o n s .  F i r s t , t h i s y e a r marks  t u r n i n g p o i n t i n the h i s t o r y of Canadian mortgage markets. National  Housing Act o c c u r r e d .  Major r e v i s i o n to  Insured mortgages were i n t r o d u c e d by the  and i n a d d i t i o n the banks were allowed to mortgage new h o u s i n g . changes e s t a b l i s h e d the framework that time. available  These  the  government  legislative  f o r contemporary mortgage market behaviour  after  Second, data s e r i e s to complete the demand and supply model were not in quarterly  s e r i e s p r i o r to 1954.  Hence 1954 was s e l e c t e d as a base  y e a r f o r these two r e a s o n s . 4.2.2  Regional Comparison  T a b l e 4.1 and r e l a t i v e  i s a composite of s e v e r a l v a r i a b l e s which s e t s out the l e v e l s o f income ( G . N . P . ) ,  p e r i o d of s i n g l e f a m i l y residences.  absolute  housing s t a r t s , mortgage l e n d i n g , average  r e s i d e n c e ownership, and a p r i c e index of s i n g l e  family  To the e x t e n t t h a t data were a v a i l a b l e , comparisons are made on a r e g i o n a l  Gross National Product oer Capital B.C.  Canada  $  $  Relative  .Conventional Mortgage Lending  Hnuslno Starts G.V.R.D.  Canada  B.U/Lanaaa  Relative  &.V.R.D7  Canada  G.V.R.D. Real Current $000 $000 30,860 44,439  Canada $000 788,856  Relative e.V.R.D./ Canada 5.63  Average period of Single Family residence ownership 1n G.V.R.D. (years) 8.267  Housing Price Index  (Based on 1949 •  1.44  1954  1,973  1.627  1.21  6,868  113,527  .061  1955  2.095  1.728  1.21  8,468  138,276  .061 '  56.764  34,195  1,056,760  5.37  8.407  1.66  1955  2,303  1,902  1.21  8,403  127,311  .066  69,112  38.183  856,583  8.07  7.307  1.81  1957  2,304  1.923  1.21  7,539  122,340  .062  61,401  29.951  666,781  9.21  8.708  2.05  1553  2.244  1.928  1.21  12,299  164.632  .074  106,427  51 ,663  1,017.313  10.46  7.757  2.06  9,510  141,345  .067  78,174  35,859  867.189  9.01  8.628  2.18  1959  2.376  1.998  1.16  1960  2.381  2.019  1.19  4,675  108,858  .043  53,997  23,174  770,092  7.01  11.908  2.33 .  19€t  2.475  2.170  1.18  5,588  125,577  .045  70,634  33,006  1,085.943  6.50  12.987  2.14  1JE2  2.623  2.2?0  1.15  • 7.387  130,095  .056  90,095  38,834  1 ,220,533  7.38  11.368  2.32  1S63  2.760  2.430  1.14  8,941  148,624  .060  82,613  35.609  1,467,479  5.63  12.340  2.32  f  Table 4.1 Composite table of regional and national housing and rortcagg market variables. Sources of data for appropriate years are as follows: Gross National and Provincial Product 1s the B.C. Economic Review Department of Economic Development, Victoria, B.C. Provincial housing starts collected from records at Central Mortgage and Housing Corporation Regional Office, Vancouver, B.C. National Housing starts ar.d conventional irortgage lending dollar amounts are taken from Housing Statistics, Central Mortgage and Housing Corporation. Price index and average period of single family residence ownership were provided by Cr. S.W. Hamilton, in study of Turnover Rates for Metropolitan Vancouver 1949-1963. Unpublished paper University of B.C. Vancouver, 1971. AH data i s i n current terms except as noted.  to CO  34 basis. The t a b l e conventional  i s most e a s i l y understood by example.  lending patterns  Examine housing s t a r t s ,  and b a s i c . G . N . P . . data i n 1958.  The Gross  Product has d r o p p e d , housing s t a r t s  have advanced d r a m a t i c a l l y  the  ratio  recession.  The high ( r e l a t i v e )  (compared to Canada)  i s accounted f o r by t h r e e  are at a h i s t o r i c high housing market family  of conventional  (7.4%  factors.  factor,  income f o r h o u s i n g : and g r e a t e r  existing  o f the t a b l e  into  demand f o r mortgage d o l l a r s .  i s to be found i n the p r i c e o f h o u s i n g .  r e c e s s i o n s d i d the. p r i c e o f housing d r o p .  greater  capita  personal  There are  three  three  Hence the composite appears to  with the e x c e p t i o n o f the housing p r i c e i n d e x .  is  The s u r p r i s i n g  -Only once d u r i n g these  an expected r e a c t i o n o f housing and mortgage markets  represent  t o changes i n i n t e r e s t  rates,  T h i s e x c e p t i o n i s worth n o t i n g as  an u n d e r l y i n g reason f o r the examination  i n the remainder o f the  single  incomes ( G . P . P . per  Highereincome t r a n s l a t e s  r e c e s s i o n a r y p e r i o d s d u r i n g the study p e r i o d .  o f the mortgage s u b s e t s found  study.  TOTAL EXTENDED MORTGAGE MARKET The t o t a l  market  extended mortgage market may be c o n s i d e r e d a subset o f the  are c o n s i d e r e d subsets o f the c a p i t a l  the c o n v e n t i o n a l mortgage market capital  capital  i n the same s e n s e . t h a t the more commonly s t u d i e d c o n v e n t i o n a l mortgage  and the bond markets  will  S e c o n d , the  This increase in turnover  t h a t of h i g h e r r e l a t i v e  compared to G . N . P . per c a p i t a ) .  4.3  F i r s t » n e w housing s t a r t s  e x p e r i e n c e d a decrease i n the average p e r i o d ownership o f  coupled with a t h i r d  it.forms  i n the wake o f  l e n d i n g i n the G . V . R . D .  G . V . R . D . compared to Canada).  r e s i d e n c e s (from 8.7 y e a r s to 7.8 y e a r s ) .  feature  Provincial  market,  it  and the bond market  market.  market  Inasmuch as  compete f o r funds w i t h i n  the  can be expected t h a t s u b s t i t u t i o n and c o m p e t i t i o n f o r funds  o c c u r w i t h i n the t o t a l  flow w i t h i n the t o t a l  extended mortgage market.  extended mortgage  market.  T h i s s e c t i o n examines  funds  LEGEND Total Extended Mortgage Market Extended Mortgage Market for Existing Housing New Mortgages on New Housing (Conventional Lenders) New Mortgages on New Housing (Non-conventional Lenders)  •z. o ecu o-  '1959  T5BF  ~T5DT  f5BT  "T55T  YEARS '///////////'///'/// /INCREASING INTEREST  T55T  •T553" Graph 4.1  "'• RATES' y /  /  DECREASING  / A  T55B~  —•  tech  INTEREST  "TSBT  RATES  TS52"  Gross Quarterly flows M954-1963) of the t o t a l extended mortgage market, extended mortgage. on l ^ s l i m housing as well as tne mortgage "lows of newhojjsjilq supp I \ ed by convention d ^ S i e n t l o n ^ ' l e n d e r s . Difference betwee, fleSTofW and exist n g m o r t g a g e markets represents new housing mortgage Data for G.V.R.D. 1s price adjusted. Credit rationing periods shown for contrast.  flow.  y////\ —T5E3"  Financing Single Family Housing i n the Greater Vancouver Regional D i s t r i c t 1954-1963 ( M i l l i o n s of $) Conventional Lenders New Housing year  Col. (1)  1954 1955 1956 1957 1958 1959 1960 1961 1962 1963  32.64 45.81 39.96 35.73 70.86 41.67 14.78 17.78 37.73 29.90  Existing Hous ing (Sales;  (21  Col. 7.86 11.01 15.92 " '14.25 20.84 20.32 22.28 20.24 32.68 28.93  Existing Housing (No Sales) Col. (3) 3.94 12.43 13.21 11.42 14.71 16.19 16.92 20.24 19.69 23.79  Government and Other Total Conventional  ft)  C o l . (5)  Cc!. 44.43 6S.13 69.12 61.29 106.43 78.18 59. Qo 57.85 90.09 82.61  2.89 3.72 3.75 3.93 15.95 22.92 12.04 7.28 4.37 3.58  Total Financing on Single Family Housing (Excluding Assignments)  Year  5+9-17)  Existing Existing Housing Housing (No Sales) (Sales) (Col. 3+7+ (Col. 2+ 6+10=18) 11 =19)  1954 1955 1956 1957 1958 1959 1960 1961 1962 1963  35.53 49.53 43.71 39.66 86.81 64.59 26.82 25.06 42.10 33.48  32.80 38.62 58.26 58.84 56.73 62.55 • 60.50 58.87 69.47 76.61  New Housing  9 .25 19 .23 20 .75 19 .08 26 .47 31 .47 26 .44 31 .60 35 .93 41 .19  Existing Housing (Sales) Col. (6) 5.29 4.46 • 10.08 10.46 6.74 7.63 11.84 8.55 . 9.10 11.90  Existing Housing (No Sales) Col. (7) 5.31 6.80 7.54 7.66 11.76 15.28 9.52 11.36 16.24 17.46  Total Government and Other Col. (8)  Col. (9)  Existing Housing (Sales) Col.(10)  13.49 14.98 21.37 22.05 34.45 45.83 33.40 27.19 29.71 32.88  N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.  19.65 23.15 32.26 34.13 29.15 34.60 26.38 30.08 27.69 35.78  Total Financing on Single Family Housing (Including Assignments)  Total Excludes . Assignments ' (Col. 17+18+ 19-20) 3  77.58 107.38 122.72 117.58 170.01 158.61 113.76 115.53 147.50 151.28  New Housing  Agreements f o r Sale  New Housing (Col. 17+ 13-21) 35.53 49.53 43.71 39.66 86.81 64.59 26.82 25.06 42.10 33.48  Table 4.2.  Existing Housing (Sales) (Col. 18+ 14-22) 39.81 44.95 69.36 67.86 67.18 73.87 67.78 62.48 • 78.93 82.76  Existing Housing (No Sales) (Col. 19+1523) 27.56 37.93 50.09 52.36 58.54 68.71 71.54 66.97 77.82 78.04  New Housing  Total Agreement For Sale Col. (12)  N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.  Relative Proportions o f Financing on Single Family Housing (Excluding Assignments)  Total New (Includes Housing Assignments) (Col. 20+16- ( C o l . 17/ 24) 20=25) 102.90 132.41 163.16 159.88 212.53 207.17 166.14 154.51 198.85 194.28  Existing Housing (No Sales) C o l . (11)  Assigned Mortgages  45.80* 46.13% 35.62% 33.73% 51.06% 40.72% 23.58% 21.69% 28.54% 22.13%  Existing Housing (Sales) (Col. 18/ 20-26) 42.29% 35.96% 47.47% 50.04% 33.37% 39.44% 53.18% 50.96% 47.10% 50.64%  Existing Housing (No Sales) ( C o l . 19/2027) 11.91% 17.91% 16.91% 16.23% 15.57% 19.84% 23.24% 27.35% 24.36% 27.23%  Gross mortgage flows i n the Greater Vancouver Regional D i s t r i c t by type of lender and type of transaction on new and e x i s t i n g housing. R e l a t i v e proportions are shown i n columns 25 to 30. a) Column 20 i s the t o t a l mortgage market; column 24 i s equal to the t o t a l extended mortgage market. Both are defined i n Section 3.2.  19.65 23.15 32.26 34.13 29.15 34.60 26.38 30.08 27.69 35.78  New Housing C o l . (13) N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A. N.A.  Assigned Mortgages on E x i s t i n g Housing Col. (14)  Assigned Agreement f o r Sale on E x i s t i n g Housing Col. (15) 18.31 18.70 29.34 33.28 32.07 37.24 45.10 35.37 41.89 36.85  7.01 6.33 11.10 9.02 10.45 11.32 7.28 3.62 9.46 6.15  R e l a t i v e Proportions of Financing on Single Family Housing (Including Assignments) New Housing (Col. 21/ 24=28) 34.53% 37.41% 26.79% 24.81% 40.85% 31.18% 16.14% 16.22% 21.17% 17.23%  Existing Housing - (Sales) ( C o l . 22/24= 29) 38.69% 33.95% 42.51% 42.44% 31.61% 35.66% 40.80% 40.44% 39.69% 42.60%  Existing Housing (No Sales) (Col. 23/24= 30) 26.78% 28.64% • 30.70% 32.75% 27.54% 33.16% 43.06% . 43.34% 39.14% 40.17%  Total Assignments C o l . (16) 25.32 25.03 40.44 42.30 42.52 48.56 .52.38 38.99 51.35 43.00  37  Graph 4 . 1 ,  T a b l e s 4.1  G . V . R . D . mortgage market.  and 4.2  illustrate  From T a b l e 4.1  by c o n v e n t i o n a l l e n d e r s r e p r e s e n t e d 7.43 centage ranged from 5.37  percent  it  several  dimensions o f  the  can be noted t h a t G . V . R . D . l e n d i n g  p e r c e n t o f the Canadian t o t a l .  (1955) to 10.46  percent in  presents a breakdown of c o n v e n t i o n a l l e n d i n g p a t t e r n s quarterly  important  (1958).  This per-  Graph  by i l l u s t r a t i n g  4.1  the g r o s s  flow o f the new c o n v e n t i o n a l mortgages on new h o u s i n g , new government  mortgages on new housing as well  as the t o t a l  extended mortgage market and the  extended mortgage market on e x i s t i n g h o u s i n g . T a b l e 4.2  p r e s e n t s a d i s a g g r e g a t i o n o f the t o t a l  extended mortgage  market.  Mortgage f i n a n c i n g i s presented by t y p e e o f  l e n d e r , type of t r a n s a c t i o n on new and  e x i s t i n g s i n g l e family  i n d i c a t e s the  housing.  T a b l e 4.2  markets o t h e r than the new mortgages on new h o u s i n g .  In  importance o f mortgage 1958 f o r  mortgage on new housing r e p r e s e n t e d 41 p e r c e n t o f the t o t a l whereas total  i n 1960,  example, the new  extended mortgage  new mortgages on new housing r e p r e s e n t e d o n l y 16 percent o f  extended mortgage market.  The new mortgage f i g u r e s  market; the  i n c l u d e both c o n v e n t i o n a l  and government l e n d i n g . C o n t r a s t the s i z e o f the new mortgage-pew housing market w i t h the mortgages the e x i s t i n g housing market.  The p o l a r cases are again p r e s e n t e d .  l a t t e r market r e p r e s e n t e d 59 p e r c e n t of the t o t a l 1960 t h i s  p r o p o r t i o n had r i s e n to 84 p e r c e n t .  In  1958,  extended mortgage m a r k e t s .  By  plays  in  r a t i o n i n g and housing p r i c e s i s o f paramount concern because o f the dominance  o f t h i s market  4.3.1  this  Hence as noted i n ifehe i n t r o d u c t i o n of  t h i s c h a p t e r , examination of the e x i s t i n g mortgage market and the r o l e i t credit  in  i n the t o t a l  extended mortgage  C y c l i c a l Nature of the Mortgage  Graph 4.1  and T a b l e 4.2  major subsets o f the t o t a l  market.  Market  not o n l y i l l u s t r a t e  the s i z e and p r o p o r t i o n s o f  extended mortgage market,  but r e v e a l  nature o f the new housing mortgage market as evidenced e a r l i e r  the  the c o u n t e r c y c l i c a l by Evans arid G u t t e n t a g .  38  For example, i n the r e c e s s i o n o f 1958, to d e c l i n i n g i n t e r e s t  rates.  new housing c o n s t r u c t i o n responded s t r o n g l y  Comparatively however, the t o t a l  extended  mortgage market does not respond i n the manner ( c o u n t e r c y c l i c a l ) Guttentag f o r example:  existing  i m p l i e d by  ,  "The most important a c t i v i t y not c o v e r e d . . . i s the mortgaging o f e x i s t i n g h o u s e s , which i s i n c l u d e d o n l y i n the mortgage r e c o r d i n g s e r i e s . This a c t i v i t y g e n e r a l l y accounts f o r more than h a l f o f the t o t a l volume o f mortgage r e c o r d i n g s . N e v e r t h e l e s s , there i s a presumption t h a t the volume o f r e s i d e n t i a l c o n s t r u c t i o n a c t i v i t y and the volume o f mortgage a c t i v i t y w i l l move i n same d i r e c t i o n . " 4 . 5 Gnaph 4.1 It  does not r e v e a l  is d i f f i c u l t  the t o t a l  to determine  any s p e c i f i c p a t t e r n .  extended mortgage market  nor c o u n t e r c y c l i c a l . 4.4  the expected c o u n t e r c y c l i c a l t r e n d assumed by  follows  Reasons f o r t h i s  At t h i s  a pattern,  point i t  Guttentag.  i s noted t h a t  which i s n e i t h e r  cyclical  b e h a v i o u r are now e x p l o r e d .  EXTENDED MORTGAGE MARKET FOR EXISTING HOUSING T a b l e s 4.3.1  and 4 . 3 . 2  reveal  the reason f o r the s t r a n g e phenomena above.  The extended mortgage market on e x i s t i n g housing i s a composite of f o u r major s u b markets. in this  These sub-markets chapter)  (identified  are as f o l l o w s :  i n Chapter III  4.3.2).  ( p r i v a t e vendor f i n a n c e d )  and a s s i g n e d mortgages on e x i s t i n g housing  to changes i n i n t e r e s t  Examination o f T a b l e s 4.3.1 sub-markets market.  as new mortgages on e x i s t i n g  The l a t t e r two sub-markets are termed c y c l i c a l because o f t h e i r  correlation  is s i g n i f i c a n t ,  i.e.,  detail  new mortgages on e x i s t i n g h o u s i n g ; r e f i n a n c e d  mortgages on e x i s t i n g houses (Table 4 . 3 . 1 ) as w e l l houses  and .now examine i n  (Table  positive  rates.  and 4 . 3 . 2  reveal  t h a t the s i z e o f each o f  each i s approximately  20% o f the extended  these mortgage  Each o f the subsmarkets c o u l d by themselves i n f l u e n c e the housing and  mortgage markets  because o f t h i s  (columns 5 , 6 and 1 1 , 1 2 ) ,  significant size.  As noted from T a b l e  new mortgages on e x i s t i n g housing account f o r  25 p e r c e n t o f the extended mortgage market  on e x i s t i n g h o u s i n g ; whereas  4.3.1 18 to refinanced  39  i Year  Mortgages on  Financing by Non-conventional Lender  % EMMEH  % EMMEH  % TMM  Col .1 C o l . 2  % TMM  C o l . 3 Col .4  —  —  Refinanced Mortgages on E x i s t i n g Housing (non-sales)  Exi s t i n g Housing  F1nanc ing by Conven t i o n a l Lende r  :  Total  % EMMEH  Financing by Conventional Lender TMM  Col .5 C o l , 6  % EMMEH  % TMM  Col. 7 Col. 8  Financing by Non-conventional Lender % EMMEH  % TMM  Col .9 Col.10  Total  % EMMEH  % TMM  c o i . n Col.1  1954  .11  .08  .08  .05  • 19  .13  .06  .04  .08  .05  .14  .09.  1955  .13  .09  .05  .03  .18  .12  ,15  .07  .08  .05  ,23  .15  1956  .14  .10  .08  .06  .22  .16  .11  .08  .06  .05  .17  .13.  1957  .12  .08  .09  .07  .21  .15  .10  .07  .06  .05  .16  .12  1958  .17  .10  .05  .03  .22  .13  .12  .06  .09  .06  .21  .12  1959  .17  .09  .05  .04  .22  .13  .11  .08  .11  .07  .22  .15  1960  .16  .14  .08  .07  .24  .21  .12  .11  .07  .05  .19  .16  1961  .15  .13  .07  .06  .22  .19  .15  .13  .09  .07  .24  .20  1962  .21  .16  .06  .05  .27  .21  .13  .10  .10  .08  .23  .18  1963  .18  .15  .07  .06  .25  .21  .16  .13  .11  .08  .27  .21  Table 4.3.1  Countercyclical components of the extended mortgage market on e x i s t i n g housing. These components are financed by conventional and government lenders. Series i s based on 1954-1963 monthly data f o r G.V.R.D. Total extended mortgage market represented by T . M . M . ; whereas extended mortgage market on e x i s t i n g housing represented by E.M.M.E.H.  40  A s s i g n e d mortgages e x i s t i n g housing  Year  Original F i n a n c i n g by Conventional Lender  EMMEH  Col.  1  Original F i n a n c i n g by Agreementsfor-sale  % TMM  Col.  New Agreement-for-sale on e x i s t i n g housinc  on  % EMMEH  2  Col.  3  Total  % TMM  Col.  % EMMEH  4  Col.  5  Total  % TMM  Col.  % EMMEH  6  Col.  7  % TMM  Col.  1954  .27  .17  .10  .07  .37  .24  .29  .19  1955  .22  .14  .08  .05  .30  .19  .28  ?  8  17  1956  .25  .18  .09  .07  .34  .25  .27  .19  1957  .28  .21  .07  .05  .35  .26  .28  .21  1958  .26  .15  .08  .05  .34  .20  .23  .13  1959  .26  .18  .08  .05  .34  .23  .24  .16  }  1960  .33  .28  .05  .04  .38  .32  .19  .16  [  1961  .27  .23  .03  .02  .30  .25  .23  .20  ]  1962  .27  .21  .06  .05  .33  .26  .18  .13  1963  .23  .19  .04  .03  .27  .22  .22  .18  j  i  •i  .3.2  A s s i g n e d mortgages and p r i v a t e vendor f i n a n c i n g f o u n d i n t h e extended mortgage market f o r e x i s t i n g h o u s i n g . These s e c t o r s a r e i d e n t i f i e d as c y c l i c a l components because o f p o s i t i v e c o r r e l a t i o n t o changes i n i n t e r e s t r a t e s . The data f o r the G . V . R . D . i s based on y e a r l y a g g r e g a t i o n o f monthly d a t a . P e r i o d o f a n a l y s i s i s 1954-1963. T o t a l extended mortgage market r e p r e s e n t e d by T . M . M . ; whereas e x t e n d e d mortgage market on e x i s t i n g h o u s i n g r e p r e s e n t e d by E . M . M . E . H .  41 mortgages on e x i s t i n g housing account f o r 14% to .27% o f the same e x i s t i n g housing market.  Table 4.3.2  (columns 5 , 6 and 7 , 8)  r e p r e s e n t s the c y c l i c a l components  which r e a c t p o s i t i v e l y to i n c r e a s e i n i n t e r e s t  rates.  The l a r g e s t o f the s u b -  markets are the a s s i g n e d mortgages on e x i s t i n g h o u s i n g , as 27% to 38% o f the extended mortgage market f o r e x i s t i n g h o u s i n g , ( o r e q u i v a l e n t l y t o t a l - m o r t g a g e -market) are funds s u p p l i e d by t h i s  22% to 32% o f  assigned s e c t o r .  The  total the  private  vendor f i n a n c i n g s e c t o r a c c o u n t s . f o r 18%.to 29% o f the extended mortgage market on e x i s t i n g housing or 13% t o 21% o f the t o t a l T a b l e 4.3.1  and 4 . 3 . 2  extended mortgage market.  have r e v e a l e d l a r g e s u b - m a r k e t s  market which may a c t as f i n a n c i n g s u b s t i t u t e s  •  i s explored in  Year  T a b l e 4.4  These sub-markets  Each o f these s u b -  turn.  A s s i g n e d mortgages on e x i s t i n g housing  New Mortgages on e x i s t i n g housing  Refinanced mortgages on e x i s t i n g housing  Original financing by a g r e e m e n t - f o r s a l e r e l a t i v e to original financing by c o n v e n t i o n a l lender  F i n a n c i n g by nonconventional lender r e l a t i v e to conventional lender  F i n a n c i n g by nonconventional lender r e l a t i v e to c o n ventional lender  Col.  1954 1955 1956 1957 1958 1959 1960 1961 1962 1963  i n the e x i s t i n g housing  f o r each o t h e r .  are comparable i n s i z e t o the new housing mortgage market. markets  7  .37 .34 .38 .27 .33 .30 .16 .10 .22 .16  1  Col.  .66 .40 .63 .73 .32 .38 .53 .43 .42 .41  2  Col.  3  1.33 .54 .57 .67 .80 .95 .55 .56 .56 .73  R e l a t i v e r a t i o s o f the sub-markets w i t h i n extended mortgage market on e x i s t i n g h o u s i n g . The r a t i o s are based on monthly d a t a , aggregated by y e a r f o r the G r e a t e r Vancouver Regional D i s t r i c t 1954-1963.  42 4.5  PRIVATE VENDOR ^FINANCING  4.5.1  C y c l i c a l Nature  Table 4.3.2  p r e s e n t s a c o n c i s e summary o f the r e a c t i o n o f the c y c l i c a l com-  ponents to i n c r e a s i n g i n t e r e s t with changes i n i n t e r e s t 1954 to 1963, portionately  rate.  the p r i v a t e  statement  4.5.2  vendor f i n a n c i n g v a r i e s  directly  During the major c r e d i t r a t i o n i n g p e r i o d s from r e a c t e d by i n c r e a s i n g p r o -  as c o n v e n t i o n a l funds were r a t i o n e d out of the mortgage market. 1958 show the p r i v a t e  t h a t the p r i v a t e  The  vendor f i n a n c i n g to be at a  peak, as can be noted from column 7 and 8 , T a b l e 4 . 3 . 2 .  m o d i f i e d to r e f l e c t direct  Private  vendor f i n a n c i n g market  r e c e s s i o n a r y p e r i o d s o f 1954, proportional  rates.  The general  vendor f i n a n c e market i s c y c l i c a l , , h o w e v e r ^ m u s t be  s e c u l a r , seasonal v a r i a t i o n  (Graph 4 . 3 . 1 ) as w e l l  as  the  r e l a t i o n s h i p to the housing market. Secular  Table 4.3.2  Variation and Graph 4.2  the use o f p r i v a t e  reveal  t h a t there  has been a general  vendor f i n a n c i n g from 1954 to 1963.  decline  in  Peaks o f 29% and 28%  ( r e l a t i v e to the extended mortgage market on e x i s t i n g housing) r e p r e s e n t a high i n market p e n e t r a t i o n .  P r i o r to 1958,  the p r i v a t e  l e a s t 27% o f the e x i s t i n g h h o u s i n g mortgage market. p r o p o r t i o n c o n t i n u e s to s h r i n k . an average l e v e l  relative  r e o r g a n i z a t i o n o f the N a t i o n a l rates.  Only a s l i g h t l y  After  that time,  the  at  relative  The r e d u c t i o n would appear to be s i g n i f i c a n t as  o f 20% by 1963 becomes the  Reasons f o r t h i s  vendor market maintained  rule.  r e d u c t i o n are not r e a d i l y  apparent.  In  1954  Housing A c t c o i n c i d e d with a r e d u c t i o n o f  d i s c e r n i b l e reduction of private  the  interest  vendor f i n a n c e i s  apparent o  on a r e l a t i v e  basis.  A more dramatic e f f e c t  i s evidenced by the withdrawal  Canadian banks from the new housing market by q u a r t e r s h o u l d have r e s u l t e d i n an i n c r e a s e i n p r i v a t e housing market,  as i t  3 1959.  the  T h i s withdrawal  l e n d e r f i n a n c i n g i n the existiling  c o u l d be expected t h a t the o t h e r c o n v e n t i o n a l l e n d e r s would  s e r v i c e the demand f o r mortgages i n new housing a f t e r the banks increase in private  of  1  withdrawal.  This  l e n d e r f i n a n c i n g d i d not o c c u r , because the o t h e r c o n v e n t i o n a l  44  l e n d e r s d i d not fund mortgages i n the new housing because o f the high  inventory  9  i n new housing f o r the p e r i o d 1959 and 1960.  It  vendor f i n a n c i n g r e p r e s e n t s a reduced percentage dominance o f the o t h e r c o n v e n t i o n a l 4.5.3  Seasonal  (20%)  private  because o f i n c r e a s i n g  l e n d e r s i n the e x i s t i n g housing market.  Variation  The seasonal p a t t e r n  o f the p r i v a t e  c h a r a c t e r i s t i c s worth n o t i n g . and t h i r d q u a r t e r s  shows t h a t i n general  are p e r i o d s of h i g h e s t demand.  compared to 1 9 5 5 - 1 ) .  than the f i r s t  An average v a r i a t i o n  to 1957-1 or 1958-3 r e l a t i v e  However, t h i s financing greater  vendor f i n a n c i n g i l l u s t r a t e s , t h r e e  F i r s t Graph 4.2  flow can be as much as 115%, g r e a t e r  relative  i s concluded . t h a t  to  The second o r t h i r d quarter  (witness  when p e r i o d s o f c r e d i t  rationing  quarter  1955-3  i s c l o s e r to 50% (see 1957-3  1958-1).  