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UBC Theses and Dissertations

A study of agreements for sale as a source of residential finance Babalos, Demetrios John 1972

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A STUDY CF AGREEMENTS FOR SALE AS A SOURCE  OF RESIDENTIAL FINANCE by DEMETRIOS JOHN BABALOS B. Comm., University of Bri t i s h Columbia, 1 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE in the School of Business Administration We accept this thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA September, 1972. In p r e s e n t i n g t h i s t h e s i s in p a r t i a l f u l f i l m e n t o f the requirements f o r an advanced degree at the U n i v e r s i t y of B r i t i s h Columbia , I agree that the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e fo r reference and s tudy . I f u r t h e r agree tha t pe rmis s ion for e x t e n s i v e copying o f t h i s t h e s i s fo r s c h o l a r l y purposes may be granted by the Head of my Department or by h i s r e p r e s e n t a t i v e s . I t i s unders tood that copying or p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l ga in s h a l l not be a l lowed wi thout my w r i t t e n p e r m i s s i o n . Department o f The U n i v e r s i t y o f B r i t i s h Columbia Vancouver 8, Canada ( i ) ABSTRACT The basic purpose of this paper was to gain a better understanding of agreements for sale as a source of residential finance. This meant discovering what terms were being charged and why purchasers of houses used agreements as a source of finance versus mortgages. To this end, three hypotheses were derived in order to arrive at these answers. The f i r s t problem was to discover the relationship that existed between the state of the economy and the usage of agreements for sale as a source of residential finance. In addition, the influence on the terms charged was measured. The second area of investigation was to discover the effect of a house buyer's socio-economic status on the probability that he would have to use an agreement for sale. The basic question concerned whether a person with a low socio-economic status would be more l i k e l y to use an agreement, The terms charged were sim-i l a r l y analyzed. The third and f i n a l problem compared the terms on agreements and on mortgages. Was there greater variation in the terms amongst agreements than mortgages? I f there were any variation, could this be due to differences in the quality of the borrower's financial collateral? To answer the f i r s t problem, data was collected for the year 1970 and 1971 on agreements for sale because these two years coincide with a recessionary and expansionary economic period, respectively. For the second problem, data was collected on mortgages for the year 1971. Purchasers under agreements for sale and mortgages were then a l l ass-igned a socio-economic status. Thereupon, the analysis was undertaken on the basis of the data collected. For the third hypothesis, the collected data for 1971 on agreements for sale and on mortgages was ( i i ) s t a t i s t i c a l l y compared. In ad d i t i o n , regression equations were derived between c e r t a i n v a r i a b l e s to a r r i v e at r e l a t i o n s h i p s between terms. In concluding, i t was found, that i n a recessionary state i n the economy, agreements f o r sale were i n greater prevalence than i n an expansionary s t a t e . The terms charged at such a time were much harsher than i n a time of economic expansion. Purchasers with low socio-economic status tended to use agreements f o r sale more often than did buyers with a high index. In general, i t was found that agreements f o r sale tended to have l e s s harsh terms than d i d mortgages. ( i i i ) TA3LB OF CONTENTS List of Tables P- v List of Graphs P- v i CHAPTER I - Introduction p. 1 Hypotheses p. 3 Importance p. k Chapter Organization p. 5 CHAPTER II - Economic and Legal Perspectives p. 6 Legal Implications p. 8 Why Are Agreements For Sale Used? p. 10 CHAPTER III - Research Procedures p. 16 Sampling And Research Procedures Data Compilation p. 20 CHAPTER IV - Analysis Of The Fir s t Hypothesis p. 22 Discussion Of Compiled Results CHAPTER V - Analysis Of The Second Hypothesis p. k2 Discussion Of Compiled Results Limitations Of The Socio-Economic Index p. 52 Conclusions p. 5k CHAPTER VI - Analysis Of The Third Hypothesis p. 5° Analysis Of S t a t i s t i c a l Results Derived Regression Equations p. 7k Chapter Summary p. 89 CHAPTER VII - Summary And Conclusions p. 92 Limitations And Weaknesses p. 92 Summary Of Results p. 9k Conclusions p. 9? Implications For Further Study p. 100 ( iv ) CHAPTER VII - cont. Implications For Bibliography Appendix Residential Finance p. 101 p. 102 p. 103 ( v ) LIST OF TABLES TABLE ONE - Bond Yields And Mortgage Interest Rates p, zh TABLE TWO - Average Interest Rates, NHA Approved Lender Loans 25 For Home Ownership TABLS THREE - Selected Economic Indicators p. 26 TABLE FOUR - Dwelling Unit Starts And Building Permits For p < 27 Vancouver, B.C. TABLE FIVE - Unemployment Rate By Region p, 28 TABLE SIX - Number Of Sales, Agreements, And Mortgages Sampled p > 30 TABLE SEVEN - Agreements/Sales p, 30 TABLE SIGHT - Average Terms For Agreements For Sale p < 34 TABLE NINE - Distribution Of Socio-Economic Status Amongst p § 43 Study Areas TABLE TEN - Average Terms By Socio-Economic Index p, 47 TABLE ELEVEN - Standard Deviation Of the Terms By Socio-Economic p, l+Q Index TABLE TWELVE - Difference Between High And Low Socio-Economic p, 49 Index TABLE THIRTEEN - Average Terms - Agreements And Mortgages p > 57 TABLE FOURTEEN - Standard Deviations - Agreements and Mortgages p. 58 ( v i ) LIST OF GRAPHS GRAPH A - Distribution Of Loan-to-Value Ratios For The Agreements P« 36 GRAPH B - Distribution Of Interest Rates For The Agreements P. 37 GRAPH C - Distribution Of Sale Prices For The Agreements P. 38 GRAPH D - Distribution Of Mortgages And Agreements For Loan-to-Value P« 60 GRAPH E - Distribution (1971) Of Interest Rates For Mortgages And Agreements ? • 62 GRAPH F - Distribution In (1971) Of Terms For Mortgages And For Agreements P» 64 GRAPH G - Distribution In (1971) Of Sales Prices For Mortgages And Agreements P. 66 GRAPH H - Distribution In (1971) Of Loan Amounts For Mortgages And Agreements P. 68 GRAPH I - Distribution In (1971) Of Monthly Payments For Mortgages And Agreements P. 70 GRAPH J - Relationship Of Loan-to-Value To Sale Price P. 75 GRAPH K - Relationship Of Loan-to-Value Ratio To Outstanding Principal P. 76 GRAPH L - Relationship Of Term To Loan-to-Value Ratio P. 78 GRAPH M - Relationship Principal Of The Monthly Payment To The Outstanding P. 79 GRAPH N. - Relationship Of Interest Rates To The Outstanding Principal P. 81 GRAPH 0 - Relationship Of Interest Rates To The Length Of The Term P« 82 GRAPH P - Relationship Of Interest Rates To Loan-to-Value Ratio P. 84 ( v i i ) ACKNOWLEDGEMENTS I would li k e to acknowledge the assistance given me by Helen Babalos, Brad Marshall, Margaret Steele, Margaret Yorke, and David Wright in researching this paper and David Lach in doing the computer analysis. I would further l i k e to thank Elisabeth Yorke for her help in completing the research.and in encouraging me to complete this paper. I, especially, would like to gratefully acknowledge Dr. Stanley Hamilton's assistance in