r u l e o f having second a n d / o r t h i r d q u a r t e r than the f i r s t  the second  and f o u r t h q u a r t e r  private  is variant.  vendor  For example,  ( 1 9 5 9 - 2 ) . a n d . ( 1 9 6 2 - 4 ) c o i n c i d e with a f i r s t  fourth quarter  low, then the p a t t e r n  does not h o l d , s i m p l y because the f i r s t  fourth quarter  demand i n the p r i v a t e  sector offsets  ventional  lenders.  the r e l a t i v e  When the c r e d i t  importance i n the f i r s t  T h i r d , not a l l creasing interest  first  or and  the l a c k o f funds from c o n -  r a t i o n i n g c e a s e s , the p r i v a t e market l o s e s and f o u r t h  and f o u r t h q u a r t e r  quarters.  p e r i o d s r e a c t the same way to  r a t e s , because of f a c t o r s o t h e r than c r e d i t  rationing.  inCon-  s i d e r a t i o n must a l s o be given to the demand^supply r e l a t i o n s h i p s i n the housing market.  Graph 4.2  increasing state  i n d i c a t e s t h a t the p r i v a t e market  f a i l e d to respond to  o f monetary s t r i n g e n c y i n 1959-1 to 1960-1.  the  P o s s i b l e reasons are  e x p l a i n e d bel'ow. 4.5.4  Vacancy i n Housing Market  The l a c k o f p o s i t i v e c o r r e l a t i o n to i n c r e a s e d i n t e r e s t 1959 to q u a r t e r  1 I960 can be i n f e r r e d from Graph 4 . 3 .  rates  in quarter 1  Housing c o n s t r u c t i o n a i d e d  45  i n the  r e c o v e r y o f the Canadian economy from the r e c e s s i o n o f q u a r t e r  to q u a r t e r i n 1958.  2,1958.  Construction starts  i n c r e a s e d from 7,539 i n 1957  The r a t i o o f unoccupied but completed housing t o . t o t a l  to a high o f  .3% compared to an average o f  .1%.  records t h e  average housing p r i c e s from 1954  Evidence from the e x p e r i e n c e private  o f the  12,299  stock,increased  to  in  1960-1961.  1963.  r e c e s s i o n o f 1959-1960, i s t h a t  the  vendor f i n a n c e market cannot be expected, to r e a c t c h a r a c t e r i s t i c a l l y  housing supply exceeds demand.  If  demand i s l a c k i n g , then the  s a l e market may not respond i n p e r i o d s o f i n c r e a s i n g c r e d i t private  to  Housing supply exceeded demand.  In such a c l a s s i c c a s e , the expected p r i c e drop soon f o l l o w e d T a b l e 4.1  2,1957  agreement-for-  rationing.  vendor f i n a n c i n g may only respond to i n c r e a s i n g i n t e r e s t  housing market has a low o r normal  4.5.5  vacancy  R e l a t i o n s h i p t o Conventional  Graph 4.4  to 4.6  presentsthe  compared to c o n v e n t i o n a l new and e x i s t i n g  housing.  lending.  Graph 4.5  excludes the r e f i n a n c i n g  mortgages  i n the  rates  The if  the  rate,^  Lenders  plotted  ratios  Graph 4.4  Graph. 4.4  if  of private  and 4.5  vendor f i n a n c e  each p l o t the  ratios  sector for  however i n c l u d e s Refinanced mortgages;  component.  Graph 4,6  includes  both  whereas  non-conventional  plots.  These graphs are  important  o f the a g r e e m e n t - f o r - s a l e the a g r e e m e n t - f o r - s a l e  for several  market.  markets  reasons.  From Graph 4.4  represents  C o n s i d e r the  f o r example,  97% o f a l l  it  conventional  relative  magnitude  can be noted l e n d i n g on  that  existing  46  2.8  Jl  2.6  2.4  R a t i o o f u n o c c u p i e d , but completed housing t o t o t a l housing s t o c k ( R a t i o x 10) ^  /  • \  /  |  -  2.2  .  2.0  J  1.8  J  1.6  "  /  k  I  ^  ' \ A/  /  1/ \  M  /  .1/ /  /  =1.00)  \ \  V  I,  A /  /  •  1954  Housing p r i c e  /  /  1.2  1.0  *  (1949  /  /  X  1956  1958  i  t  1  1960  1962  1964  Years  G  r  a  p  h  4  ,  4  P r i c e l e v e l o f housing and r a t i o o f u n o c c u p i e d , but housing t o t o t a l housing s t o c k i n G r e a t e r Vancouver D i s t r i c t 1954-1963.  completed Regional  level  LEGEND  Private Vendor Financing conventional Mortgage on Existing Housing Private Vendor Financing Conventional Mortgages on New and Existing Housing  LU  "t55fT  155T  1959 YEARS  "tar  ///////////////S///' " /INCREASING INTEREST RATES  / / / / , //// "T936  Graph 4.4  ,,,,,, /</,,,/  35B"  W/////A  t5Bt  1 w  " t o "  "  t  o  -  DECREASING INTEREST RATES  Percent of private vendor financing sector relative to a l l conventional lending on existing housing as well as percent of private vendor financing sector compared to all conventional lending on new and existing housing. Data base for G.V.R.D. covers time period of 1954-1963 and represents gross mortgage flows.  553"  1964  LEGEND Private Vendor Financing New Conventional Mortgages on Existing Housing Private Vendor Financing Mew Conventional Mortgages on New Housing  5k UJ  a.  " t e ~  "  t  e  OT  -  ,///////////////////  *''  /INCREASING INTEREST RATES  ' / / s / /" '  "  t  e  "  Graph 4.5  / ' / ' / i /  /A  "  t  e  -  YEARS  "  t  e  -  ''/////////, te  "  t  e  "  "  t  e  "  "  t  e  "  DECREASING INTEREST RATES "TW  Percent of private vendor financing sector in comparison to (nwT conventional lending on new houses as well as on new conventional lending'on existing housing. Series covers period 1954-1963 for G.V.R.D. and represents gross mortgage flows. Chances in interest rate indicated by bar graph.  3BT  "1964  Graph 4.6  Pprr.pnt. nf nrivat.P ypndnr financing compared to total frnnyoptinnal anrl nnncnnvent.ional 1 new mortgages on existing housing as well as on new housing. Period analyzed is from 1954-1963 for G.V.R.D. and represents gross mortgage flows. Interest rate change shown for comparison.  50  housing - w i t h a p p r o p r i a t e rationing  periods.^  i n c r e a s e s to 187%,  Conventional  o f r e f i n a n c i n g by c o n v e n t i o n a l  purposes.  lenders.  Graph 4.5  The r e s u l t  an i n c r e a s e i n importance o f the a g r e e m e n t - f o r - s a l e housing an average r e f i n a n c i n g r a t i o of 231% p r i o r to 1958 a r a t i o o f 137%.  Compared to  represents a f i n a l  The e f f e c t  annual  peaks i n excess of  look at the dimensions of the  lenders  200%.  sources of f i n a n c i n g are i n c l u d e d with the  Comparable post-1958  r e c o r d e d i n Graph 4.5  r a t i o of agreement-for-sale d e c l i n e i n housing s t a r t s agreement-for-sale  conventional  as to some  Agreement-for-sale  are 95% and 97%.  r e l a t i v e to 1959).  s e c t o r noted e a r l i e r  lenders?  show an i n c r e a s e ( r e l a t i v e l y )  in private  mortgage p o r t f o l i o  increase in private  c o n t i n u e s to be  to e x i s t i n g housing f i n a n c i n g  l a c k of funds by c o n v e n t i o n a l  ( a b s o l u t e d o l l a r amounts)  The i n c r e a s e d  The d e c l i n e o f  in section 4.4.2  t h e r e any seasonal s u b s t i t u t i o n o f the agreement  completed t h e i r  to  r e l a t i v e to new housing f i n a n c i n g i s due t o the 50%  (1960, 1961  from the a g r e e m e n t - f o r - s a l e  ratios  , c  agreement-for-sale  ( r e l a t i v e t o the e x i s t i n g and new housing market) of 142% and 63% p r i o r  1958 are r e c o r d e d .  Is  existing  s e c t o r as a  Even at the lowest  t h e r e are s e v e r a l  i s to dampen the r a t i o s  is  to 1958 e x i s t s and subsequent  e x t e n t the n o n - c o n v e n t i o n a l sources of f i n a n c i n g are c y c l i c a l . ratios  the  l e n d e r f i n a n c e market r e p r e s e n t s 85% of the c o n v e n t i o n a l  s e c t o r as n o n - c o n v e n t i o n a l lending.  removes  The importance of the a g r e e m e n t - f o r - s a l e  market i n e x i s t i n g -housing; whereas Graph 4.6  housing  as may be expected  sector.  s u b s t i t u t e f i n a n c e mechanism i s shown i n T a b l e 4 . 5 . r a t i o the p r i v a t e  credit  l e n d i n g i n c l u d e s l e n d i n g on e x i s t i n g  both f o r s a l e s and n o n - s a l e s ( r e f i n a n c i n g ) effect  202% and 137% d u r i n g  and Graph 4.5  agreement  s a l e s e c t o r due to in particular  vendor f i n a n c i n g i f  lending  (for  that year)  (relative)  evident  ratio.  for  The f o u r t h q u a r t e r  the  conventional  by t h a t t i m e .  do not show any  f i n a n c i n g d u r i n g the f o u r t h q u a r t e r  could l e n d e r s had Graph  significant of each y e a r  4.2  51  Year  New Mortgage on E x i s t i n g Housing  Agreements f o r s a l e r e l a t i v e t o f i n a n c i n g by c o n v e n t i o n a l l e n d e r s  %  T a b l e 4.5  1954  251  1955  209  1956  202  1957  239  1958  139  1959  170  1960  119  1961  149  1962  85  1963  123  Agreement f o r s a l e on e x i s t i n g housing r e l a t i v e t o c o n v e n t i o n a l loans on e x i s t i n g housing f o r the G . V . R . D . 1954 - 1963.  (compared w i t h the p r e c e d i n g t h i r d q u a r t e r ) . funds by c o n v e n t i o n a l an i r r e g u l a r  4.6  This could i n d i c a t e  l e n d e r s i n the f o u r t h q u a r t e r  that lack  of  o f each y e a r o n l y o c c u r s on  basis.  ASSIGNED MORTGAGE FINANCING  4.6.1 Table  C y c l i c a l Nature  4.6 (reproduced from 4 . 3 . 2 ) p r e s e n t s a c o n c i s e summary o f the  o f the p r i v a t e  vendor and a s s i g n e d mortgage s e c t o r s to i n c r e a s i n g  reaction  interest  52  A s s i g n e d mortgages e x i s t i n g housing  Year  Col.  1  Col.  % TMM  % EMMEH  % TMM  2  Col.  Col.. 3  Total  Total  Original F i n a n c i n g by Agreementsfor-sale  Original F i n a n c i n g by Conventional Lender  EMMEH  New Agreement-for-sale on e x i s t i n g housing  on  % EMMEH  4  Col.  % EMMEH  TMM  5  Col.  6  Col.  7  TMM  Col.  1954  .27  .17  .10  .07  .37  .24  .29  .19  1955  .22  .14  .08  .05  .30  .19  .28  .17  1956  .25  .18  .09  .07  .34  .25  .27  .19  1957  .28  .21  .07  .05  .35  .26  .28  .21  1958  .26  .15  .08  .05  .34  .20  .23  .13  1959  .26  .18  .08  .05  .34 .  .23  .24  .16  1960  .33  .28  .05  .04  .38  .32  .19  .16  1961  .27  .23  .03  .02  .30  .25  .23  • 20  1962  •27  .21  .06  .05  .33  .26  .18  .13  1963  .23  .19  .04  .03  .27  .22  .22  .18  T a b l e 4.6  '  A s s i g n e d mortgages and p r i v a t e vendor f i n a n c i n g found i n the extended mortgage market f o r e x i s t i n g h o u s i n g . These s e c t o r s are i d e n t i f i e d as c y c l i c a l components because o f the p o s i t i v e to changes i n i n t e r e s t r a t e s . The data f o r the G . V . R . D . i s based on y e a r l y a g g r e g a t i o n o f monthly d a t a . P e r i o d of a n a l y s i s i s 1954-1963. T o t a l extended mortgage market r e p r e s e n t e d by T . M . M . ; whereas extended mortgage market on e x i s t i n g h o u s i n g r e p r e s e n t e d by E . M . M . E . H .  8  1  !  53  rates.  On an a n n u a l i z e d b a s i s ,  i t can be noted t h a t a s s i g n e d mortgage f i n a n c i n g  v a r i e s d i r e c t l y w i t h changes i n i n t e r e s t  rates.  During the major c r e d i t  rationing  p e r i o d s from 1954 t o 1963, the a s s i g n e d mortgage f i n a n c i n g market r e a c t e d by increasing proportionately  (see columns 5 and 6) to i n c r e a s e s i n i n t e r e s t  However, c o n t r a s t i n g the a g r e e m e n t - f o r - s a l e  s e c t o r , the a s s i g n e d s e c t o r rose t o  an a l l time high d u r i n g 1960; whereas the a g r e e m e n t - f o r - s a l e due t o excess housing supply d u r i n g t h a t p e r i o d .  s e c t o r decreased  The q u a r t e r l y  1 3  flows are shown  i n Graph 4.7 t o g e t h e r with extended mortgage market on e x i s t i n g h o u s i n g . quarterly credit  flow p a t t e r n matches t h a t i n d i c a t e d b y t h e  restraint  At t h i s  annual f i g u r e s  point i t  in that during  i s a p p r o p r i a t e t o i n d i c a t e the s i g n i f i c a n c e of a s s i g n e d  t h a t the a s s i g n e d a g r e e m e n t s - f o r - s a l e and r e l a t i v e  T a b l e 4.4  indicated  t o the a s s i g n e d mortgages  ranged from 10% (1961) to 38% (1956) with a 10 y e a r average o f 26%. t h a t the percentage o f a s s i g n e d a g r e e m e n t s - f o r - s a l e dropped o f f i n 1960, 1961 ( r e f l e c t i n g  uncertainty  by p o t e n t i a l  from the r e a c t i o n o f the a s s i g n e d mortgage s e c t o r . a s s i g n e d mortgage s e c t o r i s s u f f i c i e n t ,  Noting  dramatically  vendors), there  evidence t o suggest t h a t the a s s i g n e d a g r e e m e n t s - f o r - s a l e vary  Secular  The  p e r i o d s the amount o f a s s i g n e d f i n a n c i n g i n c r e a s e s .  a g r e e m e n t s - f o r - s a l e compared with the a s s i g n e d mortgage.  4.6.2  rates.  is  little  significantly  O b s e r v a t i o n o f the combined  as can be noted i n Graph 4 . 7 .  Variation  U n l i k e the a g r e e m e n t - f o r - s a l e s e c t o r i s noted over t i m e .  s e c t o r no s i g n i f i c a n t decrease i n the assignment  This r e s u l t  i s s u e d d u r i n g the p e r i o d under s t u d y .  i s i n accordance with the type of mortgage The standard mortgage was one with 20 to  25 y e a r a m o r t i z a t i o n  and g e n e r a l l y no r e s t r i c t i o n s were p l a c e d on the mortgagor f o r  assignment p u r p o s e s .  Hence, the use o f the a s s i g n e d mortgage as a source o f funds  Graph 4.7  Gross Quarterly flows of the assigned mortgage sector and the extended mortgage market on existing housing. Denominator 1s of two forms and shows alI assigned mortgages (as well as assigned mortgages) originally financed by non-agreement for sale sector). Changes in interest rate indicated by bar graph.  55  during this 4.6.3  p e r i o d could be expected to  Seasonal  Graph 4.7 for-sale  continue.  Variation  exhibits  market.  similar  seasonal v a r i a t i o n s  Strong second and t h i r d  quarter  as was found i n the  agreement-  demand tends to be the  rule.  T h i s o b s e r v a t i o n i s i n keeping w i t h the s t r o n g seasonal demand e x p e r i e n c e d the  Canadian mortgage markets  4.6.4  Conventional  Graph 4 . 7 , sector.  4.8  Graph 4.8  conventional  Lender  and 4.9  (all  seasonal t u r n o v e r  parallel  those presented i n the  the r e l a t i o n s h i p  to the  lenders.  l e n d i n g p o s s i b i l i t i e s ) ; Graph 4.9  Graph 4.10  new and e x i s t i n g  First,  reveals  (new and e x i s t i n g  of these markets  housing)  the  the a s s i g n e d mortgage markets  i s examined.  by the c o n v e n t i o n a l  appears to be i n c r e a s i n g as the pre-1958 average  relative  financing.  be noted t h a t the a s s i g n e d mortgage market r e p r e s e n t s lending  illustrates  the  housing s e c t o r f i n a n c e d by  s e c t o r r e g a r d l e s s o f use of  the magnitude  agreement-for-sale  o f the a s s i g n e d s e c t o r to  a s s i g n e d s e c t o r r e l a t i v e to the new and e x i s t i n g conventional  patterns.  Relationship  represents  lenders  and r e f l e c t s  in  From Graph 4 . 8 ,  it  can  an average of 61% of  all  lenders.  This  average  i s 53% and the post-1958  average  14 r a t i o i s 69%. conventional 1958  Remaining with Graph 4 . 8 , l e n d i n g on e x i s t i n g  comparison of the a s s i g n e d s e c t o r  housing ( s a l e s and r e f i n a n c i n g )  reveals a pre-  average r a t i o of 158%, with a decrease a f t e r t h a t time to 113%.  occurs because of a temporary sector rather of 1961  than permanent  to 1963,  mortgagors  substitution  refinancing  r a t i o of a s s i g n e d mortgages c r e a s e s as i n t e r e s t  rates  for  r e d u c t i o n of the a s s i g n e d s e c t o r .  mortgage r a t e s  preferred  of r e f i n a n c i n g  remained  static,  to a s s i g n m e n t . ^  to c o n v e n t i o n a l  1  hence i n the It  The d e c l i n e  the a s s i g n e d mortgage During the  years  s a l e of a house,  can be concluded t h a t  mortgages on e x i s t i n g  r i s e , with the e x c e p t i o n of the  to  the  housing i n -  substitution  noted.^  LEGEND  Total Assigned Mortgages Conventional Mortgages on Existing Housing r  TW //////////// /////y>/ ' <  TW  INTEREST  RATES'  TW Graph 4.8  W / / / / / A  '  T W  T9bl  YERRS  l/INCREASING  Total Asslqned Mortqaqes Conventional Mortgages on New and Existing Housing  I960  DECREASING  TW  Percent of total assigned mortgages sector relative to a l l conventional lending nn existing housing as well as percent of total assigned mortgages financing sector compared to a l l conventional lending on new and existing housing. Data base for G.V.R.D. covers time period of 1954-1963 and represents gross mortgage flows.  INTEREST  RATES  T5SF  3B5  1964  Graph 4.9  Percent of total assigned mortgages sector 1n comparison to fnew) conventional lending on new nouses as well as on new conventional lending on existing housing. Series covers period 1954-1963 for G.V.R.D. and represents gross mortgage flows. Changes in interest rate indicated by bar graph.  LEGEND  Total Assigned Mortgages Total New Mortgages on E x i s t i n g Housing Total Assigned Mortgages Total New Mortgages on New Housing  o UJ,Ti CC™ UJ  a.  153T  "  t  e  "  "  t  ///////////.  V/.  /INCREASING / s t //// "  t  e  "  e  -  INTEREST '\  te  " t e "  RATES  "ter  -  " t e "  " t e "  " t e "  "  t  e  "  YEARS  %%%% T96TJ "T355  DECREASING  Graph 4.10 Percent of total assigned mortgages compared to total fconventional and nnnconyentional) new mortgage on existing housing as well as on new housing. Period analyzed is from 1954-1963 for G.V.R.D. and represents gross mortgage flows. Interest rate change shown for comparison.  "  t  e  INTEREST "  V///A  RATES "  t  e  "  te"  59  The dramatic i n Graph 4 . 9 .  importance o f the a s s i g n e d s e c t o r as a source of funds i s found  The a s s i g n e d s e c t o r  ( r e l a t i v e to conventional  l e n d i n g on e x i s t i n g  17  housing)  i s two and a h a l f times g r e a t e r  The importance of t h i s  than the c o n v e n t i o n a l  a s s i g n e d mortgage s e c t o r i s r e v e a l e d  lending s e c t o r .  by the above p e r -  1o.  centage and those i n Graph 4 . 1 0 .  Graph 4.10 i n d i c a t e s t h a t the a s s i g n e d  s e c t o r on average i s 162% r e l a t i v e housing and 113% r e l a t i v e  t o a l l types o f mortgage  to a l l types o f mortgage l e n d i n g on new h o u s i n g .  i n c l u s i o n o f the n o n - c o n v e n t i o n a l t o Graph 4.9 examination 4.7  (conventional o f the p r i v a t e  lenders o n l y ) .  T h i s same phenomena o c c u r r e d d u r i n g  vendor f i n a n c i n g .  CONVENTIONAL LENDER FINANCING  of the e x i s t i n g mortgage market. dicates,  ^on an annual  look at the c o u n t e r c y c l i c a l components  T a b l e 4.7  (a d u p l i c a t i o n of T a b l e 4 . 3 . 1 ) i n -  b a s i s ) , t h a t new mortgages on e x i s t i n g  housing accounted  from 18% (1955) to 27% (1962) o f the extended mortgage market  housing.  Conventional  of the same market.  rates. series),  Graph 4.11 r e v e a l s a q u a r t e r l y  The n o n - c o n v e n t i o n a l react  in t h e i r  proportionately restraint).  lender  occurring during decreasing  (accounted f o r by d i f f e r e n c e  own c y c l i c a l manner  from 5% ( p e r i o d s  interest  between two  (column 3 , T a b l e 4.7)  of c r e d i t ease)  These n o n - c o n v e n t i o n a l  s e r i e s with p r o p o r t i o n s i n  by i n c r e a s i n g  to 8 or 9% ( p e r i o d s of  credit  l e n d e r s tend t o be s m a l l , as n o t e d ; but i n  another c y c l i c a l p r o p o r t i o n o f the e x i s t i n g mortgage market T a b l e 4.7  on e x i s t i n g  l e n d e r s themselves accounted f o r 13% (1955) t o 21% (1962)  excess o f 40% of extended mortgage market  fact  The  l e n d e r s tends t o smooth out the s e r i e s compared  T h i s chapter c l o s e s with a b r i e f  for  l e n d i n g on e x i s t i n g  (colmns 11 and 12) shows the r e f i n a n c e  (non-sale)  c o u l d be s t u d i e d . mortgage  t o range from 14% (1955) t o 27% (1963) of the extended mortgage market  market  on e x i s t i n g  \  60 \  Mortgages on  Refinanced Mortgages on E x i s t i n g Hou s irjcj.Jnon-sales)  E x i s t i n g..JjgjjjirKi  Fi nancing by Convcntiona Lender  Financing by Non-conventional Lender  % EMMEH  % EMMEH  % TMM  Col.1 C o l . 2  % TMM  Col .3 C o l . 4  Total  % EMMEH  Financing by . Conventional Lender % TMM  Col .5 C o l . 6  % EMMEH  % TMM  Col .7 Col .8  Financing by Non-conventional Lender % EMMEI  % TMM  Col .9 Col .10  Total  EMMEH  % TMM  coi.n  Col .1  ' 1S54  .11  .08  .08  .05  .19  .13  .06  ,04  .08  .05  .14  .09  1955  .13  .09  .05  .03  .18  .12  .15  .07  .08  .05  ..23  .15  1956  .14  .10  .08  .06  . .22  .16  .11  .08  .06  .05  .17  .13  1957  .12  .08  -.09  .07  .21  .15  .10  .07  .06  .05  .16  .12  1958  .17  .10  .05  .03  .22  .13  .12  .06  .09  .06  .21  .12"  1959  ,17  .09  .05  .04  .22  .13  .11  .08  .11  .07  .22  .15  1950  .16  .14  .08  .07  .24'  .21  .12  .11  .07  .05  .19  .16  1961  .15  .13  .07  .06  .22  .19  .15  .13  .09  .07  .24  .20  1962  ..21  .16  .06  .05  .27  .21  .13  .10  .10  .08  .23  .18  1963  .18  15  .07  .06  .25  .21  .16  .13  .11  .08  .27  .21  Take! 4.7  C o u n t e r c y c l i c a l components of the extended mortgage market on e x i s t i n g housing. Series i s based on 1954-1963 monthly data f o r G.V.R.D. Total extended mortgage market represented by T . M . M . ; whereas extended mortgage market on e x i s t i n g housing represented by E.M.M.E.H.  LEGEND  o" Total New Mortgages on Existing Housing Extended Mortgage Market on Existing Housing New Conventional Mortgages on Existing Housing Extended Mortgage Market on Existing Housing  LU  0.  TW  "  t  e  "  "  t  e  "  "  t  e  "  "  t  e  "  '1959 YEARS  T W  ,///// / ////// /////S/ ' '' >  l/INCREASING INTEREST RATES "  t  e  -  GRAPH  4.n  TW  1W  W/////A  te  T96T  "  t  e  -  YEARS  "  t  e  "  t  e  "  //////  DECREASING INTEREST RATES  Percent new conventional mortgages on existing housing compared to extended mortgage on existing housing as well as percent total new (conventional and nonconventional) mortgages on existing housing relative to extended mortgage market on existing housing. Data base represents gross mortgage flows for G.V.R.D. for 1954-1963. Interest rate change shown by bar graph.  mdiaj  " t e "  "  553"  1964  62  housing. market.  F l u c t u a t i o n s appear comparable t o the new mortgages on e x i s t i n g housing Q u a r t e r l y data from Graph 4 . 1 2 ,  proportionate market  peaks i n 1955 and 1963  on e x i s t i n g  housing).  refinancing occurs.  In  c o n t r a s t e d to graph 4 . 1 1 ,  (i.e.,  i n excess of 40% the extended  1957 q u a r t e r  This difference  The n o n - c o n v e n t i o n a l r e f i n a n c e element  11%)  ratio  a direct  3,  relationship  1961  (column 9)  plays an important  Interestingly,  to 1963.  It  role  a high (9% to  would appear t h a t there  is  1961  (see s e c t i o n 4 . 4 . 5 ) i n the a s s i g n e d mortgage s e c t o r of  During t h i s  p e r i o d , s u b s t i t u t i o n between a s s i g n e d mortgages and  r e f i n a n c e d mortgages would appear to e x i s t recorded i n the mortgage r a t e , the m o r t g a g o r s .  of  time.  between the i n c r e a s e i n the r e f i n a n c i n g of the y e a r s  to 1963 and the d e c l i n e the same p e r i o d . ^  i n the y e a r s  a decrease i n the p r o p o r t i o n  at t h a t  ranges from 6% (1956) to 11% (1963). i s maintained  mortgage  c o u l d be due to the emphasis p l a c e d on new  housing c o n s t r u c t i o n ( r a t h e r than r e f i n a n c i n g )  again as i t  shows comparable  i n t h a t as l i t t l e  refinancing is preferred  or no change i s  to a s s i g n e d mortgages by  LEGEND  T o t a l Refinanced Mortgages on E x i s t i n g Housing Extended Mortgage Market on E x i s t i n g Housing Refinanced Mortgages (conventional l e n d e r s ) on E x i s t i n g Housing Extended Mortgage Market on E x i s t i n g Housing |  UJ  1554"  T555"  T55F"  T55T  "T55F  '1959  YEARS  T3BF  ///////////////S/s;'' > /INCREASING  T554"  ~T555~  T55S GRAPH  4.12  INTEREST  RATES')  T55F"  W/////A T5Bt  T555  TSBT  DECREASING  INTEREST  "T5BT  Percent r e f i n a n c e d mortgages on e x i s t i n g housing ( c o n v e n t i o n a l l y financed) crimnarpd to extended mortgage market on e x i s t i n g h o u s i n g . Total r e f i n a n c e d mortgages (conventional and n o n - c o n v e n t i o n a l l y f i n a n c e d ) a l s o shown r e l a t i v e to extended mortgage market on e x i s t i n g h o u s i n g . Difference between s e r i e s r e p r e s e n t s n o n - c o n v e n t i o n a l l y r e f i n a n c e d mortgages r e l a t i v e to the extended mortgage market on e x i s t i n g h o u s i n g . Data base represents gross mortgage flows f o r G . V . R . D . f o r 1954-1963. Changes 1n I n t e r e s t r a t e i n d i c a t e d by bar g r a p h .  