organizing, researching, and writing this paper. ( 1 ) CHAPTER I - INTRODUCTION The underlying purpose of t h i s study i s to increase the basic stock of knowledge a v a i l a b l e on the t o p i c of f i n a n c i n g s i n g l e - f a m i l y detached housing, I t focuses on agreements f o r sale as an a l t e r n a t i v e source of funds to finance the purchase of r e s i d e n t i a l p r o p e r t i e s . In short, t h i s paper i n v e s t i g a t e s the extent to which agreements f o r sale are used as a source of c r e d i t i n purchasing a home. Although an inte n s i v e a n a l y s i s of agreements f o r sale w i l l be presented i n the next chapter, to c l e a r up any possible misunderstandings, a b r i e f d e f i n i t i o n i s given here. B a s i c a l l y , an agreement f o r sa l e occurs when the vendor i n a r e a l estate t r a n s a c t i o n finances the s a l e . Generally, the vendor accepts a down-payment i n i t i a l l y and the r i g h t to receive a s e r i e s of p e r i o d i c payments covering i n t e r e s t and p r i n c i p a l amortization f o r the purchaser. This study has a two-fold f u n c t i o n . I t i s d e s c r i p t i v e - the extent to which agreements f o r sa l e are used and the terms negotiated w i l l be del i n e a t e d . I t i s a l s o a n a l y t i c a l - the s i g n i f i c a n c e of the r e l a t i v e magnitude of the terms and other v a r i a b l e s w i l l be derived. The b a s i c approach i s a comparative one, that i s , the r e s u l t s f o r the agreements f o r sa l e (agreements) w i l l be compared to those computed f o r the mortgages sampled. The hypotheses that are inve s t i g a t e d r e l a t e b a s i c a l l y to two questions. F i r s t , one concerns the conditions under which agreements are used to finance a r e a l estate t r a n s a c t i o n . Secondly, what d i f f -erences e x i s t f o r the terms charged between agreements and mortgages under d i f f e r e n t circumstances. ( 2 ) The f i r s t factor to be analyzed which might affect the usage of agreements w i l l be the general economic conditions of the community. In other words, does the economic level of a community, province, or country, affect the relative use of agreements as a source of residential finance vis a vis mortgages. For example, i f money i s tight (interest rates are high, consumer spending and capital investment i s low, and taxes are high), are house purchasers more l i k e l y to resort to agreements for sale to finance the transaction? The second factor relates to the socio-economic status of the purchaser. The basic question i s to what extent w i l l the socio-economic status of the borrower determine the likelihood of using an agreement as a source of credit to buy the house? For instance, i s a person with a low socio-economic status more l i k e l y to use an agreement than a person with a high status? In theory, this socio-economic index measures such aspects as one's job, personal income and wealth, education, place of residence, interest, etc. But, as w i l l be described later, the one u t i l i z e d i n this study includes only personal income levels. The third and f i n a l hypothesis i s designed in order to understand how agreements for sale and mortgages di f f e r in their respective terms. Are there financial advantges to one source of funds or the other which would affect the borrower (purchaser or mortgager)? In other words, are the terms harsher for mortgages, especially with respect to the interest rate charged, the periodic payment required, and the down-payment needed? The severity of the terms charged w i l l determine which residential purchasers can obtain mortgage financing and which ones have to look elsewhere for credit or forego the purchase. ( 3 ) HYPOTHESES IN SUMMARY ARE: 1. That during a period of economic recession, agreements for sale are more prevalent than during a period of expansion i n the economy. 2. That a person with a low socio-economic index i s more l i k e l y to finance his residential purchase with an agreement, than i s a person with a medium or a high socio-economic index and that the low index purchaser i s l i k e l y to obtain more favourable terms with an agreement than with a mortgage. 3. That the terms of Agreements for sale show a greater variation than those on mortgages, and that the variation i s a direct reflection of quality differences with respect to the borrower and his financial collateral. (k) IMPORTANCE Traditionally, food, clothing, and a roof over one's head have been the basic essentials of l i f e on our earth. The affluence of the western world has allowed people to have better quality essentials and more of them. The provision (quality and quantity) of these necessities involves social and p o l i t i c a l considerations. This means that biases and inequalities in our present system of allocating these essentials have ramifications throughout our society from a personal view-point as well as from a social, p o l i t i c a l , and economic perspective. Therefore, understanding the nature of these inequalities and why they exist, should provide a means for alleviating them. Many statements are made about how homes are financed and why; some of which seem intu i t i v e l y correct especially when "they are asserted by those actively engaged in the residential market. This research project w i l l try to provide a better understanding of these questions as they apply to agreements for sale relative to mortgages. In addition, i t w i l l endeavour to prove whether or not some of these statements are true. On the whole, this paper w i l l try to provide a better under-standing of the financial aspects of the residential market, in par-t i c u l a r that of Vancouver, B r i t i s h Columbia. ( 5 ) ORGANIZATION OF THE THESIS Chapter Two subjectively deals with agreements for sale and mortgages in the context of their usage and their respective legal problems. These are compared practically from an economic perspective and legally from a common law point of view. In addition, this chapter discusses why these two methods of residential finance are used and what circumstances determine which one i s to be used. Chapter Three discusses what data was collected, how i t was sampled and which computations were undertaken on the data. Chapter Four analyses the effect of the economic conditions of a community on the usage and terms charged for agreements. Chapter Five discusses the importance of the socio-economic status of the borrower in determining which source of finance can be used and what the terms of the contract w i l l be. Chapter Six compares agreements and mortgages as to their respective terms. Finally, Chapter Seven summarizes the results of the three preceding chapters and describes their implications for a potential residential purchaser. ( 6 ) CHAPTER II - ECONOMIC &• LEGAL PERSPECTIVES Before proceeding with the definition of an agreement for sale, i t should be noted that there are many synonyms having the same meaning in law and in business as the phrase Agreement for Sale. The following l i s t of phrases i s synonyms for the term Agreement for Sale - rights to purchase, land or property contracts, and land or property sale contracts. The legal and business implications of agreements and mortgages must be