T5BF  T5BT  RATES  T5BT  5HT  "•1964  0  64  Footnote References - Chapter  1.  IV  The land r e g i s t r y system i n B r i t i s h Columbia i s a m o d i f i e d T o r r e n s System. T h i s system was f i r s t d e r i v e d by an A u s t r a l i a n c i v i l s e r v a n t and was made law i n m o d i f i e d form i n B r i t i s h Columbia by the Land R e g i s t r y A c t ( R . S . B . C . 1960, Chapter 208). Under the A c t , the P r o v i n c e i s d i v i d e d g e o g r a p h i c a l l y i n t o seven areas f o r a d m i n i s t r a t i o n p u r p o s e s . The p r i n c i p l e element i n t r o d u c e d i n the A c t p r o v i d e s t h a t a l l instruments i n r e a l p r o p e r t y must be r e g i s t e r e d . The purpose of the system i s to save persons d e a l i n g with r e g i s t e r e d p r o p e r t i e s from the t r o u b l e of going behind the r e g i s t e r in o r d e r to p r o t e c t themselves of the v a l i d i t y o f the t i t l e . From a r e s e a r c h v i e w p o i n t , such a system p r o v i d e s an a c c u r a t e h i s t o r y o f p r o p e r t y t r a n s f e r as w e l l as the mortgage f i n a n c i n g r e l a t e d to t h a t t r a n s f e r . Further  information  may be gained be r e f e r r i n g  to  the  (a)  S.W. H a m i l t o n . " T i t l e R e g i s t r a t i o n i n B r i t i s h C o l u m b i a , " in Real E s t a t e Trends in M e t r o p o l i t a n Vancouver, (Vancouver: Real E s t a t e Board of G r e a t e r Vancouver, 1971).  (b)  J . E . Smyth and D.A. Soberman. The Law and Business A d m i n i s t r a t i o n Canada, ( T o r o n t o : P r e n t i c e - H a l l , 1968), p. 463.  2.  S . Richmond. S t a t i s t i c a l  3.  Evans, op. c i t . , p. 189, as w e l l as G u t t e n t a g , "The Short C y c l e in R e s i d e n t i a l C o n s t r u c t i o n , " pp. 275-98, r e f e r t o the c o u n t e r c y c l i c a l h y p o t h e s i s .  4.  I b i d , p.  5.  Reference to the concept of the c o u n t e r c y c l i c a l theory can be found Chapter 2 . 1 . 2 . 1 .  6.  Comparable r a t i o s of c o n v e n t i o n a l l e n d i n g on new mortgages on e x i s t i n g housing ( r e l a t i v e to t o t a l extended mortgage market are 12% and 21%. Refinance r a t i o s are 9% to 20%.  7.  T a b l e s 4.3.1 and 4 . 3 . 2 are i l l u s t r a t e d beyond the e x p l a n a t i o n noted above. The reader w i l l note t h a t a f r i n g e market e x i s t s , c o r r e s p o n d i n g t o the l a r g e r sub-market. E x p l a n a t i o n of these f r i n g e markets i s f o o t n o t e d i n order to m a i n t a i n c o n t i n u i t y , not as a means of r e d u c i n g the importance of these f r i n g e markets. For example, T a b l e 4.3.1 i l l u s t r a t e s t h a t i n a d d i t i o n t o the c o n v e n t i o n a l l e n d e r s f i n a n c i n g e x i s t i n g h o u s i n g , a s m a l l e r f r i n g e market, government and p r i v a t e , a l s o performs the same f u n c t i o n . The same phenomena repeats i n T a b l e 4 . 3 . 2 , although t e c h n i c a l l y speaking i n 4 . 3 . 2 an a s s i g n e d agreementf o r - s a l e market compliments the l a r g e r a s s i g n e d mortgage market.  274.  Analysis,  (New York:  U n d e r l i n i n g i s t h a t of the  Ronald P r e s s ,  1964), pp.  in  224-225.  author. in  65  T a b l e 4.4 i l l u s t r a t e s the r e l a t i v e importance of these n o n - c o n v e n t i o n a l l y funded s u b - m a r k e t s . Reference can a l s o be found in s e c t i o n 4 . 5 . 5 and 4 . 6 . 4 . 8.  Canadian banks withdrew due to maximum l e n d i n g r a t e r e s t r i c t i o n s Bank A c t .  under  the  9.  Measurement of the d i f f e r e n c e between new and e x i s t i n g housing i n t h i s study was based on the age of mortgage. With a l a r g e s t o c k of completed and u n occupied housing in 1960, 1961, a new house on the market f o r g r e a t e r than one y e a r , c o u l d be c l a s s i f i e d as an e x i s t i n g house, when i n f a c t the house was t r e a t e d as a new b u i l d i n g from a l e n d e r ' s v i e w p o i n t . T h i s would account f o r the i n c r e a s e i n e x i s t i n g l e n d i n g by non-bank c o n v e n t i o n a l l e n d e r s i n the e x i s t i n g housing market i n 1960, 1961 o n l y .  10.  No abrupt s h i f t in long run demand can be n o t e d . Population figures i n d i c a t e no b a s i c p o p u l a t i o n s h i f t at t h i s t i m e . P o p u l a t i o n f i g u r e s can be found i n D a b e s t a n i , A . A Model of I n t e r - P r o v i n c i a l M i g r a t i o n between B . C . and otherCanadian P r o v i n c e s . M a s t e r ' s T h e s i s , (Vancouver: U n i v e r s i t y of B . C . , 1975), p. 12  11.  If the c o n v e n t i o n a l l e n d i n g on new houses i s i n c l u d e d the r e l a t i v e magnitude the p r i v a t e vendor f i n a n c i n g drops to an average of 44% of a l l c o n v e n t i o n a l lending. The range of t h i s r a t i o i s from 23% (1958 q u a r t e r 2) to 70% (1961 quarter 3).  12.  The c o n t r a s t to the new housing market f i n a n c e d by c o n v e n t i o n a l l e n d e r s i s a l s o brought out by Graph 4 . 6 . On average p r i o r to 1958, 71% of the c o n v e n t i o n a l l y f i n a n c e d market i s absorbed by the a g r e e m e n t - f o r - s a l e market. The average f i g u r e a f t e r t h a t date i s 137%.  13.  The reasons f o r t h i s d i f f e r e n t r e a c t i o n c o u l d be due t o the f o l l o w i n g f a c t o r s . During t h i s p e r i o d , f o r e c l o s u r e s on high r a t i o mortgaged homes were at an a l l time h i g h . Hence in these and d e l i n q u e n t mortgage c a s e s , s a l e of e x i s t i n g housing with l a r g e e x i s t i n g mortgages c o u l d have been the r u l e , with l i t t l e or no a d d i t i o n a l funds r e q u i r e d . T h i s c o u l d account f o r the l a r g e percentage of a s s i g n e d mortgages. A g r e e m e n t s - f o r - s a l e on the o t h e r hand, decreased because of l a c k of c o n f i d e n c e in the economy.  14.  The i n c r e a s e of t h i s l a t t e r r a t i o i s due to an decrease i n new housing s t a r t s r a t h e r than an i n c r e a s e i n a s s i g n e d mortgages. The 60% l e v e l would appear constant.  15.  See s e c t i o n 4.6 f o r a b r i e f e x p l a n a t i o n of why s u b s t i t u t i o n of r e f i n a n c i n g f o r assignment o c c u r s . For a more i n - d e p t h study r e f e r to E g e r , A . F . " P r o b a b i l i t y of Mortgage Repayment," Unpublished working paper. (Vancouver: U n i v e r s i t y of B r i t i s h C o l u m b i a , 1975), pp. 1-25.  16.  In Quarter 3 of 1955, the r a t i o of a s s i g n e d mortgages to c o n v e n t i o n a l l e n d i n g drops d r a m a t i c a l l y . T h i s r e a c t i o n can be expected as mortgage r a t e s d e c l i n e d in that y e a r . However, by the f o u r t h q u a r t e r a s s i g n e d mortgages i n c r e a s e d t h r e e f o l d over the t h i r d q u a r t e r . I n t e r e s t r a t e change does not cause t h i s r e a c t i o n ; nor i s there a change i n s i z e of a s s i g n e d mortgage. Coupled with t h i s unexplained f o u r t h q u a r t e r i n c r e a s e , i s a seasonal d e c l i n e of c o n ventional lenders.  of  66  17.  In comparison the a s s i g n e d s e c t o r r e l a t i v e t o the c o n v e n t i o n a l l y f i n a n c e d new housing market i s 149%. The a s s i g n e d s e c t o r r e p r e s e n t s a source of funds g r e a t e r than the housing c o n v e n t i o n a l l y f i n a n c e d new housing market.  18.  At time of w r i t i n g (1976) the s i g n i f i c a n c e of the a s s i g n e d s e c t o r i n Canada i s p r o b a b l y l e s s than i n the p e r i o d under study because of the predominance of today o f f i v e y e a r c a l l s on mortgages. These f i v e y e a r c a l l s probably reduce the s i z e o f a s s i g n e d s e c t o r . In the United S t a t e s however, the v a r i a b l e r a t e mortgage i s not as widespread and the a s s i g n e d mortgage s e c t o r probably p a r a l l e l s t h a t i n d i c a t e d by t h i s s t u d y .  19.  A s t a r t i n g p o i n t f o r f u r t h e r r e s e a r c h would be to combine a l l the nonc o n v e n t i o n a l , non-government l e n d e r s by type of housing and determine the cyclical effects. At t h i s p o i n t , i n d i c a t i o n s are t h a t such a combination would merely change the a b s o l u t e magnitude o f the c y c l i c a l components, the b a s i c c y c l e of the a s s i g n e d mortgages and p r i v a t e agreements would be maintained.  20.  T h i s would account f o r the d e c l i n e of a s s i g n e d mortgages i n 1961-1963 as mortgage i n t e r e s t r a t e s d i d not i n c r e a s e s i g n i f i c a n t l y . It i s more f e a s i b l e f o r a mortgagor to o b t a i n a new mortgage (on e x i s t i n g housing) w i t h a longer a m o r t i z a t i o n p e r i o d and hence s m a l l e r downpayment, than t a k e over an a s s i g n e d mortgage with s h o r t e r a m o r t i z a t i o n p e r i o d and consequently h i g h e r downpayment. Hence the markets a r e r e l a t e d i n the manner d e s c r i b e d .  67  CHAPTER V STABILIZING EFFECT OF PRIVATE VENDOR FINANCING AND ASSIGNED MORTGAGES ON HOUSING PRICES: THE MODEL AND METHODOLOGY  5.1  INTRODUCTION  5.2  SOURCE OF FUNDS 5.2.1  P r i v a t e Vendor F i n a n c i n g  5.2.2  A s s i g n e d Mortgage F i n a n c i n g  5.3  MODEL  564  DEMAND EQUATION  5.5  5.4.1  Credit  Rationing  5.4.2  Income  Effect  5.4.3  Rental  Market  5.4.4  Alternate  Investment  SUPPLY EQUATION 5.5.1  5.6  Substitution  Vacancy Rate  COMPLETE MODEL AND METHODOLOGY 5.6.1  Complete Model  5.6.2  E s t i m a t i n g Technique  5.6.3  Methodology  68  5.1  INTRODUCTION In t h i s c h a p t e r ,  market f o r e x i s t i n g  a d e r i v e d demand and supply model i s developed f o r housing which i s f i n a n c e d by the a s s i g n e d mortgage  s e c t o r or by p r i v a t e  vendor f i n a n c i n g .  A flow of funds model  is f i r s t  the mortgage adopted  to account f o r the above two sources of f i n a n c i n g i n the mortgage market. addition  to s p e c i f y i n g the demand and supply equations of the model, use of  estimating  techniques and problems o f measurement i n markets  reviewed.  Housing p r i c e s do not enter  the model d i r e c t l y ;  the p e r i o d s d u r i n g which the equation are e s t i m a t e d .  results  and c o n c l u s i o n s , are found i n Chapter  of the p r i v a t e  mortgage s e c t o r s to changes i n i n t e r e s t each of the above two markets  5.2  The  are  they do  empirical  VI.  The word c y c l i c a l i s used i n t e r m i t t e n t l y throughout word i s used to d e s c r i b e the r e a c t i o n  in disequilibrium  however,  dictate  Chapter  In  rates.  Chapters V and V I .  vendor f i n a n c e and a s s i g n e d  A positive correlation  and changes in i n t e r e s t  This  rates  between  has been i d e n t i f i e d  in  IV.  SOURCES OF FUNDS  5.2.1  Private  Vendor F i n a n c i n g  The e x i s t e n c e of the p r i v a t e economic r e l a t i o n s h i p s  vendor f i n a n c e market does not change any macro-  of savings and i n v e s t m e n t .  However,  p e r c e p t i o n of the flow of funds w i t h i n the f i n a n c i a l illustrates  the t r a d i t i o n a l l y  accepted flow  system.  of funds model  1  it  does change the Figure  in which  5.1.1 business,  household and government s e c t o r s are i n v o l v e d i n the borrowing and l e n d i n g process of the f i n a n c i a l direct  exchange of r e a l  shown i n F i g u r e 5 . 1 . 2 .  system.  A complete flow of funds model which  assets for f i n a n c i a l  incorporates  a s s e t s by the household s e c t o r  is  The s i n g u l a r d i f f e r e n c e with the complete flow of funds  Intra Household! Transfer Government an 4 Foreign  Direct Financing  Nonfinancial Business  Conventional Indirect  Government and | Foreign  Household  Lenders  Financing  (  Direct Financing Financial Assets  Gross Savings frotj Government and Foreign, Business and the Household Sectors  F i g u r e 5.1.1  S i m p l i f i e d system o f flow o f funds  Nonfinancial Business  Household  Conventional Indirect  Lenders  Financing  Direct Financing| Real . Assets  Gross Savings fron| Government and F o r e i g n , BusinessJ and the Household Sectors  F i g u r e 5.1.2  Complete flow o f funds showing d i r e c t f i n a n c i n g w i t h f i n a n c i a l and r e a l a s s e t s by household s e c t o r  70  from the t r a d i t i o n a l  flow of funds i s t h a t i n the  not to be able to borrow d i r e c t l y  l a t t e r case,  from a s a v i n g s u n i t .  households are deemed  Hence, in order to o b t a i n a  mortgage, a household must borrow i n d i r e c t l y through a f i n a n c i a l traditional conventional housing. total  view i s incomplete as has been e x t e n s i v e l y reviewed  The  in Chapter IV.  The  l e n d e r s are not the o n l y sources of funds i n the market f o r  The p r i v a t e  existing  vendor f i n a n c e s e c t o r i s a s i g n i f i c a n t p r o p o r t i o n of  mortgage market which i n c r e a s e s i n r e l a t i v e  5.2.2  intermediary.  s i z e as i n t e r e s t  rates  the  increase.  Assigned Mortgages  While the p r i v a t e vendor f i n a n c e s e c t o r i s an e x p l i c i t source of funds a v a i l a b l e involves a transfer  source of f u n d s ,  i n p r e v i o u s l y mortgages c o n t r a c t e d ( e x i s t i n g  between h o u s e h o l d s .  the  mortgages)  The f a c t t h a t a mortgagor can a s s i g n h i s  mortgage c r e a t e s a conceptual change i n the flow of funds model u n l i k e t h a t of the p r i v a t e  vendor f i n a n c e s e c t o r .  from one p a r t of the  The a s s i g n e d mortgage t r a n s f e r s  debt  obligations  household s e c t o r to another as opposed to the c r e a t i o n of new  debt o b l i g a t i o n s i n the case of the p r i v a t e  vendor f i n a n c e s e c t o r .  This  transfer  of mortgage debt has i m p l i c a t i o n s because of the t i m i n g of the t r a n s f e r .  Assign-  ment of mortgages can be expected to i n c r e a s e as the d i f f e r e n c e between the a s s i g n e d mortgage r a t e and the c u r r e n t c o n v e n t i o n a l mortgage r a t e s  increase.  nature of the a s s i g n e d s e c t o r was noted i n Chapter I V , a s w e l l  The c y c l i c a l  as the f a c t t h a t  a s s i g n e d s e c t o r i s the l a r g e s t component of the extended mortgage market existing housing.  F i g u r e 5.1.2  r e p r e s e n t s both the e x p l i c i t  p r i v a t e vendor f i n a n c e s e c t o r and the  internal  mortgage market with the r e c o g n i t i o n of d i r e c t assignment of mortgages w i t h i n the  transfer  in  source of funds of  of funds of the a s s i g n e d  borrowings, d i r e c t  household s e c t o r .  the  l e n d i n g and  the  71  5.3  MODEL The hypothesis of t h i s  of the p r i v a t e  Due^toothe s u b s t i t u t i o n  extended mortgage market,  countercyclical  is straightforward.  The s u b s t i t u t i o n  vendor f i n a n c i n g market and the a s s i g n e d mortgage market  the p r i c e o f h o u s i n g . total  chapter  nature  of the  effective  conventional  of the c y c l i c a l  demand f o r  effect stabilizes  components*ofithe  housing c o n t i n u e s i n s p i t e  mortgage market.  Because the  cyclical  components p r o v i d e s u b s t i t u t e  f i n a n c i n g to the u n d e r l y i n g demand components,  the  fall.  p r i c e of housing w i l l  not  Given t h a t the c o n v e n t i o n a l market,  then as r a t i o n i n g  would be r a t i o n e d  lenders were the only source of funds i n the  o c c u r s , fewer housing s a l e s c o u l d be expected as  out of the mortgage market.  In p e r i o d s of c r e d i t  credit  rates.  Alternatively  terms are r e f l e c t e d  However,  i n p e r i o d s of d e c r e a s i n g i n t e r e s t  rates,  housing.  the  The c y c l i c a l components p r o v i d e a source of  funds  to c o n t i n u e in s p i t e of the r a t i o n i n g  lenders.  the concept g r a p h i c a l l y .  indicates  by c o n v e n t i o n a l  Mortgage rates  Q  2  Q  QT  3  Quantity F i g u r e 5.2  Effect  the  of  lenders are not the o n l y source of funds i n  which enables housing t r a n s f e r F i g u r e 5.2  reflects  increase.  the c o n v e n t i o n a l  market f o r e x i s t i n g  borrowers  i n i n c r e a s e d market p r i c e s of housing and p r i c e s  housing can be expected to  mortgage  rationing,  market p r i c e s of houses c o u l d be expected to drop as the p r i c e of housing higher nlnterjest  of  o f mortgages  of an .i;rrore'a sre -tn Itn'teresi: Irfft-es 'on ^ortjga^e -Tending. :  72  The e f f e c t quantity  demanded from Q-j to Q 2 , i f  financing. rates  of an i n c r e a s e in i n t e r e s t  As s u b s t i t u t i o n  at  from r-|  to r ,  decreases  2  no s u b s t i t u t i o n e x i s t s  o c c u r s , then the e f f e c t  i s t o cause a r e d u c t i o n  equilibrates  rates  in source of  o f an i n c r e a s e i n  i n demand from Q-| to Q 3 .  interest  Market r a t e of  interest  r^.  In the case of a s s i g n e d mortgage f i n a n c i n g , the p r i c e i n c r e a s e s with rationing  because the mortgagor  the market. house.  rationing  i s o b t a i n i n g a house at a mortgage r a t e l e s s  The reduced mortgage r a t e s  In the case of p r i v a t e because of the  of both sub-markets  credit  are c a p i t a l i z e d  i n the  increased price  vendor f i n a n c i n g , p r i c e i n c r e a s e s w i t h  i n c r e a s e in f i n a n c i n g a v a i l a b l e  i s to s t a b i l i z e  the observed p r i c e  for  than of  credit  housing.^  The  effect  level.  EXPECTED DEMAND RELATIONSHIPS  5.4  Q  = f  C D  (r,  R, Y , S)  Q ^ = q u a n t i t y of p r i v a t e vendor and/orrsa^sti!g'ne;drmQi^ Measured i n c u r r e n t d o l l a r s per q u a r t e r . n  3  r  = a measure of c r e d i t r a t i o n i n g . Measured as the d i f f e r e n c e the mortgage and ebomd fcate' on t a qiiaawt^pliytbai ys b $ s i s . 4 ' -  Y  = average income per c a p i t a . Measured q u a r t e r l y r a t i o of income to p r i c e of h o u s i n g . 5  R  = a measure of r e n t and housing p r i c e s . Measured q u a r t e r l y d o l l a r s as a r a t i o of r e n t and housing p r i c e s . 6  S  = a measure of r e t u r n of a l t e r n a t i v e q u a r t e r l y in current d o l l a r s . 1  Expected p a r t i a l  9Q  C D  derivatives  / 9r -< 0  9Q ^ / 9R > 0 D  9Q 3Q  C D  C D  / 9Y < 0 /  3S <  i n c u r r e n t d o l l a r s as a  forms of investment.  are:  0  Appendix I d e s c r i b e s sources and d e r i v a t i o n  of  data.  between  in  current  Measured  73  5.4.1  Credit  Rationing  The s e l e c t i o n of an independent v a r i a b l e the l i t e r a t u r e  to measure c r e d i t r a t i o n i n g  d i v i d e d i n t o two major t h e o r e t i c a l  of the mortgage r a t e to i n t e r e s t  fields.  The l a c k of  r a t e change i n the c a p i t a l  market  finds  adjustment  has f o s t e r e d  the concept t h a t n o n - p r i c e rationingiTPttafchertfch^ credit.  These n o n - p r i c e terms i n c l u d e l o a n - t o - v a l u e r a t i o s  r a t i o s e s t a b l i s h e d by the l e n d i n g i n s t i t u t i o n s . sample o f the l i t e r a t u r e rationing.  Guttentag^  the m a t u r i t y  The f o l l o w i n g s t u d i e s are but a  to deal with the problem of n o n - p r i c e  f o r example assumed t h a t i n s t i t u t i o n s  of the l o a n , r a t h e r  questioned t h i s loan,  which attempts  argument.  than a d j u s t i n g the i n t e r e s t  ration  by  loan s i z e at a given i n t e r e s t  r a t i oni ng. ''nTihfseltfa'utho'rs^  rate i t s e l f .  rate in their  that:  of bank loans demanded at  rate only  lower i n t e r e s t  rates.  elasticity  The q u e s t i o n of an  loan r a t e i s l e f t unanswered.  Another n o n - p r i c e avenue i s e x p l o r e d by Kane and M a i l k e l banks g i v e p r e f e r e n c e to customers with long run p r o f i t is rationed. bank w i l l customer.  Rather than charge higher i n t e r e s t  examine long run d e p o s i t a t t r a c t i v e n e s s However, t h e i r  rates  who argue t h a t  potential  when c a p i t a l  to c l e a r the market,  a  and l o a n i n g c a p a b i l i t y of a  argument would appear to i g n o r e the p o s s i b i l i t y t h a t  a non-prime customer c o u l d b i d funds away from a prime customer of a bank. Jaffee^  argued t h a t l e g a l  of  study of n o n - p r i c e  The Freimer and Gordon model however, does not c o n t i n u e to e x p l o r e the  optimal  Jaffee  Freimer and G o r d o n ^  "a banker chooses some i n t e r e s t r a t e and makes loan at t h i s i f the s i z e i s l e s s than or equal to the optimal loan."11.  of q u a n t i t y  altering  He q u e r i e d the adjustment of both r a t e and m a t u r i t y  i n s t e a d o f a s i n g l e adjustment o f mortgage r a t e .  emphasized optimal  and debt s e r v i c e  lending l i m i t s ,  c o n s i d e r a t i o n s of g o o d w i l l  and  74  s o c i a l moves make i t of d i f f e r e n t  i n a d v i s a b l e to charge widely d i f f e r e n t  risk class  in a n a t i o n a l  banking system.  r a t e s to customers  A r a t e s t r u c t u r e based  on a small number o f r i s k c l a s s e s , makes a d m i n i s t r a t i o n of the market f e a s i b l e . This rate structure  leads to a s l u g g i s h and j e r k y adjustment of the market r a t e s .  In g e n e r a l , the n o n - p r i c e r a t i o n i n g arguments have been d i s c o u n t e d J arguments approach a p r i c e r a t i o n i n g h y p o t h e s i s . r a t i o n i n g occurs i n the mortgage market.  M u t h ^ argued t h a t  Jaffee's  price  The Muth h y p o t h e s i s expects a reduced  mortgage r a t e compared t o the bond r a t e , d u r i n g p e r i o d s of c r e d i t but f o r d i f f e r e n t  4  reasons than r a t e d above.  rationings,  Muth c o n s i d e r e d two c l a s s e s of  borrowers. "both o f which have the same marginal r e t u r n to c a p i t a l schedule (MR), but d i f f e r e n t marginal c o s t o f c a p i t a l schedules because of d i f f e r e n c e s i n the r i s k i n e s s of t h e i r optimal l o a n c o n t r a c t s " . . . C l a s s 1 borrowers w i l l each borrow an amount equal to C-[ . . . C l a s s 2 borrowers . . . f i n d borrowing too expensive . . . and no loans w i l l be made."16 F i g u r e 5.3  r e p r e s e n t s the amount of a c l a s s 1 borrower w i l l  a c l a s s 2 borrower w i l l made to t h a t c l a s s .  f i n d borrowing too expensive and.no loans w i l l  Muth reasoned t h a t i f  the marginal c o s t of c a p i t a l  the pure r a t e of i n t e r e s t  schedule of a l l  borrowers would f a l l .  borrowers would be induced to make g r e a t e r c a p i t a l had the pure r a t e o f i n t e r e s t t h e i r marginal  demand; whereas  not f a l l e n .  be  fell,  then  Class 1  e x p e n d i t u r e than they would  C l a s s 2 borrowers would f i n d  r e t u r n schedules would have s h i f t e d from MC2 to MCg^•  that  They would  be a b l e to o b t a i n loans t h a t would not have been p o s s i b l e at the higher r a t e of interest.  75  % PER YEAR  Figure 5.3  M a r g i n a l r e t u r n t o c a p i t a l s c h e d u l e and m a r g i n a l c o s t of c a p i t a l s c h e d u l e f o r two r i s k c l a s s e s o f b o r r o w e r . C l a s s 1 borrowers a r e r e p r e s e n t e d by MC-j; c l a s s 2 borrowers are r e p r e s e n t e d by MC2.  The c l a s s 2 borrowers would f i n d t h a t t h e i r g r o s s debt s e r v i c e r a t i o now met the l e n d e r ' s r e q u i r e m e n t s .  The e n t r a n c e o f i n c r e a s e d numbers o f c l a s s 2 b o r r o w e r s  i n t h e mortgage market would p r e v e n t t h e mortgage r a t e from d e c r e a s i n g i n an a m p l i t u d e comparable t o t h e bond r a t e . An a d d i t i o n a l p o i n t i s c r u c i a l conclusion  that:  to Muth's e x p l a n a t i o n .  