understood to comprehend the quantitative analyses in the following chapters. Both the agreements and the mortgages are used principally as a means of financing real estate transactions by securing the loan with real property. The debtor contracts to re-pay the principal borrowed and also pledges real estate as security for the re-payment to the creditor. In an agreement, the vendor of a particular property accepts payment of the purchase price i n periodic instalments (usually on a monthly basis) after an i n i t i a l down-payment i s made, A purchase-money mortgage also involves these circumstances - the purchaser who is the mortgagor makes periodic payments to the vendor (mortgagee). In most cases, the purchaser has also made an i n i t i a l down-payment to the vendor. (N.B., As noted in the introductory chapter, purchase-money mortgages are not included in this study). An agreement and a purchase-money mortgage both involve only two participants - the purchaser and the vendor. However, the kind of mortgage studied in this paper has three participants in the sale and financing trans-action. There i s the purchaser (mortgagor), the vendor, and a separate mortgagee. The mortgagee in this case i s usually a l i f e ( 7 ) insurance company, a bank, a credit union, or a real estate company. The purchaser finances the sale by mortgaging the property to any one of these institutions. He makes a lump-sum payment to the vendor for his property, part of this sum i s borrowed from the mortgagee and part i s his own equity. He also contract to make periodic instalment payments to the mortgagee. The important point to note i s that under an agreement for sale, the vendor participates i n the financing arrangements and therefore, bears some risk. The vendor bears very l i t t l e risk i f the sale i s financed with a mortgage because, once he receives the purchase money and the transaction i s registered, he i s out of the picture completely under normal circumstances. The mortgagee bears the risk. Under both these financial arrangements, the purchaser i s not usually indebted for the entire purchase price. He contributes part of his own equity capital to finance the transaction. In addition, the periodic instalment payments cover the cost of interest and principal amortization. The vast majority of arms length financial arrangements involve interest payments. Under Br i t i s h Columbia's Land Registry Act 1 (R.S.B.C. 196° ) , t i t l e rests with the vendor under an agreement for sale and with the mortgagor under a mortgage. These instruments are secured by registering them as charges against the t i t l e . A charge under this act "means any estate less than the fee-simple, and shall include 2 any equitable interest in land, and any encumbrance upon land,.,." The definition of an encumbrance includes "any Crown debt, judgement, mortgage lein or other claim to or upon land created, effected, or given for any purpose whatever, whether by the act of the parties or ( 8 ) by or in pursuance of any Statute or law, and whether voluntary or 3 involuntary." Therefore, both agreements for sale and mortgages are included within this definition of an encumbrance. Fortunately, the Land Registry Act has greatly simplified the procedures involved in transferring real property. Under common law, property transactions involving instruments of finance tend to be quite complicated. In practice, the Land Registry Act applies; however, when points of law are in question, common law applies. The case of North Vancouver v. Carlisle specifically enter-tained this problem of common law superceding the statute. The pre-siding judge stated, "In my opinion the law remains as i t was, unaffected by our L.R.A., 1921, Ch.26, that by mortgage the legal t i t l e passes to the mortgagee subject to an equity of redemption i n the mortgage.""' Under an agreement, the vendor holds the legal t i t l e of the property u n t i l the last instalment has been paid by the vendee. "What remains to the vendor after making an agreement of lands was held not to be an estate or interest but a right to money for the payment of which he has a le i n upon the land and as security for which he holds the legal estate,"^ In law, the vendor i s a trustee of the purchaser. However, upon completion of the terms of the sale contract, he must convey to the purchaser the t i t l e to the property in question. Basically the purchaser has an equitable interest in the land. He retains this equity interest t i l l the terms of the agreement are com-pleted, at which time he receives the fee simple interest of the property. When a mortgage i s used to finance a real estate transaction, the vendor i s removed from the picture as soon as the conveyance i s ( 9 ) completed and the purchase price has been paid. At the time of sale, the vendor conveys his fee simple interest to the purchaser in return for the purchase monies. Thereupon (actually the following i s pre-arranged before the vendor conveys his t i t l e ) , the purchaser, to finance the transaction, gives a mortgage to the mortgagee as security for the borrowed funds. During this time when the property i s mort-gaged, the mortgagor has an equity of redemption which i s "the right of a mortgagor to redeem the mortgaged property ( t i t l e ) upon payment of a l l 7 that i s due by way of capital and interest." The mortgagee, on the other hand, holds the t i t l e to the property in question u n t i l a l l pay-ments are completed. In both a sale and a mortgage transaction and in an agreement for sale transaction, actual possession of the property i s transferred only from the vendor to purchaser. However, legal t i t l e changes hands many more times. In the situation of a sale and mortgage, the t i t l e to the property i s conveyed from the vendor to the purchaser as part of the sale and i s then transferred to the mortgagee as security for the mortgage. Eventually under the provisions of the mortgagor's equity of redemption, the purchaser re-gains t i t l e when he has f u l -f i l l e d a l l the mortgage commitments. On the other hand, i n an agree-ment t i t l e i s transferred from the vendor to the purchaser only when the terms of the agreement are completed. From the point of view of the creditor in both these forms of real estate finance, what legal security does he have in case of default by the debtor? A mortgagee's possible remedies are to sue on the mortgagor's personal covenant to obtain the balance s t i l l owing or to foreclose the mortgage which has the effect of terminating ( io ) the mortgagor's equity of redemption. Generally defaults are remedied by foreclosure because the debt outstanding in most cases i s too large to expect that the mortgagor could afford to pay i t off i n one lump sum. Legally, a purchaser, after he has defaulted under the provisions of an agreement, i s sued for specific performance of the contract or the contract i s rescinded by the vendor. The most l i k e l y reason for defaulting i s a failure to make the instalment payments, so that, the only feasible remedy i s rescission. Recission in these circumstances implies that the agreement for sale i s n u l l i f i e d and the fee simple interest in the property i s returned to the vendor. It should be noted, however, that i n B r i t i s h Columbia foreclosure of an agreement is recognised. 8 Upon foreclosure or rescission, the period of redemption has been one of the main differences between a mortgage and an agreement. Under common law, the courts have traditionally permitted a six-month period of redemption to the mortgagor. However, for an agreement for sale the courts in the past permitted only a three-month period to the purchaser. Recently this has been altered so that there i s no hard and fast rule as to the length of the redemption period. Rather, i t now depends on how secure the vendor i s financially, so that the 9 outstanding debt can be paid, WHY ARS AGREEMENTS FOR SALE USED? In the majority of residential sales transactions, the purchase i s financed by obtaining a mortgage from a l i f e insurance company, a credit union, a bank, or any number of other financial institutions. However, many individuals, who are desirous of purchasing a house, cannot obtain institutional mortgage financing. These people, therefore, ( 1 1 ) resort to an agreement for sale. The following paragraphs attempt to describe and analyze why agreements for sale are used as a source of financing. A person decides to s e l l his home usually for some significant reason. It may be because he is being transferred to another position in a different town, his wife is expecting a child, his family desires a house that provides more amenities, or his children have grown up and moved away. There are two variables that affect the vendor's position vis a vis the use of an agreement for sale to finance the purchase of his house. These are eagerness to s e l l and personal financial circumstances. The vendor's eagerness to s e l l i s usually measured in terms of time. In other words, he has to start work in another ci t y within one month or schools may be starting in two months time or the baby i s expected in six weeks. Such a time constraint affects the urgency that he feels to s e l l . The more eager he is to s e l l , the less bargaining power he has in obtaining a reasonable market price. Conversely, when he has more time to s e l l his house, he can l i k e l y bargain for a sale price that seems reasonable to him. This also applies to agreements for sale - i f the vendor urgently has to s e l l , then he is more l i k e l y to accept the use of an agreement to finance the purchase. His financial circumstances at present, and the financial arrangements in the vendor's new accommodation also affect his decision to accept an agreement. F i r s t , i f he has large savings acc-ummulated and a secure regular income, he i s more l i k e l y to accept an agreement because he can obtain reasonable mortgage financing for the purchase of his new house. However, i f he does not have a large lump-sum saved, then he probably does not have enough money to pay the down-( 12 ) payment f o r his desired new home. Under these circumstances, he l i k e l y wants to completely cash out his equity investment i n his present home. The most s i g n i f i c a n t point to note i s that the sum of the vendor's present savings and income combined with the down-payment and installments from the purchaser completely pay f o r the accommodation that the vendor desires. I f they do not amount to enough to finance his new place of residence, then an agreement w i l l not be acceptable to him. There are many d i f f e r e n t kinds of accommodations that he may be seeking - r e n t a l apartment, an equivalently priced home, or a more expensively priced home. An agreement i s more e a s i l y accepted i f the vendor i s moving into r e n t a l accommodation which requires no i n i t i a l lump-sum payment but only regular monthly r e n t a l payments. I f the vendor i s planning on moving into a more expensive home, then a lump-sum cash payment from the purchaser i s the most desirous to meet the higher down-payment and periodic payments. In many circumstances, the vendor has very l i t t l e choice - he has to accept an agreement to finance the sale. Often, these circumstances are not under the control of the vendor. I f the q u a l i t y of the house involved i s noticeably poor, esp e c i a l l y i n r e l a t i o n to the surrounding neighbourhood, or i f the neighbourhood has some stigma attached to i t , such as a high crime rate or a s o c i a l l y low class area, then p o t e n t i a l buyers w i l l not regard the house as a p a r t i c u l a r l y good purchase. Two problems are l i k e l y to r e s u l t : the vendor i n order to s e l l his home, w i l l accept an agreement with very l i b e r a l terms to entice a buyer or, secondly, only those buyers with marginal f i n a n c i a l c o l l a t e r a l w i l l be interested i n buying. In the l a t t e r case the buyer w i l l have great d i f f i c u l t y i n obtaining a mortgage, so that an agreement w i l l be the only possible means of financing the sale. A very s i m i l a r s i t u a t i o n arises ( 13 ) when the economy i s in a recession because the number of potential buyers i s reduced drastically. This forces the vendor to attract buyers with l i b e r a l l y termed agreements. As already br i e f l y described in the previous paragraph, a potential purchaser with only marginal financial collateral i s often forced to use an agreement to finance the transaction. Financial collateral includes many different but interrelated aspects. The buyer's job, his credit rating, and his past experience form part of i t . If his job seems i n -secure or he has frequently changed jobs or he has a low credit rating, the institutions are less l i k e l y to consider him a good risk for a mortgage. I f he i s having marital or other personal problems which these institutions may be aware of, then they may consider him too risky to be given a mortgage. The two most important financial factors that are heavily weighed by these institutions i n deciding whether to give a purchaser a mortgage are his regular personal income and his accummulated down-payment. If the annual amortization payments on the mortgage plus property taxes are greater than 25% of the purchaser's annual income and i f his down-payment i s less than 25% of the purchase price, then these institutions w i l l not give him a conventional mortgage. With NHA insured mortgages the two ratios become, respectively 21% and 95% up to a sales price of $25,000. Even given these relaxed terms many buyers cannot obtain mortgage financing and are, therefore, forced to use an agree-ment to finance the home purchase. In addition agreements are used when the sales transaction is a non-arms length one. In this situation the sale i s usually between friends or relations. Because there i s a trusting relationship between the two parties involved in the transaction, this means of financing the sale can be the most compatible to both the vendor and the purchaser. ( I * ) There i s very l i t t l e chance of complications such as default or legal problems. One of the advantages of an agreement that i s often cited i s the fact that i t seems to be easy and very cheap to set up. In abook on real estate finance, i t was stated, "In his eagerness to economize the vendee may consider the services of an attorney to represent his interests an unnecessary cost," 1^ It seems that in many cases, the real estate salesman transacting the sale takes care of a l l formalities - business and