Muth noted i n h i s  76  " l e n d e r s as a group stand ready to make any kind of loans at an i n t e r e s t r a t e s u f f i c i e n t l y g r e a t to compensate them f o r the a d m i n i s t r a t i v e c o s t s and r i s k t h a t the loan e n t a i l s . " 1 7 Muth appears to have underestimated the importance of t h i s conventional  latter point.  l e n d e r s r e a c t to the i n c r e a s e d r i s k of the c l a s s  demanding i n t e r e s t  rates  commensurate with the  The  2 borrowers by  increased r i s k .  A class 2  borrower with a 33 percent gross debt s e r v i c e r a t i o would be charged a h i g h e r r a t e of i n t e r e s t service r a t i o .  than would a c l a s s A dual e f f e c t  1 borrower with a 27 p e r c e n t gross debt  exists.  The r e a c t i o n of the  l e n d e r s to  the  i n c r e a s e d r i s k of c l a s s 2 borrowers i n a d d i t i o n to i n c r e a s e d demand, tends cause a l a c k of s e n s i t i v i t y in c a p i t a l  i n the mortgage r a t e d u r i n g i n t e r e s t  to  r a t e changes  markets.  The l a c k of s e n s i t i v i t y of mortgage r a t e s as noted i n the above arguments price rationing dictate  t h a t the c r e d i t  rationing variable  A measure commonly used to i n d i c a t e change i n i n t e r e s t markets  i s the d i f f e r e n c e  be measured by a p r o x y .  rates  i n the  capital  between the mortgage r a t e and the bond r a t e .  measure has been used by Smith and S p a r k s . ^  for  This  The theory behind the use of  this  measurement d e v i c e i s t h a t the bond r a t e can be expected to r e a c t more q u i c k l y to changing c r e d i t c o n d i t i o n s than the mortgage r a t e because of bond r a t e inelasticity.^ (r ) rn  The arguments of the l a c k of s e n s i t i v i t y of the mortgage  as presented above by the p r i c e r a t i o n i n g arguments may a l s o be added  to Muth and J a f f e e ' s h y p o t h e s e s . between the monfgage' anidtfeond r a t e  The r e s u l t (r  - r^)  A n e g a t i v e c o r r e l a t i o n r e s u l t s between r The r  m  m  in t o t a l  housing markets w i l l  i s t h a t the  difference  decreases as i n t e r e s t  - r^ and bond r a t e s  - r^ proxy has been t e s t e d i n n a t i o n a l  implies that regional If  rate  models.  rates  (r^).  Use of t h i s  respond to n a t i o n a l  rise.  variable  credit conditions.  f o r example, excess demand e x i s t s i n the housing market and mortgage  rates  77  d e c r e a s e , then the response by the housing market may not o c c u r . r a t i o n i n g v a r i a b l e depends on the r e g i o n a l with the n a t i o n a l 5.4.2  for  Income  mortgage  housing market  The  credit  acting in conjunction  markets.  Effect  The c h o i c e o f a v a r i a b l e  to r e f l e c t  housing can take s e v e r a l  forms.  M u t h ^ measured c u r r e n t  the  impact of income on the demand  Freidman^O emphasized permanent  income and p r i c e ; E v a n s ^ investment  income;  function  in  po  housing depended upon c u r r e n t a two q u a r t e r function.  income; whereas Hymans and S h a p i r o  change i n income lagged one q u a r t e r  The c h o i c e of the r a t i o  housing r e f l e c t s  of c u r r e n t  in their  emphasized  housing  income r e l a t i v e  to the p r i c e of  a s t a b l e consumer p r i c e index as w e l l as the b a s i c r e l a t i o n s h i p  between p r i c e of housing and income as d e s i r e d by the c o n v e n t i o n a l This ratio  (or more commonly the r e c i p r o c a l )  a potential  i s often  either  i n p u r c h a s i n g a house.  can be expected to be n e g a t i v e l y  a s s i g n e d mortgages or a g r e e m e n t - f o r - s a l e .  c o n s i d e r e d t o be a c o i n c i d e n t i n d i c a t o r with r e s p e c t to the periods of increasing i n t e r e s t  rates,  b u s i n e s s investment  is curtailed.  occur i n the market  for existing  and the  net e f f e c t  i s t h a t the  income to p r i c e r a t i o w i l l sale.  If  little  sense to o r i g i n a t e  stature.  potential  related  to  the  Income l e v e l  is  business c y c l e .  In  income can be expected to decrease as  Given t h a t s u b s t i t u t i o n can be expected h o u s i n g , then housing p r i c e l e v e l s w i l l  ratio  The q u e s t i o n a r i s e s whether  lenders.  used as a measure of what  purchaser should c o n s i d e r as an upper l i m i t  The income to p r i c e r a t i o demand f o r  starts  will  decrease as i n t e r e s t  or not t h i s  rates  expected decrease in  to  stabilize  increase.  the  be a c c e p t e d by the vendor o r g i n a t i n g an  agreement-for-  mortgagors are e x p e r i e n c i n g reduced l e v e l s of income, i t an a g r e e m e n t - f o r - s a l e  The answers to t h i s  to a borrower  paradox are s e v e r a l .  First,  of reduced  the p r i v a t e  makes  financial  vendor can  78  adjust  p r i c e or i n t e r e s t  changes i n p r i c e to from a r i s k 3.0  times  by the vendor.  In  the r i s k  involved.  Alternatively,  income may tend to be t r e a t e d as v i r t u a l l y  viewpoint.  earnings  r a t e to r e f l e c t  In essence a s h i f t  to 3.2  times  of the  p r i c e to  non-significant  income r a t i o  earnings may be c o n s i d e r e d to be  both p o l a r c a s e s , the same expected r e s u l t s  5.4.3  can be expected to i n c r e a s e .  Rental  Rental  Market  A negative  insignificant  (or  correlation  As the  private  vendor  can be e x p e c t e d .  Substitution  housing i s a s u b s t i t u t e  for  ownership.  I n c l u s i o n o f the e f f e c t  rent levels  i s necessary to account f o r  ownership.  A r e n t to house p r i c e r a t i o i s used to account f o r t h i s  For example,  from  occurs.  income t o p r i c e r a t i o d e c r e a s e s , demand f o r a s s i g n e d mortgages financing)  the  the p o s s i b l e s h i f t  from r e n t a l  of  to  shift.  the Huang^^ housing model c o n s i d e r e d the value o f new houses purchased  to be a f u n c t i o n of the expected r a t i o of rents i n summarizing the  to housing p r i c e s ;  Kalchbrenner^  SSRC-MIT-PENN (SMP) econometric model noted that per  demand f o r the stock o f housing i s a f u n c t i o n o f the the s t o c k of houses r e l a t i v e to general index lagged three q u a r t e r s  implicit  consumer p r i c e s .  i n h i s demand f o r  rental  capita  price  for  E v a n s ^ s e d a rent U  housing f u n c t i o n .  The reasoning  f o r the use o f the above o f r a t i o i s t h a t as r e n t i n c r e a s e s , the r e l a t i v e c o s t of homeownership can be expected to d e c r e a s e . ownership u n i t s for  can be e x p e c t e d .  A shift  from r e n t a l  This r a t i o is p o s i t i v e l y  related  units  to  to the demand  mortgages.^ The s p e c i f i c a t i o n of the dependent v a r i a b l e  existing occurs, shifts  housing market does not change t h i s by c o n v e n t i o n a l  lenders,  as a c y c l i c a l component of  expectation.  housing s t a r t s  decline.  i n u n d e r l y i n g demand, supply o f new r e n t a l  ownership u n i t s  i s reduced.  units  As mortgage  the  rationing  Assuming no abrupt and supply of new housing  Reduction i n the supply of r e n t a l  units  causes an  79 i n c r e a s e i n the  rental  payments o f the  tenant.  The ownership housing s e c t o r has two sources o f flows on which to r e l y f o r market.  for  The new housing supply s e c t o r may s u f f e r a r e d u c t i o n i n new u n i t s  to i n c r e a s i n g i n t e r e s t  rates.  The e x i s t i n g s t o c k however,  units due  provides a p r o p o r t i o n -  28 ately  greater  supply of e x i s t i n g units  r e d u c t i o n i n housing s t a r t s . but w i l l  not be as a b r u p t l y  which are t r a n s f e r a b l e . i n  spite of  Hence t u r n o v e r o f ownership housing may be d i m i n i s h e d , affected  as w i l l  the  rental  market.  Prices of  s h i p housing s h o u l d not move upward as q u i c k l y as the p r i c e s o f r e n t a l net e f f e c t  the  i s to cause the r e n t to p r i c e r a t i o  t i o n s o f e x i s t i n g mortgage market  increase.  owner-  units.  to i n c r e a s e as the c y c l i c a l  The p a r t i a l  derivative  The  propor-  i s expected  to  be p o s i t i v e . The q u e s t i o n o f nominal the expected d e r i v a t i v e  (recorded)  as r e n t a l  are those p a i d by the t e n a n t ; rental for.the  apartments.  In  rents,  on a s i n g l e f a m i l y  rents  (realized)  rents  i s being measured.  does not  influence  Recorded rents  are those r e c e i v e d .by the  investor  d e t e r m i n i n g demand f o r mortgages o f e x i s t i n g h o u s i n g , concern  as the  tenure  f o r ownership i s measured by the  former are s u b s t i t u t e d by the  recorded  tenant f o r monthly  demand f o r a l t e r n a t i v e  market. return  investment.  on t h e . s t o c k market Alternate  For example, t h i s  demand may a r i s e i f  i s l e s s than t h a t e x h i b i t e d  in a regional  from  the  rate  housing  S p e c u l a t i v e demand f o r mortgage can be expected  vary i n v e r s e l y with the r e t u r n  on the s t o c k  can be expected  r e a c t to the above r e l a t i o n s h i p because o f the ease of e n t r y , and l a c k o f s t a n d a r d i z a t i o n  lack of  r e q u i r e d i n o b t a i n i n g an a g r e e m e n t - f o r - s a l e  The r e a c t i o n can be expected to be f e l t  than the c o n v e n t i o n a l  the  to  market.  The c y c l i c a l components o f the e x i s t i n g housing market  rather  payments  demand f o r mortgages can be expected to vary i n v e r s e l y with  on the s t o c k market.  mortgages.  rents,  Investment  Demand f o r c y c l i c a l components o f the e x i s t i n g housing market may r e s u l t  of return  of  house.  Alternative  5.4.4  substitution  realized  substitution of rental  not by r e a l i z e d  and r e a l  first  to  regulation or assigned  i n these market  segments  l e n d e r market because o f the above c h a r a c t e r i s t i c s .  80 5.5  EXPECTED SUPPLY RELATIONSHIPS Q  c =  s  g (r,  V)  where  r  = a measure o f c r e d i t r a t i o n i n g . mortgage and bond r a t e s .  V  = i s the occupancy r a t e . Measured by the r a t i o o f completed but unoccupied housing t o t o t a l h o u s i n g s t o c k . Measured on a q u a r t e r l y b a s i s .  Expected p a r t i a l 3Q  s  aQ  s  e  /  9r < o  G  /  av < o  5.5.1  derivatives  Measured by the d i f f e r e n c e  between  the  are:  Vacancy R a t e s :  Vacant housing u n i t s of determining a v a i l a b l e  are i n v e n t o r y .  T h i s i n v e n t o r y may be viewed as a means  s u p p l y o f housing u n i t s  i n the housing market.  as vacancy r a t e has been i n t r o d u c e d i n t o housing s t a r t  m o d e l s , to determine  r e l a t i o n s h i p between number o f households and d w e l l i n g u n i t s , i n the above model to measure the and e x i s t i n g housing market. adjusted)  available  Theoretically,  Inasmuch the  vacancy r a t e i s used  s u p p l y o f h o u s i n g , both i n the new the normal  vacancy r a t e  (seasonally  s h o u l d be u s e d .  The normal, vacancy r a t e i s a composite o f d w e l l i n g  f o r s a l e and r e n t as w e l l  as those u n i t s needed f o r seasonal demand and those  under r e p a i r . difficult  In s p i t e of t h e o r e t i c a l  to measure.  completeness however,  this  rate is  units  extcemely  A second measure suggested by G r e b l e r and M a i s e l , i s  that  29 o f h o u s i n g . i n v e n t o r y under c o n s t r u c t i o n .  T h i s measure may take two f o r m s ,  actual  as the l e v e l  inventory  under c o n s t r u c t i o n as w e l l  occupied housing.  The importance o f i n v e n t o r y  i.e.,  o f completed but un-  under c o n s t r u c t i o n i s noted by G r e b l e r  . and M a i s e l . . "As i s t r u e i n any i n v e n t o r y , the u n i t s under c o n s t r u c t i o n are r e l a t e d to sales. B u i l d e r s w i l l t r y to m a i n t a i n a c e r t a i n r a t i o o f u n i t s under c o n s t r u c t i o n to s a l e s . In a market o f r a p i d t u r n o v e r , they may r a i s e t h i s r a t i o . . . As s a l e s b e g i n t o f a l l , r i s k s i n c r e a s e and b u i l d e r s w i l l c u t the r a t i o and reduce the u n i t s under c o n s t r u c t i o n by even more than the f i n a l demand."30 The same i n v e n t o r y In  choosing t h i s  which r e f l e c t  c o n c e p t ' a p p l i e s to the completed but unoccupied housing s e r i e s .  l a t t e r s e r i e s , r e c o g n i t i o n i s given to u n i t s a v a i l a b l e  more a c c u r a t e l y r e f l e c t  s u p p l y , as opposed to b u i l d e r  These e x p e c t a t i o n s may or may not r e f l e c t  the a c t u a l  for  sale  expectations.  s u p p l y as G r e b l e r and Maisel  81 note i n t h e i r  quotation  above.  Hence f o r t h i s  reason, this  completed but  unoccupied housing s e r i e s i s c o n s i d e r e d a more t h e o r e t i c a l l y than the  inventory  The v a r i a b l e  sound measure,  under c o n s t r u c t i o n . used to measure vacancy r a t e i n the above m o d e l , i s the  ratio  of  31 completed but unoccupied h o u s i n g r e l a t i v e  tottotal  housing s t o c k .  The  derivative  o f the s u p p l y o f c y c l i c a l mortgages to the vacancy r a t e i s expected to be The s i g n depends on the a v a i l a b l e all  particular  the i n c r e a s e i n i n v e n t o r y  c o u l d be expected t o have a n e g a t i v e e f f e c t  mortgage d o l l a r s as u n c e r t a i n t y is  sources o f f i n a n c i n g i n the mortgage market.  l e n d i n g sources are s u p p l y i n g mortgage c r e d i t ,  housing u n i t s  negative.  increases in.the  can be expected to r e a c t much l i k e  5.6  vendor to  of  on the s u p p l y o f c y c l i c a l  housing market.  The p r i v a t e  the b u i l d e r i n f a c e o f  vendor  uncertainty.  High l e v e l s o f completed but unoccupied h o u s i n g may reduce the p r o p e n s i t y o f private  If  the  sell.  COMPLETED MODEL AND METHODOLOGY  5.6.1  Complete Model  The complete model i s now presented i n terms o f q u a n t i t y  of c y c l i c a l  funds  demanded and s u p p l i e d . Q  D  Q  S  Q  D  C  C  C  5.6.2  = a + b =  + B  = Q  1  r + b  2  Y + b  ]  r + B  2  V *  u  3  R + b  4  S + e  (5.1) (5.2) (5.3)  C S  E s t i m a t i n g Technique  The demand and s u p p l y e q u a t i o n s are e s t i m a t e d s e p a r a t e l y . credit  rationing  variable  (r)  Given t h a t  the  i n the above equation had been endogenous, then  the procedure would have been to s o l v e the system o f equations  simultaneously  82  using the two stage l e a s t  squares t e c h n i q u e . " ^  r  limited  3  i s exogenous, given the  to the n a t i o n a l undertaken cyclical  capital  nature  markets.  independently.  of the r e g i o n a l  Hence, e s t i m a t i o n  Second,  system of  equation  mortgage market  relative  of the 'equa,ti<on 5 w i l l  be  :  i n the equations estimated  components of the mortgage market  Hence, i n these s i t u a t i o n s  However in t h i s  are segregated i n t o  i n Chapter V I ,  the  several s u b - s e c t i o n s .  the argument f o r r being exogenous i s  strengthened  considerably. 5.6.3  Methodology  In order to t e s t mortgages s t a b i l i z e  the h y p o t h e s i s t h a t p r i v a t e  the p r i c e o f h o u s i n g , p e r i o d s o f excess demand and excess  supply i n the housing market were i d e n t i f i e d The f i r s t , time p e r i o d (i.e.,  (1954  quarter  1 to 1962 q u a r t e r  decreased d u r i n g t h i s  4)  d u r i n g the p e r i o d under s t u d y .  1 t o 1957 q u a r t e r  housing p r i c e s i n c r e a s e d d u r i n g t h i s  quarter  vendor f i n a n c i n g and a s s i g n e d  period);  4)  i s one of excess demand  the second time p e r i o d  i s one of excess s u p p l y ( i . e . ,  p e r i o d from a g i v e n p r i c e  peak).  (1959  housing p r i c e s  3 3  T h i s methodology of s e l e c t i n g p e r i o d s of excess s u p p l y o r excess demand, reflects  the concern w i t h the s t r u c t u r e o f markets  in disequilibrium.  "The e s t i m a t i o n o f s u p p l y and demand schedules f o r such markets has become a problem of p r a c t i c a l importance. The main problem of e s t i m a t i o n i s t h a t i n the absence of an e q u i l i b r i u m c o n d i t i o n the observed q u a n t i t y traded i n the market may not s a t i s f y both the demand and supply s c h e d u l e s . In general approach t o t h i s problem i s to t r y t o s e p a r a t e the sample i n t o demand and s u p p l y regimes such t h a t each s c h e d u l e may be a p p r o x i m a t e l y f i t t e d a g a i n s t the observed q u a n t i t y f o r the sample p o i n t s f a l l i n g w i t h i n its regime." 3 4  The observed q u a n t i t y supplied.  i s equal t o e i t h e r  The observed q u a n t i t y  will  the q u a n t i t y  be equal to the minimum of these  quantities. Q  t  = min  demanded or the  quantity two / " \  D , t  S  t  (t  = 1,2...,T)  (5.4)  83  where  i s equal  to q u a n t i t y  supplied during period t . demands w i l l  If  if  the q u a n t i t y  go u n s a t i s f i e d .  0 as D  Equation 5.5  implies  t  to  quantity supplied,  s u p p l i e d exceeds the  quantity  P r i c e change i s assumed to be a p o s i t i v e In p a r t i c u l a r  it  may be p o s s i b l e  to  that  J  P  i s equal  demanded.exceeds the q u a n t i t y  o f the excess demand i n the market.  postulate A  the q u a n t i t y  go u n s a t i s f i e d ; whereas  demanded, s u p p l i e r s w i l l function  demanded d u r i n g p e r i o d t ;  t  1  - S  t  J  0  t h a t the d i r e c t i o n  (5.5) of.price  change may be used as  indicator  35 o f the excess demand o r excess s u p p l y i n the market. illustrated Figure  by graphing the demand and s u p p l y f u n c t i o n  T h i s above method may be a g a i n s t p r i c e as shown i n  5.4. Observing Markets  Figure 5.4  in  Disequilibrium  Observed . p r i c e and q u a n t i t y i n p e r i o d s o f excess demand o r excess s u p p l y . During p e r i o d s o f excess demand, the observed q u a n t i t y w i l l be the s u p p l y c u r v e . The r e v e r s e w i l l h o l d t r u e i n p e r i o d s o f excess s u p p l y .  84  If  the quoted p r i c e i s l e s s than P * , then t h e r e  market.  T h i s i m p l i e s from equation 5.5  equation  5.4  supplied w i l l observed. In t h i s  it  i s excess demand i n  t h a t p r i c e must be r i s i n g .  can be noted t h a t i n p e r i o d s of excess demand,  equal  the observed q u a n t i t y  and q u a n t i t y  From  quantity  demanded w i l l  not be  The converse holds t r u e when the quoted p r i c e i s g r e a t e r  case t h e r e  equation 5 . 4 ,  it  demanded w i l l  equal  i s excess supply and p r i c e must f a l l .  and the q u a n t i t y  than  P*.  Again r e f e r r i n g  can be noted t h a t in p e r i o d s of excess s u p p l y , the observed q u a n t i t y  the  to  quantity  supplied w i l l  be  unobserved. T e s t i n g o f the h y p o t h e s i s , does not i n c l u d e the d i r e c t measurement p r i c e o f housing i n the model.  The h y p o t h e s i s w i l l  be accepted or  of  rejected  on a b a s i s of i n f e r e n c e with r e s p e c t to the demand and supply equations noted d u r i n g the above two p e r i o d s .  P r i c e measurement i s not i n v o l v e d because  s u b s t i t u t i o n o f source of f i n a n c i n g does not p r o v i d e r e a d i l y turning  p o i n t s i n the  housing p r i c e d a t a .  f i n a n c i n g stops e f f e c t i v e l y  stabilizing  The p o i n t where one source of  the p r i c e of housing and the  begins cannot be measured under c o n d i t i o n s presented i n t h i s In a d d i t i o n  it  area of r e s e a r c h .  identifiable  other  time p e r i o d .  must be noted t h a t measurement of housing p r i c e s i s an unresolved Measurement problems are d i s c u s s e d by H a m i l t o n * * ,  and Nourse 7 as w e l l 3  3  as B h a t i a . ^ 3  Bailey,  Muth  Hence use of y e a r l y data to o b t a i n p e r i o d s of  excess demand or supply i n the housing markets overcomes the s h o r t run measurement  irregularities.  85  Footnote References - Chapter V  1.  (lames £VansHorne. Functions and A n a l y s i s of C a p i t a l Market R a t e s , (New York: P r e n t i c e H a l l , 1970), pp. 1-14 as w e l l as T e r r e n c e C l a u r e t i e . ^Interest R a t e s , The Business Demand f o r Funds and the R e s i d e n t i a l Mortgage Market: A S e c t i o n a l Econometric S t u d y , " J o u r n a l of F i n a n c e , December 1973, pp. 13131326, develop f l o w - o f - f u n d s models which do not r e c o g n i z e d i r e c t l e n d i n g by household s e c t o r s .  2.  T h i s statement can be c l a r i f i e d by noting t h a t with i n c r e a s e d i n t e r e s t r a t e s , p r i v a t e vendors may supply more f i n a n c i n g . The mortgagor demanding funds i s not r a t i o n e d out of the c o n v e n t i o n a l mortgage market by i n c r e a s i n g r a t e , but r a t h e r he i s r a t i o n e d out of the c o n v e n t i o n a l mortgage market by l a c k of a v a i l a b l e mortgage d o l l a r s . I n s t i t u t i o n s do not r a t i o n on a b a s i s of r a t e . Short term adjustment to the mortgage r a t e i s achieved by s t a t i n g t h a t they have (or have not) funds a v a i l a b l e at a g i v e n t i m e . An analogy can be made to a baker s e l l i n g b r e a d . If only 1 l o a f remains in a given day and t h e r e are 2 customers w a i t i n g , the baker does not a u c t i o n the b r e a d . Rather he s e l l s the l a s t l o a f to the f i r s t customer and informs the second t h a t t h e r e i s no bread u n t i l to-morrow. The second customer can go to another bakery or r e t u r n s the next day.  3.  The consumer p r i c e index d u r i n g the time p e r i o d s under study i n c r e a s e d o n l y slightly. For example from 1954 q u a r t e r 1 u n t i l 1957 q u a r t e r 4, the p r i c e index rose from 115.5 to 123.1 or a 1.5% i n c r e a s e per y e a r ( u s i n g 1949 = 100). In the second study p e r i o d , the p r i c e index rose from 100.0 to 102.6 (using 1961 = 100). The r a t e o f i n c r e a s e was l e s s than 1% per y e a r . Hence, i n both c a s e s , measurement of r e a l d o l l a r s w i l l not change the r e s u l t s . Source of consumer p r i c e index can be found i n The Consumer P r i c e Index f o r Canada (1949 = 100), (Ottawa: Dominion Bureau o f S t a t i s t i c s , Mar 1963) and i n The Consumer P r i c e Index f o r Canada 1961-1967, (Ottawa: Dominion Bureau of S t a t i s t i c s , 1969).  4.  McLeod, Young and Weir weighted 1954-1963).  bond r a t e s ,  (Toronto:  McLeod, Young and  Weir,  5.  Review o f Man Hours and Hourly Earnings With Average Weekly Wages 1945-1963. (Ottawa: Dominion Bureau of S t a t i s t i c s , August 1964).  6.  Measurement of a r e n t index was o b t a i n e d by sampling r e n t a l p r o p e r t y a d v e r t i s e d i n newspaper ads f o r the p e r i o d under s t u d y . C e n t r a l Mortgage and Housing C o r p o r a t i o n c o l l e c t i o n of r e n t a l i n f o r m a t i o n d i d not begin u n t i l 1961.  7.  Measurement of a l t e r n a t e form of investment i s d e r i v e d from r a t e of r e t u r n of s t o c k s l i s t e d on the Toronto Stock exchange. Rate of r e t u r n i n c l u d e s d i v i d e n d s and c a p i t a l g a i n s . S e r i e s developed by Dr. W. Wood, A s s i s t a n t P r o f e s s o r , U n i v e r s i t y of B . C . , Vancouver, 1975.  86  8.  J . G u t t e n t a g , " C r e d i t A v a i l a b l i t y , I n t e r e s t Rates and Monetary Southern Economic J o u r n a l , January 1960, pp. 219-229.  Policy,"  9.  Dwight J a f f e e . C r e d i t R a t i o n i n g and the Commercial Loan Market. John Wiley and Sons I n c . , 1971), pp. 1-183.  10.  M a r s h a l l Freimer and Myron Gordon. "Why Bankers Ration C r e d i t , " J o u r n a l of Economics, August 1965, pp. 397-416.  11.  Jaffee,  12.  E . J . Kane and B . G . M a l k e i l . "Bank P o r t f o l i o A l l o c a t i o n , D e p o s i t V a r i a b i l i t y and the A v a i l a b i l i t y D o c t r i n e , " Q u a r t e r l y J o u r n a l of Economics, February 1965, pp. 113-134.  13.  Jaffee,  14.  Ibid.,  15.  R i c h a r d Muth. " I n t e r e s t R a t e s , C o n t r a c t Terms and the A l l o c a t i o n of F u n d s , " J o u r n a l of F i n a n c e , December 1963, pp. 63-80.  16.  Ibid.,  p.  72.  17.  Ibid.,  p.  78.  18.  Lawrence Smith and Gordon S p a r k s . " S p e c i f i c a t i o n and E s t i m a t i o n of F i n a n c i a l Stock Adjustment Models I n t e r n a t i o n a l Economic Review, F e b r u a r y , 1971, pp. 14-26.  19.  Reasons f o r  20.  M i l t o n Freidman. A Theory o f the Consumption F u n c t i o n , ( P r i n c e t o n , P r i n c e t o n U n i v e r s i t y Press f o r NBER, 1957), p. 221.  21.  R i c h a r d Muth. "The Demand f o r Non-Farm H o u s i n g , " in the Demand f o r Durable Goods e d . by A . Harberger. (Chicago: The U n i v e r s i t y of Chicago P r e s s , 1960), pp. 29-56.  22.  Michael Evans. "Investment i n R e s i d e n t i a l C o n s t r u c t i o n , " i n Macro-economic Activity. (New York: Harper and Row, 1969), p. 197.  23.  Ray F a i r . " D i s e q u i l i b r i u m i n Housing M o d e l s , " J o u r n a l of pp. 217, notes the model used by Hymans and S h a p i r o .  24.  F a i r , " D i s e q u i l i b r i u m i n Housing M o d e l s , " p. Huang.  25.  F a i r , " D i s e q u i l i b r i u m i n Housing Models,"pp.2.2.17 i-notes the of the SMP model.  26.  Evans, "Investment in R e s i d e n t i a l  (New York:  Quarterly  C r e d i t R a t i o n i n g and the Commercial Loan Market, pp: 28.  C r e d i t R a t i o n i n g and the Commercial Loan M a r k e t , pp. pp.  69-104.  69-104.  business demand i n e l a s t i c i t y  are noted in S e c t i o n  Mortgage  2.2.1.1. N.J.:  F i n a n c e , May  1972,  218 notes the model developed by  C o n s t r u c t i o n , " p.  197.  specification  87  27.  T h i s s p e c i f i c a t i o n has the same expected r e s u l t s as noted i n T . C l a u r e t i e . "Monetary Growth Rates" . . . PhD. T h e s i s . (Washington:';'Wash'fngtonoState U n i v e r s i t y , 1971), p. 23.  28.  Hamilton,  29.  Leo G r e b l e r and Sherman M a i s e l . "Determinants of R e s i d e n t i a l C o n s t r u c t i o n : A Review of the Present Knowledge," in Impacts of Monetary P o l i c y . Commission on Money and C r e d i t . (Englewood C l i f f s : P r e n t i c e H a l l , 1963), p. 566.  30.  Ibid.,  31.  The housing stock s e r i e s has been adjusted f o r d e m o l i t i o n s , c o n v e r s i o n s based on the evidence o f the C i t y o f Vancouver. A . F . Eger. Computer Program Number 16, U n i v e r s i t y of B . C . 1974 i n d i c a t e s the a c t u a l adjustments a p p l i e d to each m u n i c i p a l i t y .  32.  R . J . Wonnacott and T . H . Wonnacott. Econometrics. (New York: John Wiley and Sons, 1970), pp. 190-192 i n d i c a t e methodology f o r e s t i m a t i n g simultaneous equations.  33.  Graphic trends of housing p r i c e s , i n t e r e s t r a t e s and vacancy l e v e l s can be found i n F i g u r e 4 . 3 .  34.  Ray F a i r and Dwight J a f f e e . "Methods o f E s t i m a t i o n f o r Markets E c o n o m e t r i c a , V o l . 40, No. 3 , May 1972, pp. 497-514.  35.  I b i d . , pp. 497-503. source i n d i c a t e d .  36.  Hamilton,  37.  M. B a i l e y , R. Muth and H. Nourse. "A R e g r e s s i o n Model f o r Real E s t a t e Index C o n s t r u c t i o n , " J o u r n a l of American S t a t i s t i c a l A s s o c i a t i o n , Dec. V o l . 58, pp. 933-942.  38.  K.B. B h a t i a . "A P r i c e Index f o r Non-Farm One Family Houses 1947-1964," J o u r n a l of American S t a t i s t i c a l A s s o c i a t i o n , March 1971, V o l . 66, pp. 23-32.  p.  Mao et a l .  "Turnover Rates i n M e t r o p o l i t a n  V a n c o u v e r , " pp.  1-31.  575.  in  Disequilibrium,  D i s c u s s i o n on d i s e q u i l i b r i u m measurement draws on the  "Housing P r i c e Index P a p e r , "  pp.  1-33. Price 1963,  88  CHAPTER VI  STABILIZING EFFECT OF PRIVATE"VENDOR FINANCING AND ASSIGNED MORTGAGES ON HOUSING PRICES:  6.1  SUMMARY  6.2  INTRODUCTION  6.3  EMPIRICAL RESULTS:  6.4  EXCESS DEMAND IN THE HOUSING MARKET  6.3.1  Price Rationing  6.3.2  Rental  Market  6.3.3  Income  Variable  6.3.4  Substitute  EMPIRICAL RESULTS: 6.4.1  6.4.2  Variable  Substitution  Investment EXCESS SUPPLY I N T H E HOUSING MARKET  Mortgage Demand Equations 6.4.1.1  Vacancy Rate  6.4.1.2  Institutional  Variable R e f i n a n c i n g o f Mortgages  Mortgage Supply Equations 6.4.2.1  6.5  EMPIRICAL RESULTS  A l t e r n a t e Measures and A g g r e g a t i o n  S i g n i f i c a n c e to Hypothesis 6.5.1  Credit Rationing  Variable  89 6.1  SUMMARY A major conclus-ion o f t h i s  demonstrated s i g n i f i c a n t 1954 t o 1957.  chapter i s t h a t the c y c l i c a l mortgage  levels of substitution  i n the excess demand p e r i o d o f  T h i s c o n c l u s i o n i s based on: the h i g h l y s i g n i f i c a n t c r e d i t  v a r i a b l e estimated  from the d e r i v e d demand equations o f e i t h e r  s a l e o r a s s i g n e d mortgage markets. agreement-for-sale cannot be  The: h y p o t h e s i s . t h a t ,  and a s s i g n e d mortgage markets  rationing  the agreement  stabilize  inspite of inconclusive s t a t i s t i c a l  closure rates,  and the withdrawal  tests.  the p r i c e o f h o u s i n g ,  results.  poor c o n s i s t e n c y and i n c o n c l u s i v e  s e c t o r o c c u r r e d : when i n s t i t u t i o n a l  r e f i n a n c e mortgage market i n s p i t e , of. d e c l i n i n g i n t e r e s t agreement-for-sale  that substitution  funds were s h i f t e d to rates.  Without  tfiiis  can be  market,  inferred  greater  and 1962.  Hence i n both study p e r i o d s , the c y c l i c a l mortgage  submarkets  the p r i c e o f h o u s i n g .  During p e r i o d s o f excess d e m a n d , . i t would appear t h a t there i s a s h i f t rental.accommodation increases.. pattern.  to lower p r i c e d . h o u s i n g i f  Measurement o f . t h e  expected r e s u l t s . the p r i v a t e  income v a r i a b l e  The s u b s t i t u t e  i s the  investment  T h i s outcome c o u l d i n d i c a t e  r  o  from  ratio  i n any d i s c e r n i b l e  reason given f o r the l a c k variable  of  d i d not show the  t h a t the emphasis o f investment by  s e c t o r was i n the m u l t i - h o u s i n g u n i t s e c t o r .  a p e r i o d o f e x c e s s , housing demand., the use o f the c r e d i t  b P  markets.  the r e n t to housing p r i c e  The income to housing p r i c e r a t i o d i d not r e s u l t  expected r e l a t i o n s h i p s .  r  the  i n h o u s i n g p r i c e s c o u l d have been expected i n the d e c l i n e i n housing p r i c e s  stabilize  m "  of  Inasmuch as the  s e c t o r remained as the major s o u r c e o f f u n d s , i t  t h a t t h i s market supported the p r i c e o f h o u s i n g . volatility  fore-  lenders from the market  Review o f the d e s c r i p t i v e evidence however, i n d i c a t e s  the a g r e e m e n t - f o r - s a l e  r e s u l t e d in a s i m i l a r  A b n o r m a l i t i e s o f high  of.non-bank conventional  f o r e x i s t i n g housing cause the model to e x h i b i t  r  the  rejected.  conclusion,  In  for-  the s u b s t i t u t i o n o f  Study o f the excess housing supply p e r i o d o f 1959 to 1962  o f 1961  sub-markets  v  In  e  s  t  o  b  e  a  statistically  rationing  s i g n i f i c a n t measure o f r a t i o n i n g i n the  variable mortgage  a p e r i o d o f excess housing s u p p l y , t h i s measure i s not adequate.  The  90  measure f a i l s  6.2  to account f o r p o s s i b l e i n t r a - i n s t i t u t i o n a l  i n mortgage  lending.  INTRODUCTION This chapter tests  V.  shift  the d e r i v e d demand and supply model f o r m u l a t e d  The model i s t e s t e d s e p a r a t e l y  an excess housing s u p p l y p e r i o d . 7 definitions  d u r i n g an excess housing demand p e r i o d and The model d e f i n e d i n S e c t i o n 5.4  tested using  o f mortgage f i n a n c i n g found i n the market f o r e x i s t i n g h o u s i n g .  The d e f i n i t i o n s classification  i n Chapter  o f the f i r s t  f o u r equations  (6.1  to 6.4  inclusive)  represent  combinations which have e v o l v e d i n the s a l e o f houses.  assignment o f e x i s t i n g mortgages o r new a g r e e m e n t s - f o r - s a l e means o f f i n a n c i n g (equation 6.1  or 6.2).  assignment of an e x i s t i n g mortgage  can be used as a s i n g l e  Combinations can be used.  f o r - s a l e plus assignment o f an a g r e e m e n t - f o r - s a l e ( e q u a t i o n 6.3  For example,  A new  o r an a g r e e m e n t - f o r - s a l e o r 6.4)  are the major  agreementplus  combinations  which have e v o l v e d .  Type o f  Definition  Equation Reference  (1)  Assignment o f e x i s t i n g mortgages  6.1  (2)  Agreement-for-sale  6.2  (3)  A g r e e m e n t - f o r - s a l e and assignment of agreement-for-sale  6.3  (4)  A g r e e m e n t - f o r - s a l e and assignment o f e x i s t i n g mortgage  6.4  (5)  Aggregate o f equations 6.1  6.4  6.5  (6)  Assignment o f a g r e e m e n t s - f o r s a l e and assignment o f e x i s t i n g mortgages  6.6  A g r e e m e n t - f o r - s a l e and assignment o f both e x i s t i n g mortgages and agreements-for-sale  6.7  sector  to  2  (7)  T a b l e 6.1  D e f i n i t i o n o f dependant v a r i a b l e s used i n the d e r i v e d demand and s u p p l y model f o r mortgage f i n a n c i n g . The percentages o f each mortgage type are based on the numbers o f o b s e r v a t i o n s per type found i n the sample p e r i o d from 1954 to 1963. Sample i n c l u d e s s a l e s and n o n - s a l e s t r a n s f e r s , recorded from c e r t i f i c a t e s o f t i t l e i n the G r e a t e r Vancouver Regional D i s t r i c t .  91  E q u a t i o n 6 . 5 to 6 . 7 r e p r e s e n t combination f o r for-sale  example,  (equation  the model size for  presents.  i n equations  usedutof friinancehthoiJsi.Tig. These  in order  to determine  Aggregation,  future studies.  aggregated d e f i n i t i o n s .  of an a s s i g n e d mortgage and an a s s i g n e d  6 . 6 ) -are...not  combinations a r e t e s t e d  artificially  in addition  Forrexample,  6.1 to 6 . 4 , the  if  the  intensive  nature  O f f i c e s needed to o b t a i n important  agreement-  artificial  impact on a g g r e g a t i o n  could r e s u l t  study of aggregated  and t h e , s p e c i a l  that  i n reduce sample  s i m i l a r expected c o e f f i c i e n t s  result  combinations c o u l d a l l o w  a reduced sample s i z e i n f u t u r e s t u d i e s and s t i l l The l a b o u r  The  maintain  for  sampling s i g n i f i c a n c e .  p e r m i s s i o n from the Land R e g i s t r y  the d a t a , make t h i s  a s p e c t of a g g r e g a t i o n  a very  one.  The methodology presented  i n Chapter V ,  indicated  the  basis of  selection  3 o f excess demand and excess s u p p l y p e r i o d s .  T h i s methodology e s t a b l i s h e d  ;  unique study p e r i o d s f o r acceptance or r e j e c t i o n credit  rationing  equations..  of  variable  demand f u n c t i o n s . remaining  the mortgage market o f e x i s t i n g the  h y p o t h e s i s depends on the  and the e l a s t i c i t y  Examination of  independent  variables  Demand e q u a t i o n s are  excess demand and excess s u p p l y . p e r i o d s are r e l a t e d o r d e r to measure the  to  the  equation  housing.  estimated  o f demand o b t a i n e d from  c o n s i s t e n c y and s t a b i l i t y  i n two d i s t i n c t  The e l a s t i c i t i e s  supply equations  The  s i g n i f i c a n c e of  completes the examination;"! of  i n the  of  the  the demand  for  both  i.e.,  these  p e r i o d s o f excess s u p p l y  impact of vacancy on the c y c l i c a l components o f  mortgage market d u r i n g excess supply p e r i o d s .  the  the  time p e r i o d s ,  calculated  two  the  in  Equation Reference  6.1  Equation Type  Equation Estimated  (L  New Agreementsfor-sale  Q  New Agreementsfor-sale and assigned agreementsfor-sale  Q  6.4  New Agreementsfor-sale and Assigned Mortgages  Q.  6.5  Aggregate of Equation 6.1 to 6.4  Q  Combination of Assigned Agreementsfor-sale and Assigned Mortgages  Q  Equation 6.6 Plus New Agreements for-sale  Q„ • 31.9 - 10.20r - 2.89R + .10Y + 4.82S 0.78) (-4.48) (-.12) (.08) (.68) [.10] [.00] [.90] [.94] [.51]  6.6  6.7  R  2  Durbin Watson Statistic  F Statistic  F Probability  (excludes constant)  C  Assigned Mortgages  6.3  Percentage Frequency of Mortgage Types Within Sample (*)  u  C n  C n  C  C  U  C n  u  - 47.5 - 37.41r - 57.87R + 1.66Y - 8.44S (3.7) (-2.28) (-3.37) (1.74) (-1.65) [.00] [.05] [.Oil (.11] [.13]  10  .76  1.84  7.90  .00  - -19.61 - 772.6r + 62.36R + .92Y + 18.17S (-.77) (-2.39) (1.84) (.49) (1.80) [-45] [.03] [.10] [.63] [.10]  16  .72  1.84  6.42  .01  - 17.09 - 377.5r - 7.88R - 11.2Y - 3.06S (1.47) (-2.54) (-.51) (-1.3) (-.66) [.17] [.03] [.62] [.22] [.52]  2  .52  2.52  2.75  .09  - 24.68 - 422.9r - 10.65R - 1.21Y - 7.86S (1.93) (-2.59) (-.62) (-1.28) (-1.54) [.08] [.03] [.55] [.22] [.15]  4  .47  2.16  2.24  .14  - 63.02 - 1964.3r - 3.OR + 2.48Y + 2.72S (1.59) (-3.77) (-.05) (1.03) (.17) [-14] [.00] [.96] [.32] [.87]  32  .77  1.78  8.62  .00  - 38.5 - 599.Or - 33.48R - .64Y - 4.16S (3.22) (-3.65) (-2.08) (-.72) (-.67) [.01] [.00] [.06] [.48] [.40]  13  .80  1.67  9.89  .00  21  .85  1.92  14.51.  .00  C  0  Table 6.2  Demand equations of cyclical components of the mortgage market for existing housing under excess demand conditions. Period of analysis 1s 1954 to 1957 inclusive for Greater Vancouver Regional District Levels of significance indicated in square brackets; t s t a t i s t i c s are shown in rounded brackets. Refer to Section 6.2 for an example of financing technique and  93  6.3  EMPIRICAL RESULTS:  EXCESS DEMAND IN THE HOUSING MARKET  The demand e q u a t i o n s r e l a t i n g a r e presented i n T a b l e 6 . 2 . internal  to excess demand p e r i o d 0-H1954 to  In r e v i e w i n g  form the b a s i s of d i s c u s s i o n .  such as the Durbin Watson s t a t i s t i c equation 6 . 3 ,  6.4  and 6 . 6 .  from the e q u a t i o n s . periods. this for  initial  A t e s t of  i n d i c a t e s negative-  This variable  a t a = .01  serial  p a t t e r n i s unknown.  in a l l  but equations 6.3  determination exhibiting  The F s t a t i s t i c and 6 . 4 .  in  has been omitted several  indicates  p a r t o f the time s e r i e s .  that  The reason  of equations i s  The m i s s i n g v a r i a b l e  significant in  these  The c o e f f i c i e n t s  of  g i v e reduced l e v e l s o f e x p l a i n e d v a r i a n c e i n those e q u a t i o n s  the high F . s t a t i s t i c s .  The above r e s u l t s  indicate that  c o e f f i c i e n t s o f the equation can be expected to be s t a b l e  in all  the  equations  6.4.  s e\i. i  M  M  B  a  Examination o f T a b l e 6.2 s i g n i f i c a n t at equations. this  correlation  i s one which i n f l u e n c e s demand f o r  equations c o u l d account f o r t h i s l a c k o f s i g n i f i c a n c e .  except  assumptions o f  Examination o f the r e s i d u a l s o f the above equations  error  of  internal consistency  T h i s suggests t h a t some v a r i a b l e  i n f l u e n c e o c c u r r e d i n the l a t t e r this  the r e s u l t s o f the m o d e l , t e s t s  c o n s i s t e n c y and t e s t s of agreement with the  the theory w i l l  1957  Table 6.3.  r e v e a l s t h a t the p r i c e r a t i o n i n g  variable  r,  l e s s than a = .05 and has the expected n e g a t i v e  sign for  all  The e l a s t i c i t y  analysis. All  e  of c y c l i c a l component demand i s the  The e l a s t i c i t i e s  o f each of the e q u a t i o n s a r e r e c o r d e d  equations demonstrate  to changes i n p r i c e r a t i o n i n g . can be found i n Appendix II.  key v a r i a b l e  a high e l a s t i c i t y  C o r r e l a t i o n , "matrices These r e s u l t s  is  in  in  o f demand w i t h r e s p e c t  s u p p o r t i n g these  i n d i c a t e that s u b s t i t u t i o n  results occurs  94 i n -the mortgage market f o r e x i s t i n g housing by the v a r i o u s c y c l i c a l components. This s u b s t i t u t i o n ventional  of financing, results  l e n d e r s r a t i o n mortgages.  i n mortgage demand being met as c o n -  The s t a b i l i t y  the s i g n i f i c a n c e o f the p r i c e r a t i o n i n g  variable  o f the equations as w e l l as  indicate significant  substitution  by the c y c l i c a l components o f the mortgage market f o r e x i s t i n g h o u s i n g . substitution  o c c u r r e d under c o n d i t i o n s o f excess demand.  p r i c e s o f housing can be expected to s t a b i l i z e mortgage c r e d i t .  This  Under these c o n d i t i o n s  as c o n v e n t i o n a l  housing l e n d e r s  On the b a s i s o f these r e s u l t s , the h y p o t h e s i s t h a t the s u b s t i t u t i o n  e f f e c t o f the a g r e e m e n t - f o r - s a l e  and a s s i g n e d mortgage market s t a b i l i z e  the p r i c e  o f housing cannot be r e j e c t e d .  Equation Reference Number 6.1  Equation Type  Assigned conventional  Elasticity  mortgage  ?  -1.10 [.04]  6.2  New  6.3  New a g r e e m e n t s - f o r - s a l e agreements-for-sale  and a s s i g n e d  6.4  New a g r e e m e n t s - f o r - s a l e mortgages  and a s s i g n e d  6.5  A g g r e g a t i o n o f equations 6.1 to 6.4  -1.38 [.003]  6.6  Combination o f a s s i g n e d agreementsf o r - s a l e and a g r e e m e n t s - f o r - s a l e and a s s i g n e d mortgages  -1.29 [.004]  6.7  Combination o f new a g r e e m e n t s - f o r s a l e as w e l l as a s s i g n e d mortgages and a s s i g n e d mortgages and a s s i g n e d agreements-for-sale  -1.30 [.001]  T a b l e 6.3  ration  -1.39 [.03]  agreements-for-sale  -2.39 1.031"  ,  -1.95 [.03]  E l a s t i c i t i e s o f demand f o r c y c l i c a l components of- the mortgage market f o r e x i s t i n g h o u s i n g . L e v e l s o f s i g n i f i c a n c e o f , p r i c e r a t i o n i n g v a r i a b l e i n d i c a t e d by square b r a c k e t s .  95  In a d d i t i o n to demonstrating a high e l a s t i c i t y , e q u a t i o n s 6.3  and 6.4  e q u a t i o n s 6.1  o r 6.2.  related rapid  than the  price increase.  If  elasticity  i n c r e a s e i n the p r i c e of h o u s i n g .  i n c r e a s e i n housing p r i c e s , equations 6.3  These l a t t e r  can be noted  and 6.4  t h i s downpayment  i s not a v a i l a b l e ,  o f mortgage f i n a n c i n g , such as equations 6.3 o f e q u a t i o n 6.5  and 6.4  and 6.6  the c y c l i c a l components are h i g h l y e l a s t i c .  i n equations 6.5  and 6.6.  rapid  then combinations  are necessary.  i n d i c a t e on a combined b a s i s The i n t e r n a l  consistency of are „  In a d d i t i o n , these e q u a t i o n s  t h a t should f u t u r e study be n e c e s s a r y f o r  or  in periods of  the equations and expected s i g n o f the p r i c e r a t i o n i n g v a r i a b l e maintained  greater  source o f f i n a n c i n g i n d i c a t e d by equations 6.1 :  The e l a s t i c i t i e s  can be  During p e r i o d s o f to have  e q u a t i o n s a s s u m e a l a r g e downpayment  that  than do  The magnitude of each of these e l a s t i c i t i e s  to the r a t e o f  elasticities 6.2.  have a s i g n i f i c a n t l y g r e a t e r  it  both the p r i v a t e  indicate  vendor f i n a n c i n g  and a s s i g n e d mortgage s e c t o r , then a reduced sample s i z e c o u l d be c o n s i d e r e d , so as to reduce study c o s t s without c r e a t i n g  Q:6.3.2RER^fa3^MaE^e$u§f#-§td'^l3tlnjon  sampling  ..  The r e s u l t s o f the r e n t to p r i c e r a t i o a r e m i x e d . of private  vendor f i n a n c i n g i n d i c a t e s  as i s the combined a s s i g n e d a g r e e m e n t - f o r - s a l e 6.5).  s w i t c h i n g from r e n t a l  s t r o n g l y i n the a g r e e m e n t - f o r - s a l e r e p r e s e n t s lower  price housing.  6.1)  is highly  equation .10.  significant,,  and a s s i g n e d mortgage  However, the observed s i g n s a r e  The impact o f  The important  s i g n i f i c a n c e and c o r r e c t s i g n a t a =  The a s s i g n e d mortgage f i n a n c i n g s e c t o r (equation  (equation  error.  sector  incorrect.  accomodation appears t o be f e l t most  sector.  T a b l e 6.4  The a g r e e m e n t - f o r - s a l e  sector  i n d i c a t e s t h a t the average l o a n o f  MORTGAGE TYPE New Agreements-for-sale  New Mortgages on E x i s t i n g Housing  New Mortgages on New Housing  Year Average Loan Amount $  Average Loan to Value Ratio %  Average Loan Amount $  Average Loan to Value Ratio %  Average Loan Amount $  Average Loan to Value Ratio %  9,400  78  9,900  79  1954  4,500  76  4,600 .  50  1955  5,400  78  5,900  60  1956  5,200  79  8,000  64  10,300  73  1957  5,900  76  7,100  60  10,700  72  1958  6,700  74  8,400  61  11,600  79  1959  7,700  80  8,100  63  11,900  78  1960  7,800  83  9,400  63  11,300  69  1961  8,100  83  8,500  67  11,900  76  1962  7,100  83  8,300  69  12,700  70  1963  7,600  85  9,500  70  12,800  74  o  0  Table 6.4  Average loan to value r a t i o and average d o l l a r loan amount of new and existing mortgage market for G.V.R.D. from 1954 to 1963. Data i s recorded i n current d o l l a r s .  97 the a g r e e m e n t - f o r - s a l e financed housing.  In  sector is s i g n i f i c a n t l y a d d i t i o n the  l e s s than t h a t o f  loan-to-value  ratio of.the  conventionally  agreement-for-  s a l e s e c t o r i s h i g h e r than t h a t o f the c o n v e n t i o n a l l y f i n a n c e d s e c t o r . the p r i c e o f housing i n the a g r e e m e n t - f o r - s a l e t h a t o f the c o n v e n t i o n a l l y f i n a n c e d s e c t o r . rental  to ownership, i t  Income  tenants  for rental  sector.  statements  going to switch go to  The lower  from  the priced similarity  is considered  can be e x p e c t e d .  Variable income to housing p r i c e r a t i o and.  demand f o r c y c l i c a l funds are not found i n T a b l e 6 . 2 .  correct.  than  accommodation because o f the  The expected r e l a t i o n s h i p between the  mortgages)  are  F u r t h e r a n a l y s i s o f the above r e l a t i o n s h i p s  necessary b e f o r e d e f i n i t i v e  6.3.3  If  the a g r e e m e n t - f o r - s a l e  housing i s a c l o s e s u b s t i t u t e i n monthly payments.  financed sector is less  would appear t h a t they would more l i k e l y  lower p r i c e d h o u s i n g , i l e . ,  Hence  has the most s i g n i f i c a n t Alternative  estimation  t-statistic  Equation 6.1  (assigned  ( . 1 1 ) ; however, the s i g n i s i n -  o f the demand e q u a t i o n was o b t a i n e d by r e p l a c i n g  4 the income to housing p r i c e v a r i a b l e with a m i g r a t i o n migration change.  variable.  S e l e c t i o n of  the  v a r i a b l e was chosen i n o r d e r to overcome the problem of measuring p o p u l a t i o n The income v a r i a b l e was a d j u s t e d to r e f l e c t  the p o p l u a t i o n b a s i s .  the p o p u l a t i o n data s e r i e s i s based on f i v e y e a r census i n f o r m a t i o n ; run f l u c t u a t i o n s  are not r e c o r d e d .  The m i g r a t i o n  However,  hence s h o r t  v a r i a b l e was used as a proxy  reflect  changes i n demand due to p o p l u a t i o n i n c r e a s e .  omitted  in.these series of tests  to  The income v a r i a b l e was  because o f p o s s i b l e problems o f  multicollinearity.  5 The r e s u l t s  indicate  ments-for-sale  that migration  (equation  s i g n i f i c a n t at a = . 0 6 . was  6.2),  had a . s i g n i f i c a n t  i n t h a t the m i g r a t i o n  impact on demand  for  agree-  to p o p u l a t i o n r a t i o was  The o t h e r equations showed no s i g n i f i c a n c e and the  variable  eliminated. The l a c k o f s i g n i f i c a n c e o f the income v a r i a b l e  The income v a r i a b l e  i s an a v e r a g e .  groups c o u l d be a n a l y s e d .  Different  stems from one major s o u r c e .  income s e r i e s , r e f l e c t i n g  T h i s a n a l y s i s c o u l d be extended to a s p a t i a l  demographic dimension.  98 However, i n t h i s  s t u d y , s i g n i f i c a n t sample s i z e d i d not e x i s t to permit  by s u b - m e t r o p o l i t a n  analysis  area.  Being unable to study the income and l e n d i n g behaviour of an i n d i v i d u a l mortgagor i s a.most troublesome one i n the housing and mortgage G e n e r a l l y p r o x i e s f o r income must be u s e d . value r a t i o  f o r an income p r o x y .  