legal. The terms superficially seem to be very simple and merely state the sales price, the down-payment, the monthly payment, and the interest rate. Unfortunately, because of this, the wording of the contract i s misconstrued, on occasion, or important clauses involving acceleration or pre-payment are omitted completely. These ambiguities and omissions l i k e l y prejudice unfairly the interests of both parties to the contract. When considered rationally, as much consideration (time and expense) should be involved i n settling an agreement contract as i s required for a mortgage. Although the previous discussion has centered on the factors that might lead one party to a sale transaction to use an agreement to finance i t , in most situations, i t i s not so one sided. In other words, there are usually factors affecting both vendor and the purchaser, that force them to use an agreement to finance the transaction. These factors can be any one of the ones previously discussed in this section -from personal income to the state of the economy. ( 15 ) FOOTNOTES - CHAPTER II 1. Land Registry Act, R.S.B.C. 196°, Ch. 208. Consolidation. 2. IBID. p. 2215 3. LOC. CIT. 4. North Vancouver v. Carlisle (1922) 70 DLR 527. 5. LOC. CIT. 6. Auld, F.C. The Canadian Abridgement, Burroughs & Co., Toronto, 19^3. P. 65^. 7. Cheshire, G.C. The Modern Law of Real Property. Butterworths. London, 1962, p. 68. 8. Singer v. Garrett (1929) Two Western Weekly Reports. 201 (B.C.) p. 201. 9. LOC. CIT. 10. Hoagland and Stone. Real Estate Finance. R.W. Irwin, Inc. I969,. Fourth Edition, I l l i n o i s , p. 137. ( 16 ) CHAPTER I I I - RESEARCH PROCEDURES Data was collected from the Teela Market Surveys,^ only for the Cities of Vancouver and North Vancouver, and the District Municipalities of North Vancouver and West Vancouver, Teela i n 1970 published 24 books and in 1971» 27 books. Each book, comprising two sections, covers a two week period of the year. The f i r s t section l i s t s a l l the property transactions registered in that two week period and the second l i s t s a l l the mortgages registered. Agreements for sale, because they are part of the sale transaction, are included where applicable in the information provided for each property transaction. Information was gathered for agreements and mortgages for the year 1971 to undertake the comparison between these two means of res-idential finance. It was also amassed to discover the effect of socio-economic index on the usage and terms of agreements with respect to mortgages. In addition, data on agreements was collected for 1970 so that cyc l i c a l economic changes could be related to the usage and terms of agreements. The 1970 data for agreements was amassed on the basis of a f i f t y percent random sample of the to t a l population. The 1971 information was gathered on the basis of a one-third random sample, A smaller random sample was used in 1971 because the results for 1970 indicated that a one-third sample i n 1971 would be s t a t i s t i c a l l y valid. In 1970, data for 552 agree-ments was collected while in 1971 information for 313 agreements was gathered. The mortgage sample was designed merely to be an indication of conventional institutional mortgage lending, so that comparisons could be drawn with agreements. I n i t i a l l y , a l l the mortgages that were registered in 1971 and were also published in Teela were collected and prepared for computer analysis, A distribution of mortgages issued per individual ( 17 ) company was derived on the basis in which every firm issuing fewer than 30 mortgages in 1971 was removed from the potential sample. A mortgage i s not necessarily used to finance a house pur-chase. A house can be given as security for a mortgage but the funds given may be for business purposes. It may also be a refinancing of an older mortgage or agreement. Because the agreements included in the sample seemed to be financing a house sale, i t was necessary that only those mortgages used to finance house purchases be included in the sample. To derive meaningful s t a t i s t i c s , l i k e situations must be compared. To eliminate those mortgages not f i t t i n g this criterion, each mortgage remaining after the i n i t i a l sampling had been completed was searched to discover whether a sale had occurred in 1971. If such a transaction existed for a particular mortgage, then i t was included in the f i n a l sample of mortgages to be analyzed. To do this search for a sale, the assessment records of the three City and Municipal Administrations on the North Shore were used. Because of constraints of time and money, the City of Vancouver's assess-ment records were not examined. Rather, the Teela Summary for 19711 was searched for each mortgage by the address of the mortgagor. From a total population for the four areas of 8755 mortgages, the sample to be used in this paper f i n a l l y amounted to 1812 mortgages. As already discussed in the preceding paragraphs, the two basic sources for data required in this study were the Teela Periodicals and  Summary for 1971 and the assessment records of the North Shore munici-pa l i t i e s . From the Teela periodicals, data on the agreements and the mortgages was taken. For each agreement for sale this information included the address, sales price, the down-payment, the periodic monthly ( 18 ) payment, and the interest rate. The address, the outstanding p r i n c i p a l , the periodic monthly payment, the interest rate, as well as the name of the mortgagee was collected f o r each mortgage i n the sample. As prev-iously noted, the 1971 sales prices f o r the mortgages issued i n the City of Vancouver were obtained from the 1971 Teela Summary while the sales f o r those issued on the North Shore were obtained from municipal assessment records. Furthermore, each property transaction was allocated to a socio-economic group so that income comparisons could be drawn. This vras done 2 on the basis of Map One which has the four areas under study separated geographically along major corridors into three zones - a high, medium, and low socio-economic status zone. As e a r l i e r delineated, socio-economic index was defined only i n terms of the personal income of the family. Unfortunately, at t h i s time the only income s t a t i s t i c s available were those obtained i n the 196i Canada-wide census. I t was on the basis of these s t a t i s t i c s that Map One was drawn. The annual income levels separating the high, medium, and low socio-economic indexes were $6500 and $4500 5 respectively, (These figures were derived by tracing the socio-economic zones geographically back to personal income levels i n each Census Tract ), I f the personal incomes f o r June IQol were given 4 an index value of 100,0 then the index value f o r June 1971 would be 178.0^. (No adjustments f o r cost of l i v i n g changes). Using the previous indexes, the income separations i n 1971 between high, medium, and low socio-economic index would be $11,600 and $8,000 respectively. The approximate value of the house which a family might own earning these amounts would be $33|200 and. $24,000, respectively. These figures are based on the commonly accepted rule-of-thumb that a family's home should not exceed i n value i t s income by more than a factor of three. ( 19 ) The use i n 1971 of this 196l socio-economic map of Greater Vancouver, brings up the question of i t s accuracy in being applied to the 1971 s i t -uation. Many economic, p o l i t i c a l , demographic, and physical changes, have occurred in Vancouver since 196l. These absolute changes, however, have not altered the relative positions of the various segments of Greater Vancouver.