White  literature.  f o r example used loan  to  The b a s i c problem i s not overcome by t h i s  approach as o n l y 10% o f the housing s t o c k i s t r a n s f e r r e d w i t h i n a given y e a r . ^ Hence i t  i s u n r e a l i s t i c to expect average income data to r e f l e c t  demand o f  the  household p u r c h a s i n g g r o u p .  6.3.4  Substitute  Investment  The expected r e l a t i o n s h i p s between the a l t e r n a t i v e  investment v a r i a b l e and  demand f o r c y c l i c a l mortgages bears i n c o n c l u s i v e r e s u l t s . substitute  investment v a r i a b l e  determine  The use o f t h i s  from housing with r a t e s  variable  the  o f r e t u r n on  represents a preliminary  probe to  possible relationships.  T h i s s t u d y , d e a l t with the s i n g l e f a m i l y i g n o r e d the impact o f m u l t i p l e f i n a n c e d by c o n v e n t i o n a l s t u d y . ' ' However, variable,  this  r e f l e c t e d s t a n d a r d demand theory because o f  possible s u b s t i t u t i o n o o f rates of return the s t o c k market.  The use o f  it  housing u n i t s .  housing market  and as s u c h ,  These housing u n i t s tend to be  l e n d e r s and as such d i d not e n t e r the scope o f  i n e x p l a i n i n g the p o o r - r e s u l t s o f the s u b s t i t u t e  allowances and the a b i l i t y  family  to c r e a t e  unit s e c t o r .  this  investment  s h o u l d be noted t h a t the bulk o f investment by p r i v a t e  was d i r e c t e d at the m u l t i p l e  it  individuals,  Favourable c a p i t a l  long run r e s e r v e s f o r c a p i t a l  cost  cost Q  a l l o w a n c e , p r o v i d e d the f i n a n c i a l  framework  f o r investment i n t h i s  The same concepts c o u l d have been a p p l i e d by the i n d i v i d u a l  sector.  to a s i n g l e  family  9 unit:  however economies of s c a l e  housing u n i t  do not e x i s t and as a r e s u l t ,  s e c t o r was the area favoured f o r  iimvestment.  the  multiple  Equation Reference  .  Equation Type  Equation Estimated  < < <  6.1  Assigned Mortgages  6.2  Assigned Agreement-forsale  6.3  New Agreementsfor-sale  6.4  New Agreementsf o r - s a l e and assigned agreementsfor-sale  = 63.39 - 645.9r - 63.5R (2.57) (-1.90) (-2.24) [.03] [.09] [.05]  6.5  New Agreementsf o r - s a l e and Assigned Mortgages  = 143.34 - 108.2r - 126.54R (2.18) (-.12) (-1.68) [.05] [.90] [.12]  6.6  Aggregate o f Equation 6.1 to 6.5  = 50.4 - 18.3r - 36.6R - 2.50Y - 18.9S (1.82) (-.04) (-1.15) (-1.28) (-1.79) [.10] [.96] [.27] [.23] [.10]  Combination o f Assigned Agreementsf o r - s a l e and Assigned Mortgages  = 75.64 + 9.4r - 58.3R .74Y - 26.9S (2.01) ( .02) (-1.35) (-.28) (-1.88) [.07] [.99] [.20] [.78] [.09]  6.7  Percentage Frequency o f Mortgage Types W i t h i n Sample (%)  R  2  Durbin Watson Statistic  F Statistic  F Probability  (excludes constant)  = 17.40 + 523.5r + 42.46R - 2.97Y + 2.97S (.35) (.77) (.75) (-.85) (.16) . [.73] [.46] [.47] [.42] [.88]  10  .20  2.01  .61  .67  - 48.84 + 232.9r - 39.32R + 3.36Y - 20.40S (.83) (.28) (-.58) (.82) (-.91) [.42] [.77] [ .57] [.43] [.39]  16  .14  1.16  .41  .80  .70  2.60  5.70  .02  4  .42  2.60  1.84  .20  32  .27  2.25  .92  .49  !  13  .38  3.03  1.54  .26  1  21  .30  2.40  1.05  .43  = 43.82 - 357.3r - 63.5R + -.65Y - 4.26S (1.86) (-1.10) (-2.35) (-.39) (-.47) [.09] [.30] [.04] [.70] [.64]  2  •  .13Y - 21.35S (.07) (-2.26) [.94] [.05] j  .26Y - 45.645 (.06) (-1.82) [.951 [.10]  i i i  i i i  i i  Table 6.5  Demand equations o f c y c l i c a l components o f the mortgage market f o r e x i s t i n g houses under excess supply c o n d i t i o n s i n the housing market. Period o f a n a l y s i s i s from 1959 to 1963 i n c l u s i v e f o r Greater Vancouver Regional D i s t r i c t . Levels o f s i g n i f i c a n c e i n d i c a t e d i n square b r a c k e t s ; t s t a t i s t i c s are shown i n rounded brackets.  100  6.4  EMPIRICAL RESULTS:  6.4.1  EXCESS SUPPLY IN THE HOUSING MARKET  Demand Equations  The demand e q u a t i o n s r e l a t i n g  to the excess housing s u p p l y p e r i o d o f 1959  to 1962 a r e presented i n T a b l e 6 . 5 .  The demand equations a r e s p e c i f i e d i n the  same manner as those e q u a t i o n s estimated c o n s i s t e n c y has been l o s t .  in section 6.3.  However the e q u a t i o n  For>: example, a l l e q u a t i o n s i n d i c a t e  degrees o f n e g a t i v e auto c o r r e l a t i o n  significant  (with the e x c e p t i o n o f equation 6 . 2 ) ,  c o e f f i c i e n t s o f d e t e r m i n a t i o n a r e low and the F p r o b a b i l i t i e s a r e g r e a t e r .05  than  i n s i x o f seven e q u a t i o n s . The l a c k o f s i g n i f i c a n c e o f the c r e d i t r a t i o n i n g v a r i a b l e c o u l d a r i s e from  several  possible factors.  Measurement b i a s c o u l d be instrumental  i n c a u s i n g the  l a c k of s i g n i f i c a n t r e s u l t s .  A c c o r d i n g l y , an a l t e r n a t e form o f the c r e d i t  rationing  d i f f e r e n c e o f the aggregated bond r a t e , was em-  variable,  the f i r s t  ployed i n the e s t i m a t i o n o f the demand e q u a t i o n s i n the excess supply p e r i o d . However r e s u l t s were no more s i g n i f i c a n t than those r e c o r d e d i n T a b l e 6 . 5 . F u r t h e r e x p l o r a t i o n o f the use o f an a l t e r n a t e measure f o r the c r e d i t  rationing  v a r i a b l e was t e r m i n a t e d . Another p o s s i b l e reason why the c r e d i t r a t i o n i n g v a r i a b l e l a c k e d s i g n i f i c a n c e c o u l d be due to i n c o r r e c t s p e c i f i c a t i o n o f the demand e q u a t i o n . auto-correlation l i k e l y variable 6.4.1.1  i n T a b l e 6.5 suggests t h a t some v a r i a b l e  The n e g a t i v e  i s missing.  to add t o the demand equation i s the vacancy r a t e  Vacancy Rate  A most  variable.  Variable  The vacancy v a r i a b l e o r i g i n a l l y had been s p e c i f i e d ( S e c t i o n 5 . 5 . 1 ) as a supply v a r i a b l e  i n t h e supply e q u a t i o n .  The d e r i v a t i v e  o f the supply o f c y c l i c a l  mortgages to the vacancy r a t e was expected t o be n e g a t i v e . a r e s u p p l y i n g mortgage c r e d i t ,  If  a l l l e n d i n g sources  the i n c r e a s e i n i n v e n t o r y of housing u n i t s can be  expected to have a n e g a t i v e e f f e c t  on the s u p p l y o f c y c l i c a l mortgage d o l l a r s .  101 High l e v e l s  o f completed but unoccupied housing may reduce the  the p r i v a t e  vendor to  can be c o n s i d e r e d as a supply  may a l s o b e • c o n s i d e r e d as a demand v a r i a b l e .  housing v a r i a b l e m a y demand expectation", market. following  as i t  may  can be used as an e x p e c t a t i o n  completed  represent  f o r those persons who are c o n s i d e r i n g e n t e r i n g  The vacancy v a r i a b l e  variable,  The u n o c c u p i e d , but  be c o n s i d e r e d as a demand v a r i a b l e  the housing  operand f o r  the  reasons.  Household f o r m a t i o n , i n r  households i n p a r t i c u l a r , Filtering  of  sell.  Inasmuch as the vacancy v a r i a b l e it  propensity  up (another  p a r t i s a postponable d e c i s i o n i n t h a t  non-family  decrease i n numbers d u r i n g p e r i o d s o f economic  postponable d e c i s i o n ) , from low q u a l i t y  housing to  value housing a l s o can be expected t o be reduced i n p e r i o d s o f economic The vacancy r a t e can be used t o capture noted above.  Otherwise  the e x p e c t a t i o n s  these e x p e c t a t i o n s  o f demand f o r  would not be accounted f o r .  to t e s t the impact o f Vacancy r a t e on the demand f o r mortgages, the was i n c l u d e d i n the  demand e q u a t i o n  f o r the excess s u p p l y p e r i o d .  uncertainty. higher uncertainty.  reasons In  vacancy The  order variable  derivative  r 3Qrj  /9v i s expected to be n e g a t i v e as with i n c r e a s e d u n c e r t a i n t y ,  can be expected to  decrease.  demand f o r housing  Equation Reference  Percentage Frequency of Mortgage Types Within Sampie  R  10  .21  2.12  .49  .78  16  .44  1.40  1.44  .30  +.04V (.03) [.97]  2  .69  2.60  5.70  .01  170.50 - 928.8r - 217.5R -2.67Y - 36.7S + 8.5V (3.5) (-1.30) (-3.5) (-.76) (-1.98) (3.12) [.01] [.22] [.01] [.46] [.07] [.01]  32  .65  3.35  3.34  .06  89.0 - 421.2r - 106.IR - 2.34 - 22.25 + 4.5V (2.99) (-.96) (-2.76) (-1.06)(-1.94) (2.66) [.01] [.36] [.02] [.31] [.08] [.03]  21  .61  3.14  2.76  .09  Equation Type  Equation Estimated  6.1  Assigned Mortgages  6.2  Assigned Agreement-forsale  %c =  68.87 - 372.Or - 106.4R + 1.20Y - 13.8S + 6.2V (1.36) (-.50) (-1.65) (.33) (-.72) (2.22) [.21] [.63] [.13] [.15] [.49] [.05]  6.3  New Agreementsfor-sale  %c =  43.9 - 360.9r - 63.9R (1.74) (-.98) (-1.98) [.12] [.35] [.07]  6.5  New Agreementsfor-sale and Assigned Mortgages  6.7  Combination of Assigned Agreementsfor-sale and Assigned Mortgages  -21.69 + 652.9r + 56.8R (-.41) (.85) (.85) [.68] [.42] [.42]  %c =  Table 6.6  - 2.5Y + 1.6S - 1.3V (-.66) (.07) (-.45) [.52] [.94] [.65]  -.7Y (-;36) [.72]  -4.23S (-.44) [.67]  2  Durbin Watson Statistic  F Statistic  F Probabil ity  (excludes constant  Selected demand equations of cyclical components of the mortgage market for existing housing under excess supply conditions in the housing market. Demand equations measure affect of vacancy rate on mortgage demand. Period of analysis is from 1959 to 1963 inclusive for the Greater Vancouver Regional D i s t r i c t . Levels of significance indicate in square brackets; t statistics are shown in rounded brackets.  103 T a b l e 6.6  summarizes s e l e c t e d demand equations  equations d i f f e r  from those o f T a b l e 6.5  i n the excess s u p p l y p e r i o d .  only i n the f a c t  t h a t the vacancy  These variable  has been i n t r o d u c e d i n t o the demand e q u a t i o n . The demand equations p r e s e n t e d i n T a b l e 6.6 equations o f T a b l e 6 . 5 . the  F probability  rationing  although the Table 6 . 5 , marginally, .36.  Negative variable  level  the  auto c o r r e l a t i o n  levels  i n some improvement to increase in a l l  equations  remains a problem however.  i n excess o f a=.05.  of s i g n i f i c a n c e o f the c r e d i t  o r the e q u a t i o n  equations,  variable  6.4  and 6.7  between the vacancy r a t e and e i t h e r  It  indicates  results.  significant positive  the a g r e e m e n t - f o r - s a l e  o t h e r equations d i d not e x h i b i t  would appear t h a t the vacancy r a t e v a r i a b l e  the equation  .22  and  rationing  results.  p r e s e n t e d by e q u a t i o n s 6 . 2 ,  All  improves  from the c r e d i t  The s i g n o f the vacancy c o e f f i c i e n t s was expected to be n e g a t i v e .  mortgage s e c t o r .  The  from .96 and .99 to  c o n c l u s i o n s can be determined d i r e c t l y  at  However, compared to  rationing  i n the aggregated equations .(.6.5 and 6 . 7 ) ,  the  cases and  are s i g n i f i c a n t  has the c o r r e c t s i g n i n f o u r o f the f i v e  of s i g n i f i c a n c e is  No s i g n i f i c a n t  variable  C o e f f i c i e n t s of determination  improved so t h a t t h r e e o f the f i v e  less than.o=.10. credit  result  The evidence correlation  s e c t o r o r the a s s i g n e d  s i g n i f i c a n t vacancy c o e f f i c i e n t s  has not added anything s i g n i f i c a n t  to  104  6.4.1.2  Institutional  R e f i n a n c i n g o f Mortgages  Two avenues have been e x p l o r e d to determine why the c r e d i t variable.is  not s i g n i f i c a n t ,  equation and i n a d d i t i o n A third  a new v a r i a b l e was i n t r o d u c e d to the demand  a different credit  r a t i o n i n g v a r i a b l e was s p e c i f i e d .  p o s s i b i l i t y i s now e x p l o r e d by e x a m i n i n g ' t h e  the model.  rationing  b a s i c assumptions o f  The demand e q u a t i o n was s p e c i f i e d under c o n d i t i o n s which  a basic level  of i n s t i t u t i o n a l  lending a c t i v i t y  i n the mortgage market.  e v e r d u r i n g the excess s u p p l y p e r i o d . , fundamental lending behaviour.  These s h i f t s  s h i f t s occurred in  c a s t the a g r e e m e n t - f o r - s a l e  i n a d i f f e r e n t r o l e than t h a t o r i g i n a l l y  as i n t e r e s t  agreement-for-sale  sector i n i t i a l l y  significantly  rates  in estimation  particular,  p o s t u l a t e d when the model was s p e c i f i e d .  increased.  As i n t e r e s t  rates  rates.  increased  declined,  d e c l i n e d , but then proceeded to  i n the f a c e of the d e c l i n i n g i n t e r e s t  f o r the d i f f i c u l t y  How-  institutional  sector in  At the b e g i n n i n g o f the excess supply p e r i o d , the a g r e e m e n t - f o r - s a l e characteristically  implied  increase  T h i s respond accounts  o f the demand equations o f S e c t i o n 6 . 4 . 1 .  n o n - c h a r a c t e r i s t i c respond can be accounted f o r by examining the l e n d i n g o f the  conventional  lenders.  By the end o f 1959,  new housing market, because o f l i m i t a t i o n s Non-bank c o n v e n t i o n a l  the  This  patterns  the banks had abandoned the  on l e n d i n g r a t e s  under the Bank A c t .  l e n d e r s r e d u c e d . l e n d i n g i n the e x i s t i n g housing market,  because o f the high l e v e l housing i n 1960 and 1961.  of f i n a l  orders o f f o r e c l o s u r e s on s i n g l e  The high l e v e l . o f  family  f o r e c l o s u r e , coupled with an excess  s u p p l y o f completed but unoccupied new h o u s i n g , however caused the non-bank c o n ventional  l e n d e r s to s h i f t  Graph 4.5  i n Chapter IV r e v e a l s  housing by c o n v e n t i o n a l  from the market f o r e x i s t i n g h o u s i n g .  lenders.  Reference  the r e d u c t i o n o f l e n d i n g i n the market f o r T h i s reduced l e n d i n g by the t r u s t  and  to existing  life  105  i n s u r a n c e companies l e f t  the a s s i g n e d mortgage and a g r e e m e n t - f o r - s a l e  s e c t o r s as the major sources o f funds i n the mortgage market. A third  institutional  o f Graph 4.2  shift  i s a l s o important  to n o t e .  Examination  r e v e a l s t h a t r e f i n a n c i n g by t h e n o n - b a n k c o n v e n t i o n a l  lenders  13 was at a r e c o r d peak d u r i n g t h i s  period.  Not o n l y would the s h i f t  of  these l e n d e r s from the market f o r e x i s t i n g housing to the r e f i n a n c e market have l e f t  the a g r e e m e n t - f o r - s a l e s e c t o r i n p a r t i c u l a r as the major s o u r c e  o f f u n d s , but i t rationing  would cause a b a s i c measurement problem with the  credit  variable.  C o n s i d e r . t h e i m p l i c a t i o n s o f each o f these p o i n t s i n t u r n .  The emergence  o f the a g r e e m e n t - f o r - s a l e s e c t o r as the major source o f funds i s e v i d e n t the Graph 6.T  r e p r o d u c e d , from Graph 4 . 5 .  The a g r e e m e n t - f o r - s a l e s e c t o r i n e  creased during a period of decreasing i n t e r e s t o f the o t h e r i n s t i t u t i o n a l is  from  r a t e s , because o f the absence  l e n d e r s i n the e x i s t i n g housing market.  This  result  the o p p o s i t e o f t h a t observed and modelled i n the excess demand p e r i o d .  minimum l e v e l  o f housing t u r n o v e r o c c u r r e d , supported by the  sale sector.  Reference to T a b l e 4.1  peridd o f . s i n g l e family . y e a r s i n 1961 occurred. at t h i s  agreement-for-'-  i n d i c a t e s a dramatic s h i f t  in  average  r e s i d e n c e ownership from 8.6 y e a r s to 1960 to  and 12.9 y e a r s i n 1962.  A  11.9  A decrease i n demand f o r housing had  Reference to the same t a b l e r e v e a l s a drop i n the p r i c e o f housing  time (1961).  While i t  has not been p o s s i b l e to develop  of agreement-for-sale s u b s t i t u t i o n , i t d e s c r i p t i v e evidence i t  elasticities  i s p o s s i b l e to c o n c l u d e , from the  i s p o s s i b l e to i n f e r  t h a t the a g r e e m e n t - f o r - s a l e  s t a b i l i z e d housing p r i c e s d u r i n g the excess s u p p l y .  Without  sector  t h i s commonly  a c c e p t e d m a r k e t , h o u s i n g p r i c e s would have e x p e r i e n c e d g r e a t e r  volatility  YEARS \//////  /////////////  ' ' '  /INCREASING INTEREST RATES  TB3T  •fssr  •1956 Graph S.  '195/ . .. 1  T93B"  W/////A  DECREASING INTEREST RATES  "t5BT  Percent o f p r i v a t e vendor f i n a n c i n g s e c t o r 1n comparison to (new) conventional ng. l e n d i n g on new houses as w e l l as on new conventional l e n d i n g on e x i s t i n g housi..^ S e r i e s covers p e r i o d 1954-1963 f o r G . V . R . D . and r e p r e s e n t s gross mortgage f l o w s . Changes i n i n t e r e s t r a t e i n d i c a t e d by bar graph.  —vm  107  downward d u r i n g t h i s  period.  A second major i m p l i c a t i o n o f the i n s t i t u t i o n a l r e f i n a n c e market  concerns the use o f the c r e d i t  mortgage r  variable  mortgages. (i.e.  m  -  b  to  The  i s a composite o f c o n v e n t i o n a l and N . H . A .  or r e f i n a n c e )  lending  i n r e c o r d i n g the mortgage component.  any attempt to weight  f i n a n c e market  the  rationing variable.  No s p e c i f i c concern i s given to the type o f mortgage  transfer  i s there  r  lender s h i f t  each component p a r t .  to  A shift  Nor  the  re-  from the e x i s t i n g housing t r a n s f e r market, would have  no e f f e c t whatsoever on the measured r  variable.  One c o n v e n t i o n a l  m mortgage ( e x i s t i n g mortgage i n v o l v i n g a t r a n s f e r )  would be s u b s t i t u t e d  f o r another c o n v e n t i o n a l mortgage ( a . r e f i n a n c e d mortgage). to the r e f i n a n c e market mortgage r a t e . f o r the s h i f t  causes no change i n the r e c o r d i n g  The  shift  of.the  The c r e d i t r a t i o n i n g v a r i a b l e does not p r o p e r l y account i n mortgage funds w i t h i n the c o n v e n t i o n a l mortgage  lender  g r o u p , or between the p r e v i o u s group and the a g r e e m e n t - f o r - s a l e s e c t o r d u r i n g . t h e exeess supply p e r i o d . 6.4.2  Mortgage Supply Equation .. ..  S u p p l y equations e s t i m a t i n g t h e s u p p l y o f c y c l i c a l mortgage were a l s o examined to see i f T a b l e 6.7  form ( i . e .  demand o r s u p p l y ) a f f e c t  the  results.  i n d i c a t e s the r e l a t i o n s h i p s d e r i v e d from the s t u d y .  e q u a t i o n s show minor v a r i a t i o n S e l e c t i o n o f the f i n a l significant variable  variable  i n the v a r i a b l e s  used i n  estimation.  form o f e q u a t i o n was based on the most  i n the equations a n a l y z e d .  s i s t e n c y t h a t the demand e q u a t i o n s e x h i b i t e d  The i n t e r n a l  i n T a b l e 6.2  are  e v i d e n t i n the s u p p l y e q u a t i o n s o f the excess supply p e r i o d . efficients  of determination  The  are l e s s than 50 p e r c e n t , n e g a t i v e  connot Coauto c o r r e l a -  £.qua L X O H Reference  Dub i n .. Watson ; Statistic  Equation Estimated  Statistic "  F Probability  •'  (excludes constant)  6.1  = 7.44 + 132.6r + 1.01V (.86) (.25) (.65) [.41] [.80] [.53]  6.2  '«." =  6.3  <.° =  .73 + 465.5r+ 3.07V (.08) (.85) (1.89) [.93] [.41] [.08] 7.17 + 235.Or - 2.53V (1.48) (.79) (-2.83) [.16] [.44] [.01] 11  .03  1.95  .20  .81  .23  1.19  1.82  .20  .50  2.10  6.03  .01  6.4  = 10.43 - 559.2r + 3.16V (2.82) (-2.11) (2.23) [.02] [.06] [.05]  .37  2.68  3.55  .06  6.5  = 19.85 + 714.25r +2.74V (1.74) (1.02) (1.33) [.10] [.32] [.21]  .15  2.07  1.05  .37  6.6  = 13.37 - l . O l r + 1.6V (2.86) (-.30) (.87) [.01] [.76] [.40]  .06  2.67  .38  .68  6.7  - 11.21 + 319.3r + 2.2V (1.79) (.83) (1.90) [.09] [.42] [.08]  .23  2.33  1.82  .20  Table 6.7- Supply equations of the c y c l i c a l components i n the.mortgage market f o r e x i s t i n g housing under excess supply conditions. Period of analysis i s 1959 to 1962 i n c l u s i v e f o r the Greater Vancouver Regional D i s t r i c t . T-statistics are shown as rounded brackets. Levels of significance are indicated i n square brackets. : '  109 tion exists  i n f o u r equations and the F p r o b a b i l i t y  s i x o f the seven e q u a t i o n s . shifts  is greater  However the r e s u l t s , given the  as o u t l i n e d above, are not unexpected.  It  than . 0 5 ,  institutional  i s not p o s s i b l e to comment  f u r t h e r on the form o f the equations because o f the i n s t i t u t i o n a l 6.4.2.1  Alternative  shifts.  Measures and Aggregation  The vacancy r a t e was a l t e r n a t i v e l y measured as a f i r s t d i f f e r e n c e determine  if  measurement e f f e c t would improve the equation r e s u l t s .  can be noted i n equation 6 . 4 .  A lagged p r i c e v a r i a b l e  impact o f t h i s  variable  not improved.  Aggregation o f equations 6.5  6.5  in  change was s l i g h t .  ratio,  to  The r e s u l t s  a l s o was i n t r o d u c e d .  The  The s i g n i f i c a n c e of the e q u a t i o n was to 6.7  caused no improvement.  SIGNIFICANCE TO HYPOTHESIS The most c o n c l u s i v e r e s u l t s  r e g a r d i n g the s u b s t i t u t i o n e f f e c t o f the  agreement-  f o r - s a l e and a s s i g n e d mortgage market can be f o u n d i n the excess demand p e r i o d . The t e x t s o f c o n s i s t e n c y i n d i c a t e s t a b i l i t y variable this  o f the p r i c e r a t i o n i n g  i s h i g h l y e l a s t i c and s i g n i f i c a n t at a-.05.  result  variable.  This  A major c o n c l u s i o n from  i s t h a t s u b s t i t u t i o n occurs i n the mortgage market f o r e x i s t i n g housing  when changes i n i n t e r e s t  rates  o c c u r i n the c a p i t a l  markets.  The  agreement-for-  s a l e and a s s i g n e d mortgage s e c t o r , p r o v i d e f i n a n c i n g which allows an e f f e c t i v e let  f o r demand.  T h i s demand s t a b i l i z e s the p r i c e o f housing d u r i n g p e r i o d s o f  excess demand i n the housing market.  .  The same c o n c l u s i o n cannot be. a s c e r t a i n e d with the same degree o f because o f the mortgage s h i f t . o f  non-bank c o n v e n t i o n a l  market, d u r i n g the excess s u p p l y p e r i o d .  The s h i f t  l e n d e r s to the  certainty refinance  by non-bank c o n v e n t i o n a l  to the new housing and r e f i n a n c e mortgage markets have not been i n c o r p o r a t e d the model.  out-  Hence any i n f e r e n c e based on s t a t i s t i c a l  inferred.  into  r e s u l t s with r e s p e c t to  s u b s t i t u t i o n by the c y c l i c a l mortgage funds cannot be v a l i d a t e d e m p i r i c a l l y , the excess s u p p l y p e r i o d , but only  lenders  in  no  With r e f e r e n c e  to Graph 6.1  it  sector increased proportionately o f the excess supply p e r i o d . sector i n i t i a l l y  can be noted t h a t the  as i n t e r e s t  As i n t e r e s t  rates  rates  agreement-for-sale  i n c r e a s e d d u r i n g the  d e c l i n e d , the  beginning  agreement-for-sale  d e c l i n e d , but then proceeded to i n c r e a s e s i g n i f i c a n t l y  the d e c l i n i n g i n t e r e s t  rates.  Non-bank c o n v e n t i o n a l  i n face  l e n d e r s i n view o f high  of  levels  o f f o r e c l o s u r e , s h i f t e d from f i n a n c i n g e x i s t i n g mortgages which i n v o l v e d a s a l e , to r e f i n a n c i n g mortgages which d i d not i n v o l v e a s a l e . the Bank A c t from l e n d i n g at housing market.  rates  i n excess o f s i x p e r c e n t , withdrew from the new  The vacumm c r e a t e d by the withdrawal  caused the a g r e e m e n t - f o r - s a l e  Banks being p r o h i b i t e d by  o f these i n s t i t u t i o n a l  lenders  s e c t o r to i n c r e a s e i n a p e r i o d o f d e c r e a s i n g  interest  rates. Inasmuch as the a g r e e m e n t - f o r - s a l e interest market  rates  d u r i n g the  initial  s e c t o r p r o v i d e d a source o f funds when  stages o f the excess s u p p l y p e r i o d , t h i s  s t a b i l i z e d the p r i c e o f h o u s i n g .  Inasmuch as t h i s  p r o v i d e d a s o u r c e o f funds when i n t e r e s t sources o f funds s h i f t e d to the the p r i c e o f h o u s i n g . during t h i s  period.  1960 to 1961.  