^ In other words, the census tracts with the high socio-economic index remain today the highest and similarly, the census tracts with the medium or low socio-economic indexes remain relatively constant in their positions. ( 20 ) DATA COMPILATION To f a c i l i t a t e the efficient use of a l l this collected data, i t was key-punched on to computer cards. The f i r s t operation performed by the computer on the data was to calculate the length of the term for each agreement and mortgage and then to transcribe i t on to the particular computer card. With over 2100 different transactions, the data could not be amassed nor could significant results be drawn merely by inspection of the collected information. Therefore, the f i r s t step undertaken by the computer was to calculate the means of the various terms on the basis of the four study areas and the three socio-economic levels. In addition, as a check on the significance of these means standard deviations of these results were also derived. On a similar basis, the distributions of these terms were calculated, Agreements and mortgages were included on these operations separately so that their numerical results could be compared. To try to understand the relationship existing between the various terms, linear regression equations were derived by computer analysis. Once again, these operations were undertaken separately for agreements and mortgages, so that, their results could be compared. The basic purpose of this analysis was to relate two or more terms of an agreement or mortgage mathematically. An equation would be computed indicating the relationship between the variables (terms). ( 21 ) FOOT-NOTES - CHAPTER I I I 1. Teela Market Surveys, Vancouver, B.C., 1970 & 1971 issues. 2. B e l l , I.L. An Overview for Social Planners. Research Dept. Community Chest and Councils of Greater Vancouver, Vancouver 1965, p.7. 3. Ibid, p. 42, 43, 44. 4. D.B.S. Employment Indexes and Average Weekly Wages and Salaries. Queen's Printer, Ottawa, D.B.S. 8003-512, A p r i l 1966, Table 6, p.257. 5 . Statistics Canada, Employment Earnings and Hours. Queen's Printer, Ottawa, D.B.S. 72-002, November 1971. Table 15 , p. 104. 6. Simmons. "Voting Behaviour and Socio-economic Characteristics The Middlesex East Federal Elections, I965." Canadian Journal of  Ecomics and P o l i t i c a l Science. XXX 111 (August, 196?) p. 393. CHAPTER IV ( 22 ) - ANALYSIS OF THE FIRST HYPOTHESIS The f i r s t hypothesis, which i s to be discussed in this chapter, i s that during a period of economic recession, agreements are more pre-valent than during a period of expansion in the economy. Basically the data collected for agreements in 1970 and 1971 i s compared with respect to the numbers of agreements issued and the terms charged. As w i l l be amplified in later sections, the years 19?0 and 1971 coincide respectively, with a period of economic recession and recovery in Canada. Agreements for sale cannot be considered in isolation. They are a means of real estate finance completely inter-related with the financial structure of Canada's economy. Business cycles and institutional (gov-ernment and private finance) changes a l l affect agreements as well as mortgages, Aggregate demand in the economy i s below i t s f u l l capacity during a recession, therefore, inventories of goods and materials as held by 1 firms, increase. Interest rates, i n general, climb. As part of gov-ernmental monetary policy the Bank of Canada interest rate i s increased as a persuasive means of encouraging chartered banks and, as a result, other financial institutions to raise their interest rates. At the same time the money supply of the economy i s reduced, stabilized, or permitted to grow, but at a rate less than would be the case under most economic 3 4 circumstances. Government spending i s also reduced or stabilized. Capital investment i s low, unemployment high, inventories high, and over-all spending low.'' On the whole the economy i s sluggish. In these conditions credit lending i s reduced because the available supply of funds i s low,^ In addition, institutional lending officers raise their n loan requirements for giving credit, which i s merely part of the over-all ( 23 ) pessimism that prevails the economy when i t i s in a recession. The s t i f f e r requirements coupled with the high cost of credit forces the more marginal home buyers to use agreements for sale to finance their residential purchases. On the other hand, a period of economic recovery, with respect to government monetary policy, i s characterized by a bank rate that i s being reduced, an expanding money supply and government spending that 8 i s increasing. Often f i s c a l policy i s altered by reducing income tax 9 to further encourage recovery. In this period of recovery capital investment i s increased after the unused capacity of the economy i s u t i l i z e d . Inventories f a l l and unemployment i s reduced as job oppor-tunities open up.1^ With the economic conditions easing up, credit i s obtained more easily, so that, the marginal home buyers, who in a period of recession were forced to resort to using agreements for sale, can now obtain mortgage financing through one of the financial institutions. 1 In a time of recovery the requirements for credit are reduced, as i s the cost of credit. Given the following economic indicators, i t follows that the year 1970 was a recession year while 1971 was a year of economic recovery. On Table One there i s a very definite reduction in interest rates in Canada as a whole from 1970 to 1971. The spread between 1970 and 1971 varies anywhere between 1.00% and 0,50%, Similarly, the interest rates for NHA approved lender mortgages (see Table One) in Br i t i s h Columbia have a spread of approximately one percent. This applies to new and existing housing. Unfortunately, interest rates on residential mortages for this study's area of concern, Vancouver, are not compiled separately. BOND YIELDS AND MORTGAGE INTEREST RATES (l9?0 & 1971) TABLE ONE -- THE FOLLOWING ARE AVERAGE STATISTICS FOR CANADA JAN. FEDERAL GOVERNMENT - 1970 8.31 BONDS - 1971 6.6? CORPORATE - 1970 9.36 BONDS -1971 8.16 CONVENTIONAL- 1970 10.58 MORTGAGES - 1971 9.94 NHA INSURED - 19?0 10.06 MORTGAGES - I97I 9.65 FEB. MAR. APR. 8.31 7.93 8.04 6,85 6.76 6.97 9.33 9.28 9.27 8.33 8.39 8.49 10.54 10.58 10.60 9.72 9.28 9.20 10.27 10.21 10.29 9.47 8.98 8.84 MAY JUNE JULY 8.23 8.09 7.91 7.38 7.30 7.49 9.34 9.30 9.18 8.53 8.64 8.68 IO.58 10.53 10.38 9.25 9.3^  9.46 10.28 10.24 10.03 8.79 8.80 8.88 AUG. 8.00 7.15 9.23 8.52 10.40 9.53 9.94 8.99 SEP. 7.88 6.97 9.21 8.41 IO.36 9.55 9.97 9.05 OCT. 7.94 6.71 9.25 8.27 10.35 9.55 9.86 9.09 NOV. 7.50 6.56 9.09 8.19 10.28 9.26 9.83 9.05 DEC. 6.99 6.56 8.8?"" •P-8.30w 10.16 9.10 9.79 8.91 ( 25 ) TABLEUTWO - AVERAGE INTEREST RATES, NHA APFROVED LENDER LOANS FOR HOKE OWNERSHIP AND EXISTING HOUSING IN B.C. NEW HOUSING EXISTING HOUSING JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. 1 9 7 0 9 . 9 8 £ 1 0 . 