rates  agreement-for-sale  d e c l i n e d and when  r e f i n a n c e market,  fall  The housing p r i c e index s u f f e r e d a d e c l i n e o f 8 p e r c e n t  from  However, w i t h o u t  s e c t o r f u n c t i o n i n g as a commonly accepted mortgage  mechanism, g r e a t e r  volatility  t h a t time p e r i o d .  Unfortunately,  statistically.  remains however, no l e s s  The r e s u l t s o f the o t h e r  this  l a t t e r c o n c l u s i o n cannot be  d i s c u s s i o n at t h i s  point  substantiated  i n both the excess s u p p l y and These v a r i a b l e s are  o f the h y p o t h e s i s , but r a t h e r  complete the demand and s u p p l y e q u a t i o n s .  during  valid.  independant v a r i a b l e s  to the acceptance o r r e j e c t i o n  the  transfer  c o u l d have been expected i n housing p r i c e s  excess demand p e r i o d have been p r e v i o u s l y o u t l i n e d .  further  stabilized  T h i s i s not to s a y , t h a t the p r i c e o f housing d i d not  agreement-for-sale  critical  sector  institutional  t h i s mortgage market  Lack o f demand caused the p r i c e d e c l i n e .  It  mortgage  serve  T h i s f u n c t i o n has been s e r v e d .  i s deemed n e c e s s a r y .  not to No  in  Credit Rationing Variable  6.5.1  The v a r i a b l e used to measure mortgage r a t i o n i n g the d i f f e r e n c e between the mortgage and bond r a t e ( r demand i n the housing market, statistically  it  o f excess s u p p l y i n the housing market,  institutional conventional period.  m  - r^).  has been shown t h a t t h i s  s i g n i f i c a n t measure of r a t i o n i n g  was not adequate.  i n the mortgage market  The measure f a i l e d  it  In a p e r i o d o f excess  variable  provided a  i n the mortgage market.  In a p e r i o d  has been shown t h a t t h i s measure t h i s  because the f  s h i f t w i t h i n the mortgage market.  m  component must r e f l e c t  possible  As p r e v i o u s l y o u t l i n e d , non-bank  l e n d e r s s h i f t e d to the r e f i n a n c e market d u r i n g the excess s u p p l y  T h i s s h i f t would not a f f e c t  the measurement o f the mortgage r a t e ,  the n a t i o n a l l y c o n s o l i d a t e d f i g u r e s , no r e c o r d o f the s h i f t data p r e s e n t l y  as i n  i s p o s s i b l e , using  available.  T h i s d i s s e r t a t i o n has f o c u s e d on the s u b s t i t u t i o n o f funds between agreement-for-sale  the  s e c t o r , as well as the a s s i g n e d mortgage s e c t o r , with t h a t  the c o n v e n t i o n a l l e n d e r s .  In a d d i t i o n ,  must be d i r e c t e d to the e f f e c t 6.5.  is  it  i s now apparent t h a t f u r t h e r  of i n t r a - i n s t i t u t i o n a l  of  study  s h i f t s as noted i n s e c t i o n  F u t u r e work i n d e v e l o p i n g an adequate measure o f p r i c e r a t i o n i n g  mortgage market must i n c o r p o r a t e the r e s u l t s noted above.  in  the  112  Footnote References - Chapter  1.  VI  Equation 6.6 r e p r e s e n t s combinations of f i n a n c i n g a s s o c i a t e d with e i t h e r the a g r e e m e n t - f o r - s a l e s e c t o r or the a s s i g n e d mortgage s e c t o r . t c QT £g*"e r> '•- - .1 Equation 6.7 and 6.8 are combinations which i n c l u d e a s s i g n e d mortgages and a r g u m e n t s - f o r - s a l e which are l i n k e d to c o n v e n t i o n a l l e n d i n g . If a mortgagor e l e c t e d to f i n a n c e by means of a new c o n v e n t i o n a l mortgage and an a s s i g n e d mortgage, the a s s i g n e d amount would be r e p r e s e n t e d i n data used to e s t i m a t e 6.7 and 6 . 8 . Equation 6.6 does not i n c l u d e any c o n v e n t i o n a l mortgage r e l a t e d lending. 3  2.  3.  44.  Ray F a i r and Dwight J a f f e e . "Methods of E s t i m a t i o n f o r Markets i n D i s e q u i l i b r i u m , " E c o n o m e t r i c a , V o l . 40, No. 3 , May 1972, pp. 497-514. MMeasuremehtcofttotal m i g r a t i o n to B r i t i s h Columbia was made p o s s i b l e by an annual data s e r i e s compiled from payments made under the Family Allowance Act. S e r i e s are r e f e r e n c e d i n Net M i g r a t i o n B r i t i s h Columbia 1951-1970. Dept. of I n d u s t r i a l Development. V i c t o r i a , B . C . 1971.  5.  The expected r e l a t i o n s h i p of the c y c l i c a l components to changes i n demand is positive. Less s t r i n g e n t c r e d i t a n a l y s i s by i n d i v i d u a l vendors such t h i s group c o u l d demand a s i g n i f i c a n t p r o p o r t i o n of e i t h e r p r i v a t e vendor f i n a n c i n g or the a s s i g n e d mortgage f i n a n c i n g .  6.  P h i l i p H. White. "Proloque to an A n a l y s i s of the R e s i d e n t i a l Mortgage Market in Vancouver," Unpublished p a p e r , (Vancouver: U n i v e r s i t y of B r i t i s h C o l u m b i a , 1965), pp. 1-35.  7.  S . H a m i l t o n , et a l .  8.  B. S w i r s k y . "Income Tax Treatment of D e p r e c i a b l e P r o p e r t y , " i n Papers on Real E s t a t e and Income T a x , (Don M i l l s , O n t a r i o : Real E s t a t e I n s t i t u t e of Canada, 1972), pp. 11-18. Swirsky e x p l a i n s t h e pre 1972 c a p i t a l c o s t allowance p r o c e d u r e , t o g e t h e r with the changes i n t r o d u c e d at t h a t t i m e .  9.  Real E s t a t e Trends i n M e t r o p o l i t a n Vancouver, (Vancouver: Real E s t a t e Board of G r e a t e r Vancouver, 1975-1976), p. B - l 0 , i n d i c a t e s the economies of s c a l e of rental units.  "Turnover Rates i n M e t r o p o l i t a n  V a n c o u v e r , " pp.  1-31.  10.  The v a r i a b l e P r e p r e s e n t s a lagged housing p r i c e v a r i a b l e to account f o r p o s s i b l e impact on supply of c y c l i c a l mortgage d o l l a r s .  the  11.  The vacancy v a r i a b l e was measured as the f i r s t d i f f e r e n c e i n the completed but unoccupied housing data s e r i e s i n both equations 6.5 and 6 . 6 . The expected r e l a t i o n s h i p i s p o s i t i v e .  113  12.  F i n a l o r d e r s of f o r e c l o s u r e f o r the y e a r s follows:  1956  to 1961  were r e c o r d e d as  Year  Number i n G r e a t e r M e t r o p o l i t a n Vancouver  1956 1957 1958 1959 1960 1961  25 75 90 92 490 464  Source of t h i s i n f o r m a t i o n i s C e n t r a l Mortgage and Housing C o r p o r a t i o n Mortgage Accounts i n A r r e a r s . C e n t r a l Mortgage and Housing C o r p o r a t i o n , (Vancouver: C e n t r a l Mortgage and H o u s i n g , 1963). F u r t h e r v d a t a c o l l e c t i o n of the s e r i e s was not continued by C e n t r a l and Housing C o r p o r a t i o n a f t e r 1961. 13.  Mortgage  B. S y s o c k i . "Remodelling of Housing Booms Amidst Slump i n New Home S a l e s , " Wall S t r e e t J o u r n a l , December 26, 1975, p. 1.  114  CHAPTER  VII  IMPACT OF PRIVATE VENDOR FINANCING AND ASSIGNMENT OF MORTGAGES ON THE NARROW AMPLITUDE OF MORTGAGE RATES  7.1 7.2 7.3  SUMMARY INTRODUCTION BACKGROUND LITERATURE SURVEY ON NARROW AMPLITUDE OF MORTGAGE RATES 7.3.1  Pricing  Arguments  7.3.2  Commitment  7.3.3  Institutional  Procedure Factors  7.4  MORTGAGE RATE AMPLITUDE HYPOTHESIS  7.5  TEST OF HYPOTHESIS 7.5.1  7.6  Substitution  Effect  IMPLICATIONS FOR FURTHER RESEARCH  115  7.1  SUMMARY T h i s c h a p t e r r e v e a l s t h a t the s u b s t i t u t i o n of sources of mortgage f i n a n c i n g  d u r i n g p e r i o d s of i n c r e a s i n g i n t e r e s t tude of observed mortgage r a t e s .  r a t e s c o u l d account f o r the reduced a m p l i -  The narrow amplitude of mortgage r a t e s should  not be c o n s i d e r e d as a s i g n of i n e f f i c i e n t  7.2  mortgage markets.  INTRODUCTION The narrow amplitude of mortgage r a t e s ,  the  s u b j e c t of c o n s i d e r a b l e d i s c u s s i o n .  has been  to problems of mortgage  Before the h y p o t h e s i s i s i n t r o d u c e d , a  review of the narrow amplitude of mortgage r a t e s  the  market  In t h i s chapter a h y p o t h e s i s i s developed to e x p l a i n the  amplitude of mortgage r a t e s .  7.3  to bond r a t e s ,  There has been a tendency to l i n k  observed narrow amplitude o f mortgage r a t e s inefficiency.  relative  narrow  literature  is presented.  BACKGROUND LITERATURE SURVEY ON THE NARROW AMPLITUDE OF MORTGAGE RATES  7.3.1  P r i c i n g Arguments  Guttentag and Beck^ p r o v i d e an important  summary of the r e s e a r c h i n t o  q u e s t i o n of why the c y c l i c a l amplitude of mortgage r a t e s t o bond r a t e s .  The f i r s t  the  i s narrow i n comparison  few r e f e r e n c e s noted below p a r a l l e l  those noted by  Guttentag and Beck.  2 Grebler,  Blank and Winnick  suggested t h a t the s l u g g i s h n e s s of mortgage  rates  vi-ssdue to the f a c t t h a t c h a r g e s , above the c o n t r a c t r a t e are o f t e n paid by the mortgagor in s e c u r i n g a mortgage.  These s e r v i c e charges c o u l d m a n i f e s t  as d i s c o u n t e d mortgages which i n f a c t would g i v e the return  than i n d i c a t e d by the c o n t r a c t r a t e .  themselves  l e n d e r a h i g h e r r a t e of  In essence G r e b l e r , Blank and Winnick  are arguing t h a t the wrong mortgage r a t e i s being measured and used f o r comparison  116  to the bond r a t e .  Guttentag and Beck analyzed a mortgage r a t e s e r i e s of d i s c o u n t e d  mortgages and found t h a t gross y i e l d was s l i g h t l y d i d not c o n s i d e r the t e s t  l e s s than c o n t r a c t y i e l d .  c o n c l u s i v e and noted t h a t d e f i n i t i o n  comparable s t u d i e s , prevented them from r e j e c t i n g  They  of f e e s and l a c k of  the G r e b l e r , B l a n k , Winnick  hypothesis. Klaman suggested t h a t the r e l a t i v e l y  narrow c y c l i c a l amplitude of mortgage  y i e l d s was due to the f i x e d c o s t of a d m i n i s t r a t i n g mortgages. "In g e n e r a l , the l a r g e r such c o s t s are r e l a t i v e to the i n t e r e s t r a t e , the more s t a b l e the i n t e r e s t r a t e w i l l be. The reason i s s i m p l e ; a minimum margin must be maintained between the i n t e r e s t r a t e and a l e n d e r ' s f i x e d a d m i n i s t r a t i v e c o s t s to assure him a r e a s o n a b l e r e t u r n . . . on r e s i d e n t i a l l o a n s , a d m i n i s t r a t i v e c o s t s of a c q u i s i t i o n , s e r v i c i n g and r e c o r d - k e e p i n g , perhaps 75 b a s i s p o i n t s compared to 10 on c o r p o r a t e s e c u r i t i e s , c r e a t e a r e l a t i v e l y s t a b l e s t a t e i n r e s i d e n t i a l mortgage i n t e r e s t r a t e s . " 4 Guttentag and Beck r e j e c t forementioned are s e v e r a l  t h i s concept by n o t i n g t h a t the e x p l i c i t  times  l e s s than the mortgage c o s t s ,  i n f l u e n c e on the s l u g g i s h n e s s i s indeed s l i g h t . i m p l i e s t h a t mortgage r a t e s  are a d d i t i v e r a t h e r  hence,  costs  their  Furthermore, Klaman's concept than c o m p e t i t i v e .  Hence, the  However,. Klaman noted another p o s s i b l e reason f o r the l a c k o f  sensitivity  concept as suggested by Klaman i s i n doubt.  of the mortgage r a t e s .  He noted  that:  "as we move away from s t a n d a r d i z e d to more d i f f e r e n t i a t e d markets . . . the number of v a r i a b l e s , i n a d d i t i o n t o p r i c e , to be n e g o t i a t e d m u l t i p l e s . . . Numerous c o n t r a c t terms other than p r i c e are s u b j e c t to i n d i v i d u a l n e g o t i a t i o n downpayment p r o v i s i o n s , . . . prepayment p e n a l i t i e s and n o n - i n t e r e s t c o s t s . The nature and l o c a t i o n of the p a r t i c u l a r r e s i d e n t i a l u n i t s e c u r i n g the mortgage however, are important f a c t o r s in the mortgage t r a n s a c t i o n . " 6 Klaman i n t r o d u c e s the concept of n o n - p r i c e r a t i o n i n g .  The o b s e r v a t i o n of changes  i n n o n - p r i c e terms has l e d to c o n s i d e r a b l e r e s e a r c h as o u t l i n e d  in Section 5 . 4 . 1 .  Muth'  c l a s s e s of  7  reasoned t h a t changes i n i n t e r e s t  to the market,  rather  than e x p l i c i t  rates  brought d i f f e r e n t  r a t i o n i n g by means of n o n - p r i c e terms.  by J a f f e e ^ and Eger^ would appear to s u b s t a n t i a t e the Muth c o n c e p t .  borrower Evidence  The m u l t i p l e  -  117  term h y p o t h e s i s i s not a s i g n i f i c a n t f a c t o r  i n the c r e d i t r a t i o n i n g p r o c e d u r e .  Interest rate remains.the s i g n i f i c a n t r a t i o n i n g d e v i c e . 7.3.2  Commitment Procedure  Perhaps more fundamental  than the p r i c i n g arguments are those problems  i n v o l v e d i n the o b s e r v a t i o n of mortgage r a t e s . approved (committed)  The more r e a d i l y a v a i l a b l e data  mortgage loan i n f o r m a t i o n of c o n v e n t i o n a l  Hence, t h i s data i s g e n e r a l l y used f o r e s t i m a t i o n .  lending  institutions.  Problems a l s o a r i s e due t o  time l a g s between commitment of mortgage funds by a l e n d e r and the a c t u a l mortgage funds by a mortgagor.  During p e r i o d s o f i n c r e a s i n g i n t e r e s t  is  the  use of  rates, a  long lag between commitment and a c q u i s i t i o n tends to dampen the observed mortgage rate.  With a shortened l a g , the dampening e f f e c t  r a t e s then tend to r e a c t this  i s much l e s s .  Observed mortgage  l e s s v i g o r o u s l y to changes in c r e d i t c o n d i t i o n s and from  l a c k of r e a c t i o n , concern f o r e f f i c i e n c y a r i s e s . The problem i n o b s e r v a t i o n and v a r i a b i l i t y  r e c o r d i n g of the a c t u a l a difference actual  o f mortgage r a t e concerns the  mortgage r a t e determined at the time of l o a n .  is  between the observed mortgage r a t e at time of commitment and the  mortgage r e c o r d e d when the funds are r e q u i r e d .  causes t h i s  There  The commitment process  difference.  The forward commitment process i s i n f l u e n c e d by s e v e r a l f a c t o r s . of construction i s important.  A b u i l d e r of s i n g l e f a m i l y  houses w i l l  First,  type  seek a  mortgage loan commitment s e v e r a l months i n advance of the requirements f o r a long term ( t a k e - o u t ) mortgage.  In the case of commercial b u i l d i n g s the  p e r i o d may be two or t h r e e y e a r s . ment a f f e c t  the commitment p r o c e s s .  Second,  lender p r e f e r e n c e and p o r t f o l i o  Banks and near-banks are more l i k e l y  i n commitments to a prime r a t e because of t h e i r as a source of f u n d s ; l i f e r a t e because of t h e i r  commitment adjustto  tie  dependence on s h o r t term savings  i n s u r a n c e companies tended to commit funds at a f i x e d  d e s i r e to match c u r r e n t sources and uses of f u n d s .  Third,  118  the Canadian c l i m a t e a f f e c t s  commitment p r o c e s s .  q u a r t e r may not be t a k e n - o u t  until  A commitment i w t h e " s e c o n d  the second q u a r t e r  of the f o l l o w i n g y e a r  because of a more lengthy b u i l d i n g process in w i n t e r . In order t o overcome the problems of using mortgage commitment d a t e ,  distributed  lags have been used to account f o r the entrance of the t a k e - o u t mortgages i n t o mortgage data s t r e a m . level^' 7.3.3  it  Unfortunately  is d i f f i c u l t  Institutional  because of the  to s u b s t a n t i a t e the  l a c k of work at the d e s c r i p t i v e  results.  Factors  F i n a l l y to complete the review of the major c a u s e s ^ of mortgage r a t e s  the  of the narrow  amplitude  Smith notes t h a t the l a c k of a secondary market a f f e c t s  r e s p o n s i v e n e s s o f the mortgage r a t e s .  Smith argues  the  that:)  "because of the n e g o t i a t e d nature of the t r a n s a c t i o n s and l e n d e r d e s i r e s t o m a i n t a i n good borrower - l e n d e r r e l a t i o n s h i p s , primary r a t e adjustments u s u a l l y lag adjustments on o u t s t a n d i n g i s s u e s . " 1 2 T h i s argument i s a r e p e a t  o f the n o n - p r i c e r a t i o n i n g d i s c u s s e d e a r l i e r .  It  not apparent t h a t t h e s e n o n - p r i c e c o n s i d e r a t i o n s are a s i g n i f i c a n t f a c t o r e s t a b l i s h i n g mortgages r a t e s .  The above reason does not i n d i c a t e t h a t  e x i s t e n c e o f a secondary mortgage market would m a t e r i a l l y of the mortgage  7.4  the  in  the  amplitude  rate.  MORTGAGE RATE AMPLITUDE HYPOTHESIS The n u l l  h y p o t h e s i s presented i n t h i s  chapter i s t h a t t h e r e  between the amplitude of the observed mortgage r a t e ( r ) m  Ifcie a l t e r n a t e h y p o t h e s i s i s t h a t t h e r e of r  affect  is  m  and r ^  is a difference  i s no d i f f e r e n c e  and the bond r a t e between the  (r^).  amplitude  The observed mortgage r a t e i s d e f i n e d as the s i m p l e average  mortgage r a t e i s of a l l  c o n v e n t i o n a l and government l e n d e r s of f i r s t  The bond rate- i s a weighted average of a l l c o r p o r a t e bonds.  federal,  mortgages.  p r o v i n c i a l , m u n i c i p a l and  119  7.5  TEST OF THE HYPOTHESIS Direct  t e s t i n g of the n u l l  h y p o t h e s i s i s not p o s s i b l e because of the  in sources of funds t h a t occur in the mortgage market d u r i n g p e r i o d s of rationing.  To c o u n t e r a c t t h i s  problem three  t e s t s were d e v i s e d .  a l t e r n a t e hypothesis was t e s t e d f o r the time p e r i o d 1954 to 1957 s u l t s are shown in Table  m  - r, b  =  .036  -  credit  First,  the  inclusive.  Re-  7.1.  R r  substitution  .40 r  ?  Durbin Watson Statistic  .90  L  1.14  F Statistic  F prob.  114.6  .00  b  T a b l e 7.1  (22.27)  (-  [.00  [ .00  ]  10.7) ]  Regression of the d i f f e r e n c e between observed mortgage r a t e and bond r a t e ( r r. ) and the bond r a t e (r^) f o r 1954 to 1957. t s t a t i s t i c s are in rounded b r a c k e t s ; square b r a c k e t s i n d i c a t e l e v e l s of s i g n i f i c a n c e . m  The s i g n i f i c a n t the amplitude  negative  of the r  m  is  relationship  between r  l e s s than t h a t of r^  The a l t e r n a t e h y p o t h e s i s can be a c c e p t e d .  m  - r^  and r^  indicates  that  under changing c r e d i t c o n d i t i o n s .  Reasons f o r t h i s d i f f e r e n c e  are  outlined  below. 7.5.1  Substitution  Effect  The r e s u l t s of demand equations  i n Chapter V I ,  indicated strong  by the c y c l i c a l components of the mortgage market f o r e x i s t i n g results^'a  r e  repeated  in Table  7.2.  substitution  housing.  The  120  Equation reference number  Equation  type  Elasticity  Assigned conventional  6.1  New  6.2  6.3  6.4  mortgage  -1.10 [.045]  agreements-for-sale  -1.39 [.03]  New a g r e e m e n t s - f o r - s a l e agreements-for-sale  and a s s i g n e d  -2.39 [.03]  New a g r e e m e n t s - f o r - s a l e  and a s s i g n e d mortgages  -1.95 [.03]  Combination o f equations 6.1 to 6.5  -1.38 [.003]  Combination o f a s s i g n e d a g r e e m e n t s - f o r - s a l e and a g r e e m e n t s - f o r - s a l e and a s s i g n e d mortgages  -1.29 [.004]  6.7  Combination o f new a g r e e m e n t s - f o r - s a l e as w e l l as a s s i g n e d mortgages and a s s i g n e d mortgages and a s s i g n e d a g r e e m e n t s - f o r - s a l e  -1.30 [.001]  T a b l e 7.2  E l a s t i c i t i e s o f demand f o r c y c l i c a l components o f the mortgage market f o r e x i s t i n g h o u s i n g . L e v e l s o f s i g n i f i c a n c e o f p r i c e r a t i o n i n g v a r i a b l e i n d i c a t e d by square b r a c k e t s .  6.5  6.6  The h i g h l y e l a s t i c of credit rationing.  coefficients  In f a c t  that s u b s t i t u t i o n  occurs d u r i n g p e r i o d s  T h i s s u b s t i t u t i o n p r o v i d e s s t r o n g e v i d e n c e t h a t the narrow  amplitude o f mortgage r a t e s problem.  indicate  i s a measurement p r o b l e m , not a mortgage market  the s u b s t i t u t i o n  observed mortgage r a t e to appear  oiff one type o f mortgage f o r the o t h e r ,  inefficiency  causes the  sluggish.  Completion o f the t e s t o f the h y p o t h e s i s suggests t h a t the observed mortgage r a t e and c y c l i c a l component r a t e s h o u l d be compared. further  substantiate  that s u b s t i t u t i o n  Similarity  occurs with c r e d i t  o f rates  rationing.  would  T a b l e 7.3 r e v e a l s  121  the mortgage r a t e s  by component.  Chi-square t e s t s ' "  i n d i c a t e t h a t the c y c l i c a l 1 C  components o f the market f o r e x i s t i n g housing are not s i g n i f i c a n t l y from the observed mortgage r a t e s . at r a t e s  different  As the a l t e r n a t e sources of f i n a n c i n g occurs  c o m p e t i t i v e with the observed mortgage r a t e s ,  the a l t e r n a t e h y p o t h e s i s can  be accepted with the i n f e r e n c e t h a t the s u b s t i t u t i o n of source of f i n a n c i n g competitive  7.6  rates  IMPLICATIONS  reduces observed mortgage r a t e  at  amplitude.  FOR FURTHER RESEARCH  The f o r e g o i n g o b s e r v a t i o n s i n d i c a t e t h a t the narrow amplitude market  should not be c o n s i d e r e d as a s i g n of mortgage market  effect  of s u b s t i t u t i o n  mortgage  inefficiency.  causes the observed r a t e to r e a c t with a dampened  These o b s e r v a t i o n s a r e important not c l e a r the market  of the  The amplitude.  i n t h a t c r i t i c i s m s t h a t the mortgage r a t e does  can be r e b u t t e d .  ~  J  The r e b u t t a l  i n which numerous buyers and s e l l e r s do indeed e x i s t .  would be based on a market Hence, charges of  1.8 o l i g o p o l i s t i c mortgage l e n d i n g ^ by c o n v e n t i o n a l to f u r t h e r  institutions  should be s u b j e c t  study.  19 ;  Second, the  h y p o t h e s i s presented by S p a r k s " - , t h a t t h e r e  is a fixed  of funds to be a l l o c a t e d between mortgages and bonds should r e c e i v e scrutiny.  Demand f o r  careful  bonds has been assumed to be i n e l a s t i c ; whereas demand  f o r mortgage has been assumed to be e l a s t i c .  The s u b s t i t u t i o n of sources of  mortgage funds d u r i n g p e r i o d s of c r e d i t r a t i o n i n g of funds theory  supply  needs f u r t h e r  attention.  suggests t h a t the f i x e d  supply  MORTGAGE RATES BY TYPES OF MORTGAGE Market for New Housing  MARKET FOR EXISTING HOUSING Year  Assigned Mortgages Column 1 q, •&  1954  5.49  Assigned Agreements for Sale Column 2 %  Agreements for Sale Column 3 %  New a Mortgages Column 4 %  Refinanced Mortgages Column 5 %  5.76  6.00  6.08  6.22  a  Aggregate Market Rates 20  New a Mortgage Column 6 9-  -  Observed Rate Column 7 % (Col.4+5+6)  5.33  5.94  Cyclical Component Rate Column 8  21 Market Rate Column 9  (Col.1+2+3) 5.75  % (Col.7+8) 5.84 5.88  1955  5.51  5.73  6.05  6.29  6.41  5.28  6.00  5.76  1956  5.55  5.98  ; 6.14  5.97  6.59  5.57  6.04  1957  5.89  5.77  5.96  5.89  6.45  6.71  7.18.  6.24  6.71  195S  6.07  5.90  6.39  6.01  6.51 •  6.66  .7.32  6.17  6.72  1959  6.14  6.09  6.43  6.37  6.73  6.65  6.91  6.21  6.59  1960  6.40  6.13  6.50  6.22  6.87  7.09  7.47 .  6.72  7.09  1961  6.41  6.29  6.75  6.48  6.72  6.93  7.54  6.96  6.81  1962  6.50  6.33  6.05  6.40  6.71  7.25  7.36  6.89  .7.16  1963  6.48  6.32  6.82  6.60  6.74 .  6.95  7.41  6.74  7.03  6.55  6.79  '. '  TABLE: 7.3  Average mortgage rates by type of mortgage for both markets i n existing housing and new housing in G.V.R.D. 1954 to 1963. Includes both conventional and governmental lenders. Data represents f i r s t mortgage data. a  ' • ro ' .'ro  123  Footnote References - Chapter  VII  1.  Jack Guttentag and M o r r i s Beck. New S e r i e s on Home Mortgage Y i e l d s S i n c e 1951. N a t i o n a l Bureau of Economic R e s e a r c h . . General S e r i e s No. 92. (New York: Columbia U n i v e r s i t y P r e s s , 1970), pp. 1-357.  2.  Leo G r e b l e r , D. Blank and L . Winnick. C a p i t a l Formation i n R e s i d e n t i a l Estate. (Princeton: P r i n c e t o n U n i v e r s i t y P r e s s , 1956), p. 223.  3.  Guttentag,  4.  Saul Klaman. The Postwar R e s i d e n t i a l U n i v e r s i t y P r e s s , 1961), p. 78.  5.  Underlining is that of t h i s  6.  Klaman, op. c i t . ,  7.  Richard Muth. " I n t e r e s t R a t e s , C o n t r a c t Terms and A l l o c a t i o n o f F u n d s , " i n J o u r n a l o f F i n a n c e , March 1962, pp. 63-80.  