1 9 1 0 . 4 0 1 0 . 2 4 1 0 . 4 1 1 0 . 3 5 9 . 8 6 1 0 . 1 7 9 . 9 0 1 0 . 0 4 1 0 . 0 8 9 . 8 9 1 9 7 1 9.71* 9 . 4 1 9 . 0 4 8 . 9 7 8 . 8 6 8 . 8 3 9 . 0 6 9 . 1 1 9 . 0 8 9.06 9.06 8 . 9 4 1970 10.2156 10.30 10.37 10.64 10.67 10.64 10.17 10.14 10.22 10.15 10.11 10.19 1221 9.93% 9 . 7 9 9 . 4 7 9 . 1 0 9 . 0 6 9 . 2 2 9 . 3 1 9 . 4 4 9.51 9 . 4 1 9 . 1 2 9 . 1 0 N.B. Above averages are weighted averages. ( 26 ) TABLE THREE - SELECTED ECONOMIC INDICATORS 1970 1971 14 UNEMPLOYMENT RATE (B.C.) BUILDING PERMITS (VAN.) 1 5 Residential Non-Res. 7.6* $168,998,000 116,039,000 7.1% $201,531,000 191,819,000 Total 285,037,000 393,350,000 16 MORTGAGE LOAN APPROVALS (B.C.) - N.H.A. insured & conventional New Residential Existing Total 12,333 D . U . 9,215 20,502 D.U. 16,503 21,5^8 37,005 ( 27 ) TABLE FOUR - DWELLING UNIT STARTS17 AND BUILDING PERMITS18 FOR VANCOUVER, B.C. DWELLING UNIT STARTS BUILDING PERMITS (Thousands of Dollar) JAN. 1970 950 1971 1010 FSB. 1005 1210 MAR. 1337 1368 APR. 921 1303 MAY 542 949 JUNE 479 1427 JULY ?28 1570 AUG. 1170 1074 SEPT. 1455 1425 OCT. 1884 1155 NOV. 1304 1444 DEC. 1962 1618 TOTAL 13737 15553 1970 Residential 168,998 1971 201,531 Non-Residential 116,039 191,819 Total 285,03? 393,350 A dwelling unit i s defined as a structurely separate set of l i v i n g quarters having i t s own entrance from outside of the "building, or from a common passage inside. A l l metropolitan areas and urban centers with a population or 10,000 or more...are enumerated completely each month. ( 28 ) TABLE FIVE - UNEMPLOYMENT RATS BY RSGION (PER CENT)19 ANNUAL AVERAGE -1970 1971 BRITISH COLUMBIA 7.1 MONTHLY AVERAGE BRITISH COLUMBIA UNADJUSTED FOR SEASONAL VARIATIONS ADJUSTED FOR SEASONAL VARIATIONS 1970 1971 1970 1971 JAN. 7.3 9.4 5.8 7.6 FEB. 6.7 8.7 5.7 7.4 MAR. 7.0 8.3 6.5 7.7 APR. 8.6 8.1 6.1 7.6 MAY 8.1 6.8 8.3 6.8 JUNE 9.7 7.1 9.8 7.2 JULY 8.3 6.2 9.4 7.0 AUG. 7.1 8.7 6.7 SEPT. 6.6 5.5 8.2 6.8 OCT. 7.9 5.7 8.7 6.2 NOV. 8.6 7.1 8.2 6.8 DEC. 8.0 6.9 7.9 6.9 N.3. The unemployed as a percentage of the labour force for each region. ( 29 ) I f there any d i f f e r e n c e s between the i n t e r e s t rates charged i n B r i t i s h Columbia as a whole and i n Vancouver they are very s l i g h t . Vancouver's would tend to be marginally lower. However, rather than adjust the i n t e r e s t rate charged, the mortgage loan o f f i c e r i n these o u t l y i n g communities i s more l i k e l y to merely not give a mortgage. Table Three i l l u s t r a t e s very c l e a r l y that economically 1971 was a much b e t t e r year than 1970. The unemployment rate (unadjusted) i n Vancouver decreased t h i r t y - e i g h t percent and the number of mortgage loan approvals i n B.C, rose seventy-two percent. On a month-by-month basis dwelling u n i t s t a r t s i n Vancouver have increased markedly, e s p e c i a l l y i n the months from December to J u l y of 1971. From t h i s t a b l e i t would seem that the e a r l y signs of recovery began i n the f o u r t h quarter of 1970 when housing s t a r t s almost doubled from the t h i r d quarter l e v e l . This e a r l y increase i s app-ropriate, because the housing industry has always been the f i r s t to react to a change i n monetary p o l i c y . Table F i v e gives a very c l e a r i n d i c a t i o n of the changes i n the unemployment rate f o r B.C. over 1970 and 1971. From a high of 9.Q% i n June of 1970, i t f e l l to a low of 6.2% i n October of 1971 f o r the adjusted rate which i s a 2.6% d i f f e r e n c e over a period of s i x t e e n months. ( 30 ) TABLE SIX 1970 1971 Number of Sales (Single-family Homes) - 4235 4123 Agreements For Sale -Primary Means of Finance - 552 331 -New Issue Number of Mortgages - 3596 3586 N.B. 1970 - 12 Periods of Data Collection From Teela 1971 - 9 Periods of Data Collection From Teela TABLE SEVEN AGREEMENTS FOR SALE SALES AGREEMENTS/SALES 1970 1971 1970 1971 1970 1971 VAN. - 422 268 3060 2891 13.856 9.Jfo NORTH 99 43 853 895 11.6 4.8 VAN. WEST VAN. - _3_l _20 322 337 9.6 5.9 TOTAL SAMPLE - 552 331 4235 4123 13.15* 8.0?6 N.B. Source - Research Data ( 31 ) Interest rates were s i g n i f i c a n t l y lower than those of 19?0, employment was higher, r e s i d e n t i a l credit was much more p l e n t i f u l , and construction l e v e l s were markedly higher. Because of these s i g n i f i c a n t trends, i t i s safe to make the assumption that 1970 was a recession year and 1971 was a year of recovery. Now that the economic conditions of 1970 and 1971 have been established, a comparison of the research re s u l t s f o r agreements i n those two years can be undertaken. Because 1970 was f i f t y percent sampled and 1971 was one-third sampled, the absolute number of sales, agreements, and mortgages cannot be related. However, i f a r a t i o of agreements to sales i s created and likewise f o r mortgages, comparisons may be drawn between the two r a t i o s . This r a t i o quantifies the pro-pensity to use agreements. On t h i s basis, f o r every hundred r e s i d e n t i a l sales i n the study area there were 13.1 agreements issued i n 1970 and only 8.0 agreements given i n 1971. Therefore, the number of agreements was reduced by 5.1 i n 1971 from the previous year, during which time the state of the economy improved from recession to advanced recovery. On the other hand, there were 85.0 mortgages issued i n 1970 and 87.0 issued i n 1971. I t i s strange, though, that there was not a substantial o f f - s e t t i n g increase i n the number of mortgages. The mortgages issued increased by only two. This meant that more buyers used t h e i r own equity to purchase houses. Many buyers, who were previously owning, did not s e l l t h e i r former homes i n 1970 because of the poor market conditions. Rather, they waited t i l l 1971 when the r e a l estate market had improved. This would account f o r the larger number of homes sold i n 1971 than i n 1970, Many of these people who waited f o r better market conditions probably ( 32 ) had one hundred percent equity in their property, hence, they could purchase new homes with no money borrowed. It would be very unlikely that a prospective home buyer would assume a mortgage issued in 1970, because those mortgages had a high interest rate. If he could not obtain mortgage financing, then he was forced to assume the mortgage already existing on the property. However, i f the mortgage was issued previous to 1970 when lower interest rates prevailed, he might assume i t . In addition, the buyer would be l i k e l y to assume an existing agreement on the property i f i t s terms seemed reasonable with respect to present market conditions, especially the interest rate. Therefore, the reason why the relative number of mortgages did not increase more substantially probably stemmed from the fact that more families used one hundred percent equity and more buyers assumed existing agreements or mortgages depending on the terms available. On the same basis of comparing the numbers of agreements to the numbers of residential sales, a l l three major areas have a significant reduction i n the number of agreements issued per one hundred sales. That the City of Vancouver decreased the least can probably be accounted for by the large number of low socio-economic status families and by the large quantity of older homes in that