8.  Dwight J a f f e e . C r e d i t R a t i o n i n g and the Commercial Loan Market. John Wiley and Sons, 1971), pp. 1-183.  (New York:  9.  A . F . Eger. "A Case f o r the Muth H y p o t h e s i s , " Unpublished paper, U n i v e r s i t y of B . C . , 1975), pp. 1-27.  (Vancouver:  op. c i t . ,  p.  p.  Real  36. Mortgage Market.  (Princeton:  Princeton  author.  78. Mortgage  10.  S t u d i e s t h a t e x p l i c i t l y d e s c r i b e the U . S . forward commitment procedure a r e l i m i t e d and are found i n Klaman, op. c i t . , pp. 175-238, as w e l l as i n Mortimer Kaplan. "Recent I n s t i t u t i o n a l Arrangements i n Mortgage L e n d i n g , " i n J o u r n a l o f F i n a n c e , March 1958, p. 195. Kaplan notes there i s c o n s i d e r a b l e v a r i a t i o n i n the l a g between commitment and a c q u i s i t i o n . Lawrence Smith and Gordon S p a r k s . " S p e c i f i c a t i o n and E s t i m a t i o n of F i n a n c i a l Stock Adjustment M o d e l s , " . . . . I n t e r n a t i o n a l Economic Review, February 1971, pp. 14-26, use U . S . commitment data i n a study of stock adjustment models f o r l i f e i n s u r a n c e companies f o r Canada. Canadian commitment data o r s t u d i e s a r e l a c k i n g .  11.  Other reasons suggested are d i f f e r e n c e s i n l e v e l of r i s k premium. Guttentag, op. c i t . , p. 93 found no d i f f e r e n c e i n mortgage premium a t b u s i n e s s c y c l e peaks and trough i n comparing c o n v e n t i o n a l mortgages and c o r p o r a t e bonds. A l l a n Winger "Regional Growth D i s p a r i t i e s and the Mortgage M a r k e t , " J o u r n a l of Finance 1969, pp. 659-662 suggests t h a t d i f f e r e n c e s i n r e g i o n a l flow c o u l d a f f e c t mortgage r a t e a m p l i t u d e . The f i x e d r a t e theory on F . H . A . mortgages has been developed by Gordon S p a r k s , "Economic A n a l y s i s of the Role of F i n a n c i a l I n t e r m e d i a r i e s i n the Postwar C y c l e , " i n Determinants of Investment B e h a v i o u s , (New York: Columbia U n i v e r s i t y P r e s s , 1967), p p . 301-332.  12.  Lawrence B. S m i t h .  The Postwar Canadian Housing and R e s i d e n t i a l  Mortgage  124  Markets and the Role of Government, T374), pp. 76-77. ~  (Toronto:  U n i v e r s i t y of Toronto  " C r e d i t R a t i o n i n g and the Commercial Loan M a r k e t , "  Press,  13.  Dwight J a f f e e .  p.  30.  14.  The data used i n t h i s study r e p r e s e n t s a c t u a l mortgage r a t e s . There i s no need to i n t r o d u c e l a g s i n t o the data s e r i e s f o r the commitment p r o c e s s , because the data r e p r e s e n t s a c t u a l r a t e s , r a t h e r than committed r a t e s .  15.  In t h i s study a simple weighting of v a r i o u s mortgage markets was u s e d . weighted market r a t e , would not change the r e s u l t s because of the s i m i l a r i t y i n s i z e of the submarkets to each o t h e r .  16.  The n u l l h y p o t h e s i s t e s t e d was t h a t t h e r e i s no d i f f e r e n c e between the market mortgage r a t e and the observed mortgage r a t e . On the b a s i s of c h i - s q u a r e t e s t s , the n u l l h y p o t h e s i s cannot be r e j e c t e d at a p r o b a b i l i t y of . 9 9 . S i m i l a r r e s u l t s were found i n comparing the c y c l i c a l component r a t e and the observed mortgage r a t e .  17.  Ray F a i r . 1972, pp.  18.  John Evans. The R e s i d e n t i a l Mortgage Market I n s t i t u t i o n a l Behaviour. Unpublished p a p e r , 1974), pp. 1-180.  19.  S p a r k s , op. c i t . ,  20.  The mortgage r a t e used to study mortgage r a t e amplitude i s t h a t of the conventional lenders. T h i s r a t e i n c l u d e s mortgages on new and e x i s t i n g housing f i n a n c e d by c o n v e n t i o n a l l e n d e r s . T h i s r a t e has been s t u d i e d because o f the ease of data c o l l e c t i o n . For purposes of t h i s chapter the observed r a t e i s c o n s i d e r e d to be synonymous with c o n v e n t i o n a l mortgage rates.  21.  The market mortgage r a t e i s the aggregate of a l l p o s s i b l e sub-markets and i n c l u d e s r a t e s o f l e n d i n g on e x i s t i n g and new housing by c o n v e n t i o n a l and n o n - c o n v e n t i o n a l l e n d e r s .  A  " D i s e q u i l i b r i u m i n Housing M o d e l , " J o u r n a l of F i n a n c e , May 207-230.  p.  i n Canada: Market S t r u c t u r e and (Vancouver: U n i v e r s i t y of B . C . ,  302.  125  CHAPTER VIII IMPLICATIONS FOR FURTHER STUDY  8.1  FURTHER STUDIES AND POLICY  IMPLICATIONS  8.2  COMMENTS ON THE USE OF MORE ACCURATE DATA  126 8.1  FURTHER STUDIES AND POLICY IMPLICATIONS The r e s u l t s presented in the previous chapters have provided a framework  from which further studies may be undertaken. e x c i t i n g because of the wide range p o s s i b l e .  Such studies are challenging and For example, t h i s study did not  include the combined mortgage financing of agreements-for-sale and new conventional mortgages on e x i s t i n g housing as well as the combination of new mortgages and assigned mortgages on e x i s t i n g housing. housing t r a n s f e r s .  These two groups account for 5% of a l l  E x p l i c i t recognition of combining p r i v a t e and conventional  financing needs f u r t h e r study. The r o l e of the refinancing in the market for e x i s t i n g housing i s one which has been ignored. of ownership.  Refinancing in the sense used here, does not involve a t r a n s f e r  For example, refinancing can occur for purposes of conversion of  e x i s t i n g housing stock.  Exploration of the c o r r e l a t i o n between p r i c e r a t i o n i n g ,  income l e v e l and i n d i c a t o r s such as building permits f o r conversion, purchase of b u i l d i n g supplies would p r i v a t e the basis f o r the study.  The use of refinancing  to increase the supply of housing units would accomplish two major goals.  First,  mortgage c a p i t a l would go d i r e c t l y to the supply of new housing units without the s i g n i f i c a n t delays c u r r e n t l y hampering subdivision process in CanadaJ  Increased  mortgage funds f o r housing i f not directed immediately towards increasing the housing supply, tend only to increase the p r i c e of housing, because of the short run i n e l a s t i c i t i e s ' of housing supply.  Second, the supply of well located  housing units by conversion of e x i s t i n g stock, could be achieved with minimum disruption of e x i s t i n g neighborhoods. In addition refinancing for non-real estate purposes has been noted by Gelb^ as well as Sommers and Rhine.^  Size of the refinance loan r e l a t i v e  principal  outstanding on the o r i g i n a l mortgage provides the key to the purpose of the loan. For example, i f the new loan i s greater than the p r i n c i p a l outstanding on the  127  original  l o a n , then n o n - r e a l  e s t a t e m o t i v a t i o n can be e x p e c t e d .  With t h i s  i n f o r m a t i o n , the r e l a t i o n s h i p s between the more c o s t l y consumer c r e d i t and the r e f i n a n c e mortgage market f o r n o n - r e a l  e s t a t e purposes c o u l d be e x p l o r e d .  T h i s type of s u b s t i t u t i o n can be expected as renewal calls  on mortgages become commonplace.  market  of the mandatory f i v e  year  Such a study would have p o l i c y i m p l i c a t i o n s  i n t h a t N.H.A. mortgages c o u l d be found to be used f o r n o n - r e a l The use o f N.H.A. mortgages f o r n o n - r e a l  estate  estate purposes.  purposes suggests a n o n - d e s i r a b l e  use of mortgage f u n d s . A t h i r d study which stems from the study of the narrow amplitude of mortgage r a t e s , would u t i l i z e mortgage markets.  the r e c o g n i t i o n of the p r i v a t e vendor f i n a n c e and a s s i g n e d  Such a study would draw on s t u d i e s by Evans^ and Poapst^ and  would determine the magnitude of mortgage market e f f i c i e n c y by e s t i m a t i n g a l l o c a t i v e and o p e r a t i o n a l efficiency  e f f i c i e n c y of the mortgage market.  the  Operational  i n v o l v e s the r e d i s t r i b u t i o n of wealth from consumers to p r o d u c e r s ;  whereas a l l o c a t i v e e f f i c i e n c y r e p r e s e n t s a w e l f a r e l o s s to the economy due to a mi s a l l o c a t i o n of r e s o u r c e s . ^ This third  study would n e c e s s i t a t e the u p - d a t i n g of the mortgage data bases i n  o r d e r to a s c e r t a i n the r e l a t i v e a s s i g n e d mortgage s e c t o r s . f i v e year v a r i a b l e  magnitude o f the p r i v a t e vendor f i n a n c i n g and  Institutional  changes such as i n t r o d u c t i o n of  the  r a t e on mortgages has removed some of the advantage of  the  o b t a i n i n g an a s s i g n a b l e mortgages.  The magnitude of the r e d u c t i o n i s unknown.  However, a study c o n t r a s t i n g a Canadian mortgage market with and without a f i v e y e a r c a l l would permit under p o l a r c o n d i t i o n s .  the mortgage market e f f i c i e n c y measures to be compared This p i l o t  study c o u l d be i n i t i a t e d  housing market of m e t r o p o l i t a n Vancouver. o b s e r v a t i o n to the r e q u i r e d d a t a .  i n the  regional  The land r e g i s t r y system a l l o w s  The p i l o t  the  study c o u l d then be expanded on a  128  regional  b a s i s f o r M o n t r e a l , T o r o n t o , p r o v i d e d t h a t the mortgage data c o u l d be  obtained. A fourth  study would i n v o l v e the use of p r i v a t e  of funds f o r the mortgage market. mortgage market e f f i c i e n c y  T h i s s t u d y , drawing on the  b a s i c data of  s t u d y , would a s c e r t a i n the d e s i r a b i l i t y  promoting the use of p r i v a t e mortgage market.  vendor f i n a n c i n g as a s o u r c e  of  vendor f i n a n c i n g as a source of funds i n  Government i n s u r a n c e , t a x a t i o n i n c e n t i v e s , f o r the  the  actively the private  vendor s e c t o r would p r o v i d e the necessary framework.  C o - i n s u r a n c e concepts c o u l d  be a p p l i e d so as to reduce the problem of v a l u a t i o n .  Such a scheme c o u l d be  expected to p r o v i d e a source of funds f o r the market f o r e x i s t i n g same time a c h i e v i n g two important distributed utilized  more c o m p e t i t i v e l y  to t r a n s f e r  the c o r p o r a t e  8.2  property,  goals.  housing and at  F i r s t , mortgages c o u l d perhaps be  and s e c o n d , c o n v e n t i o n a l  l e n d e r funds  currently  could be sought by the new housing market or by  sector.  COMMENTS ON THE USE OF MORE ACCURATE DATA The n e c e s s i t y f o r a c c u r a t e data has been demonstrated by the new h o r i z o n s  opened with the data analyzed from the  land r e g i s t r y  such data i s not only c o s t l y , but extremely warded a f t e r a s i g n i f i c a n t e f f o r t regarding  improvements  system.  C o l l e c t i o n of  t e d i o u s and i n the main only  has been put f o r w a r d .  re-  K l e i n ' s comments  in economic judgment are indeed noteworthy  at t h i s  time.  "Improvements i n economic judgment come from s e v e r a l s o u r c e s . Improved econometric techniques p r e s e n t powerful means of s t a t i s t i c a l i n f e r e n c e . However, these econometric t e c h n i q u e s o n l y r e s u l t in u s e f u l a p p l i c a t i o n s i f r e s e a r c h of a r a t h e r p e d e s t r a i n nature i s undertaken. The b u i l d i n g o f i n s t i t u t i o n a l r e a l i t y i n t o a p r i o r i f o r m u l a t i o n s . o f economic r e l a t i o n s h i p s and the r e f i n e m e n t o f b a s i c data c o l l e c t i o n have c o n t r i b u t e d much more to the improvement of e m p i r i c a l econometric r e s u l t s than have more e l a b o r a t e means of s t a t i s t i c a l i n f e r e n c e . I look forward towards improvements i n p r e c i s i o n of econometric judgments of the o r d e r  129  of magnitude of 50% as a r e s u l t o f a b e t t e r knowledge of the f u n c t i o n i n g of economic i n s t i t u t i o n s , through the use o f new measurements on v a r i a b l e s or through the use of more a c c u r a t e d a t a . In c o n t r a s t I would expect marginal improvements of 5 or 10% through the use of more powerful means of s t a t i s t i c a l inference."8  130  Footnote References - Chapter  VIII  1.  R e s i d e n t i a l Land Development i n O n t a r i o . I n s t i t u t e of O n t a r i o , 1972), pp. 1-73.  2.  D. D a v i d - J o h n s o n . "Government Housing P o l i c i e s and Programs: T h e i r Impact on Housing Demand," Unpublished p a p e r , (Vancouver: U n i v e r s i t y of B r i t i s h Columbia, 1975), pp. 1-45.  3.  Gelibi Mortgage Debt f o r  4.  Sommers and R h i n e , The New Dimension of Mortgage  5.  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Southwestern  Publishing  C l a u r e t i e , T. Monetary Growth R a t e s , the Business Demand f o r Funds and the R e s i d e n t i a l Mortgage Market. Unpublished P h . D . T h e s i s . Pullman^tWash. :: .Washington S t a t e U n i v e r s i t y , 1971. 1  D a b e s t a n i , A. A Model of I n t e r - P r o v i n c i a l M i g r a t i o n between B . C . and other Canadian P r o v i n c e s . Unpublished M a s t e r ' s T h e s i s . Vancouver: U n i v e r s i t y of B . C . , 1975. Duesneberry, J . S . C o . , 1958. Evans, M. New York:  Business C y c l e s and Economic Growth.  "Investment i n R e s i d e n t i a l Harper and Row, 1969.  F i s h e r , E.M. and F i s h e r R.M. 1954.  New York:  McGraw-Hill  C o n s t r u c t i o n , " i n Macroeconomic A c t i v i t y .  Urban Real E s t a t e .  New York:  Henry H o l t and C o . ,  F i s h e r , R.M. " A v a i l a b i l i t y of C o n s t r u c t i o n C r e d i t f o r H o u s i n g , " i n Ways to Moderate F l u c t u a t i o n s i n Housing C o n s t r u c t i o n . Washington: Board o f Governors o f Federal Reserve System, 1972. Freidman, M. A Theory of the Consumption F u n c t i o n . U n i v e r s i t y P r e s s , 1957. Gelb, B.A. 1972.  Mortgage  Debt f o r Non-Real  Princeton, N . J . :  Estate Purposes.  Ottawa:  Princeton  Conference B o a r d ,  G r e b l e r , L . , B l a n k , D.M. and W i n n i c k , L. C a p i t a l Formation i n R e s i d e n t i a l Estate, Princeton: P r i n c e t o n U n i v e r s i t y P r e s s , 1956.  Real  G r e b l e r , L. and M a i s e l , Sherman J . "Determinants o f R e s i d e n t i a l C o n s t r u c t i o n : A Review o f Present Knowledge," i n Impacts o f Monetary P o l i c y . Research study prepared f o r the Commission on Money and C r e d i t . Englewood C l i f f s , N . J . : P r e n t i c e - H a l l , 1963, pp. 475-620. G u r l e y , J . G . and Shaw, D. I n s t i t u t i o n , 1960.  Money on a Theory o f F i n a n c e .  Washington:  Brookings  136  Guttentag, J . M . "The Behaviour o f R e s i d e n t i a l Mortgage Y i e l d s S i n c e 1951," i n Essays on I n t e r e s t R a t e s , e d i t e d by G u t t e n t a g , J . M . and Cagan, P. New York: N a t i o n a l Bureau of Economic R e s e a r c h , 1969, pp. 29-76. H a m i l t o n , S.W. in Metropolitan 1971.  " T i t l e R e g i s t r a t i o n i n B r i t i s h C o l u m b i a , " i n Real E s t a t e Trends Vancouver. Vancouver: Real E s t a t e Board of G r e a t e r Vancouver,  J a f f e e , D.M. C r e d i t R a t i o n i n g and the Commercial Loan Market. Wiley and Sons I n c . , 1971. Klaman, S . B . The Postwar R e s i d e n t i a l U n i v e r s i t y P r e s s , 1961.  Mortgage Market.  New York:  Princeton:  John  Princeton  M a i s e l , S . "The R e l a t i o n s h i p of R e s i d e n t i a l F i n a n c i n g and Expenditures on R e s i d e n t i a l Construction." Conference on Savings and R e s i d e n t i a l F i n a n c i n g . C h i c a g o : Proceedings o f U . S . Savings and Loan League, 1965. Mammel, C. The Short-Term F l u c t u a t i o n s of Regional Housing and Mortgage Unpublished Ph.D. T h e s i s . L e x i n g t o n , Kentucky, 1973. Mortgage Accounts i n A r r e a r s . 1963.  Ottawa:  Central  Mortgage and Housing C o r p o r a t i o n ,  Muth, R . F . "The Demand f o r Non-Farm H o u s i n g , " i n the Demand f o r Durable e d i t e d by A . C . Harberger. C h i c a g o : U n i v e r s i t y of Chicago P r e s s , 1960. Net M i g r a t i o n B r i t i s h Columbia 1951-1970. Development, 1971. Poapst, J . Developing the R e s i d e n t i a l Mortgage and H o u s i n g , 1973.  Victoria:  Department o f  Mortgage Market.  Vol.  Ill,  Vancouver.  Vancouver:  Goods,  Industrial  Ottawa:  . R e s i d e n t i a l Mortgage Market. Working paper prepared f o r Commission o f Banking and F i n a n c e , Ottawa, 1962. Real E s t a t e Trends i n M e t r o p o l i t a n G r e a t e r Vancouver, 1975.  Markets.  Central  Royal  Real E s t a t e Board of  R e a l t y Mortgage Loans Newly R e g i s t e r e d i n O n t a r i o - 1969-70; 1971; 1972. Ontario S t a t i s t i c a l C e n t r e , Economic and S t a t i s t i c a l S e r v i c e s D i v i s i o n , Department of T r e a s u r y and Economics, Queens P a r k , T o r o n t o . R e s i d e n t i a l Land Development O n t a r i o . , 1972.  in Ontario.  Toronto:  Urban Development  Institute  of  R i c k s , R. B r u c e . N a t i o n a l Housing Models: A p p l i c a t i o n o f Econometric Techniques to Problems of Housing R e s e a r c h . Lexington: D.C. Heath and C o . , 1973. S c h e c t e r , H.B. The R e s i d e n t i a l Mortgage F i n a n c i n g Problem. Subcommittee on Housing, Committee on Banking and C u r r e n c y , 92 nd C o n g r e s s , F i r s t S e s s i o n , 1971. i he P  137  Smith, L . B . The Postwar Canadian Housing and R e s i d e n t i a l Mortgage Markets and the Role o f Government. Toronto: U n i v e r s i t y o f Toronto P r e s s , 1974. Smith, L . B . Housing i n Canada: Urban Canada S e r i e s , 1971. Smyth, J . E . and Soberman, D.A. Toronto: Prentice-Hall, 1968.  Market S t r u c t u r e  and P o l i c y Performance.  The Law and Business A d m i n i s t r a t i o n  Ottawa:  i n Canada.  S p a r k s , G. "Economic A n a l y s i s of the Role o f F i n a n c i a l I n t e r m e d i a r i e s i n the Postwar C y c l e , " i n Determinants of Investment B e h a v i o u r . New York: Columbia U n i v e r s i t y P r e s s , 1967. Swan, C. "Homebuilding: A Review of the E x p e r i e n c e , " Economic A c t i v i t y . Brookings I n s t i t u t e , 1970.  i n Brookings Papers on  T h y g e r s o n , K . J . The E f f e c t o f Government Housing and Mortgage C r e d i t Programs on Savings and Loan A s s o c i a t i o n s . U . S . Savings and Loan League, O c c a s i o n a l Paper No. 6, 1973. U.S. Congress. Senate. Subcommittee on Housing and Urban A f f a i r s . Committee on Banking and C u r r e n c y , Study of Mortgage C r e d i t . 90th C o n g r e s s , F i r s t s e s s i o n , 1967. Van H o m e , J . H a l l , 1970.  F u n c t i o n s and A n a l y s i s of C a p i t a l  Market R a t e s .  New York:  Prentice-  Winger, A . R . "An Economic A n a l y s e s of MortgagessDuring P e r i o d s of Monetary Restraint: C h a r a c t e r i s t i c s and A c q u i s i t i o n s by L e n d e r s , " i n Ways to Moderate F l u c t u a t i o n s i n Housing C o n s t r u c t i o n . Board o f G o v e r n o r s . Federal Reserve System, 1972, pp. 456-487. Wonnacott, 1970.  R . J . and Wonnacott,  T.H.  Econometrics.  Toronto:  John Wiley & S o n s ,  138  Appendix I:  Variable  Data Source and  Derivation  Comment  Mortgage flows  Q u a r t e r l y mortgage flows measured i n c u r r e n t d o l l a r s . Random sample of c e r t i f i c a t e s o f t i t l e o f Vancouver and New Westminster Land R e g i s t r y O f f i c e s . Sample r e p r e s e n t s 2.8 p e r c e n t of a l l s i n g l e f a m i l y h o u s i n g . Sample p e r i o d , 1 9 5 4 t o 1963.  Credit rationing variable  Measured as the d i f f e r e n c e between the mortgage and bond r a t e on a q u a r t e r l y b a s i s . Mortgage and bond r a t e o b t a i n e d from McLeod, Young, Weir, bond s e r i e s . Mortgage and bond r a t e r e p r e s e n t aggregated r a t e s i n t h e i r own c l a s s . For example, the aggregated bond r a t e i s a weighted average o f f e d e r a l , p r o v i n c i a l , c o r p o r a t e and m u n i c i p a l bond r a t e s .  Income variable  Measured q u a r t e r l y i n c u r r e n t d o l l a r s as the r a t i o of income to housing p r i c e r a t i o . Income data o b t a i n e d from Review o f Man Hours_and Hourly E a r n i n g s With Average WeekTy Wages 194*5-1"963, Dominion Bureau of S t a t i s t i c s , A u g u s t , 1964'. Housing p r i c e data o b t a i n e d from H a m i l t o n , S . W . , "Housing P r i c e Index P a p e r " . Unpublished p a p e r . U n i v e r s i t y o f B r i t i s h C o l u m b i a , 1974.  Rental Substitution Variable  Measured q u a r t e r l y i n c u r r e n t d o l l a r s as a r a t i o o f r e n t to housing p r i c e s . Rent index was obtained by sampling r e n t a l p r o p e r t y a d v e r t i s e d i n newspapers^ads. f o r the p e r i o d 1954-1963. Housing p r i c e s noted above.  Substitute investment variable  Measured q u a r t e r l y i n c u r r e n t d o l l a r s , from s t o c k s l i s t e d on the Toronto Stock Exchange. Rate of r e t u r n o f s t o c k s i n c l u d e s r e a l i z e d d i v i d e n d s and q u a r t e r l y capital gains. T r a n s a c t i o n s c o s t s are ignored i n the c a l c u l a t i o n o f the c a p i t a l g a i n . S e r i e s developed by D r . W. Wood, U n i v e r s i t y o f B r i t i s h C o l u m b i a , Vancouver 1975.  Vacancy vvariabil'e  Measured q u a r t e r l y as the R a t i o of c o m p l e t e d , but u n o c c u p i e d housing to t o t a l housing s t o c k . Completed but unoccupied housing u n i t s o b t a i n e d from C e n t r a l Mortgage and Housing C o r p o r a t i o n , Vancouver Regional B r a n c h , 1954-1963. Housing stock data developed from i n f o r m a t i o n s u p p l i e d by C e n t r a l Mortgage and Housing C o r p o r a t i o n , Vancouver Regional B r a n c h , 1954-1963. Housing stock a d j u s t e d f o r d e m o l i t i o n s , c o n v e r s i o n s i n accordance w i t h i n f o r m a t i o n s u p p l i e d by Planning Department, C i t y o f Vancouver.  139  Appendix  II:  Correlation  Coefficients  The f o l l o w i n g c o r r e l a t i o n m a t r i c e s are r e p r e s e n t a t i v e o f those found the mortgage demand equation o f the excess demand p e r i o d 1954-1957. Equation 6.1 Assigned Conventional mortgage  Assigned Conventional mortgage  -  (Assigned c o n v e n t i o n a l Credit Rationing ratio  Rent/ Price ratio  in  mortgage)  Unemployment ratio  Speculative Substitution ratio  Vacancy] ratio  1.0  Credit Rationing ratio  -.65  Rent/Price ratio  -.74  Unemployment ratio  1.00  ,52  1.00  -.25  .07  .42  Speculative Substitution ratio  .61  ,71  -.80  -.49  Vacancy ratio  .27  ,56  -.18  .04  Equation 6.5 Cyclical mortgages  -  1.00  (Combination of Equation 6.1 Credit Rationing variable  Rent/ Price ratio  1.00  .54  to  1.00  6.4)  Unemployment ratio  Speculative Substitution ratio  Cyclical mortgages  1.00  Credit rationing ratio  -.80  1.00  Rent/Price ratio  -.80  .52  1.00  Unemployment ratio  -.09  -.07  .42  1.00  .65  -.71  -.80  -.49  1.00  .37  -.56  -.18_  -.04  .54  Vacancy Ratio  Speculative Substitution ratio Vacancy  ratio  1.00  140  The above m a t r i c e s r e v e a l t h a t the c o r r e l a t i o n c o e f f i c i e n t of the c r e d i t r a t i o n i n g v a r i a b l e has s i g n i f i c a n c e . For example, i n e q u a t i o n 6.1 r = -.65 and i n e q u a t i o n 6.5 r . = Q.80. Hence the s i g n i f i c a n c e o f t h i s c r e d i t r a t i o n i n g v a r i a b l e as d e s c r i b e d i n s e c t i o n 6.3.1 r e s u l t s from b a s i c r e l a t i o n s h i p s between the c y c l i c a l components and the c r e d i t r a t i o n i n g v a r i a b l e . Because of the i n s t a b i l i t y of the o t h e r independent v a r i a b l e s i n the m o d e l , the s i g n i f i c a n c e o f the c r e d i t r a t i o n i n g v a r i a b l e c o u l d have been s p u r i o u s . However, the above m a t r i c e s i n d i c a t e t h i s not to be the c a s e . A b a s i c r e l a t i o n s h i p does e x i s t between the c y c l i c a l components and the c r e d i t r a t i o n i n g v a r i a b l e . m  m  r  r  

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