area. North Vancouver decreased by more than half down to a level comparable to West Vancouver's. This tremendous reduction probably stemmed from the fact that North Vancouver would seem to be an area for which i t would be relatively easy to obtain mortgage financing. It i s a popular upper middle-income suburban area with good and plentiful amenities such as parks, schools, shops and roads. Its land values are increasing very quickly every year because the demand for land there exceeds the supply of land. ( 33 ) Most of i t s homes are not very low p r i c e d (below $20,000 i n value) nor are they too high p r i c e d (above $50,000 i n v a l u e ) . In other words, t h i s area f i t s i d e a l l y i n t o the c r e d i t requirements of most mortgage l e n d e r s , ( y>) TA3LS SIGHT - AVERAGE TERMS FOR AGREEMENTS FOR SALS VANCOUVER NORTH WEST TOTAL VANCOUVER VANCOUVER LOAN-TO-VALUE: 1970 - 0.?19 0.?67 O.697 O.727 1971 - 0.739 0.784 0.724 0.745 INTEREST RATES: 1970 - 9.50^ 9.639 9.750 9.519 1971 - 8.85* 9.570 9.053 8.961 TERMS (YEARS): 1970 - 19.1 22.0 21.0 19.5 1971 - 16.5 22.1 22.3 17.7 SALES PRICE: 1970 - $24,680 24,001 33,383 25,02? 1971 -. $26,046 25,210 38,763 26,702 N.B. SOURCE - RESEARCH DATA ( 35 ) The state of the economy not only affects the relative usage of agreements for sale but also the terms changed. Agreements do not exist isolated from the rest of the available financial instruments in the economy. They are, i n actuality, a l l inter-related, so that, for example, a general rise in interest rates pushes up the interest rates on mortgages and, therefore, on agreements, Similarily, changes in the loan-to-value ratios and terms of mortgages also effect them for agreements. In the time periods being considered in this paper, the state of the economy went from recession to recovery, 1970 was a year of tight money and a low level of growth, while 1971 was characterized by an easing supply of credit and an expanding economy from a growth point of view. Therefore given these trends in the economy, similar changes should have occurred in the terms changed for agreements. Both loan-to-value ratios and interest rates (see Table Eight) were relaxed in severity. In a l l the study areas and for the total sample, the average loan-to-value ratio was increased, and thus the buyer could make a smaller cash down-payment to purchase the house, Similarily, interest rates f e l l by one-half a percent at the least. In addition to the changes in the means, there was a remarkable change in the distributions of both these terms. As i s indicated in Graph A, loan-to-value ratios in 1971 tended to be significantly more spread out than their counter-parts in 1970, In fact, the standard deviation of the mean increased by 0.0\2J% to 0.1553% from 0.1^3%. In 1970 12.3^ of the agreements had a ratio of greater than 0.85, while in 1971 27.55? had a ratio of greater than O.85. The range for loan-to-value ratios of less than 0.60 accommodated 16,3% of a l l the 1 ! i ! i T f 1 ! I 1 1  1 ! I i i i i i i ! ] T i i T T I [-1 fvT GRAPH A ! I TIT"I ;D\STR»6UTVON I i i : h r TH-& i i f i i r O F I L O A N -1 FOR i l k AGREEMENTS i i T O ! i ! " I T T I TV SA RATIOS ! I " T T M i ! ! I ! i ! 1 I i i ' : M l ! i i 1 i - n - ! t i l l ! I r TTTT ! I I P M i l i i ! 4 - - ^ : : Vx 1 I I I i | i 1 M ! i : ! I ' M I I I ! ( 39 ) agreements issued in 1970 and 15.4% of those given in 1971. Therefore the trend of loan-to-value ratios was in an upward direction. Graph B clearly illustrates the changes in the distribution of interest rates between 1970 and 1971. In 1970 the mode which was in the range of 10.00% to 10.50% accounted for 40.4% of the agreements and in 1971» the mode which was in the range of 9.00% to 9.50% amounted to 38.3%. In addition, the standard deviation of the means varied by only .0007% from one year to the next. Although, the interest rates charged f e l l significantly from 1970 to 1971i the distributions did not alter very much. However, at the extremes, less than 8.00% and greater than 10.50%, they decreased proportionately. The length of the terms of the agreements varied inconsistently from area to area. In total (see Table Eight), the average term decreased by 1,8 years. But, in both West Vancouver and North Vancouver (City and D i s t r i c t ) , the terms increased by 0.1 years and 1.3 years respectively. Only in Vancouver did the term span a briefer period. It decreased by 2 ,6 years. It should be noted that Vancouver amounts to 81.0% of the total sample. Therefore, over 80.0% of the total sample of agreements had their terms decreased by 2.6 years on the average. Not only did the average term decrease but also the standard deviation of the mean decreased by 2 ,26 years which indicates that the distribution of terms was more concentrated i n 1971 than in 1970. Although the level of sales prices cannot be directly linked to the state of the economy, there are indirect linkages. When an economy i s healthy and growing, people's incomes increase thus allowing people to bid for the more desirable dwellings. Assuming that most families 20 would prefer to li v e in a single-family, detached house , then the ( ) prices of these types of dwellings would increase. Therefore, 1971 with i t s healthier economy would most l i k e l y have higher residential sales prices than 1970. This previous argument i s one means of explaining the higher average sales prices for agreements in 1971 (see Table Eight). The other argument, equally as hypothetical as the previous one, i s that lower interest rates (see Table One and Eight for evidence that interest rates were lower in 1971 than i n 1970) mean that prices must be higher. This analysis assumes that the vendor and the purchaser are sophisticated investors completely aware of the opportunity costs of their investments, s t a t i s t i c a l l y an unprovable statement. S t a t i s t i c a l l y , the reason for the higher average sales price would seem to originate from a movement of the mode sales price and a change in the distribution curve of sales prices. (See Graph C). The mode has increased from the range. $15,000 to $20,000 to the range $20,000 to $25|000. From being steeply concentrated, the distribution line has spread out more. In fact, in the range of $30,000 and above, there were 23.9% of the agreements i n 1970 and 26.8% of them i n 1971 which i s an increase of 2.9%. On the basis of the s t a t i s t i c a l results given in this chapter, i t can be concluded that very definitely the state of the economy, nationally as well as locally, affects not only the relative usage of agreements but also the terms charged. The year 1971» being a year of economic recovery and growth, had significantly fewer agreements for sale issued than in 1970. In addition, the terms, especially the loan-to-value ratios and interest rates, were not as harsh financially as they had been in 1970, The loan-to-value ratios were higher and the interest rates were lower. ( w ) FOOTNOTES - CHAPTER IV 1. L.H. Officer & L.B. Smith, "Stabilization Policy in the Post-war Period," Canadian Economic Problems and Policies, McGraw-Hill, Toronto, 1970, p. 1 3 . 2 . Ibid., p. 22 3. LOC. CIT. 4 . Ibid., p. 16 5. LOC. CIT. 6 . Committee on The Working of The Monetary System, "The Influence of Monetary Measures," Canadian Banking and Monetary Policy, McGraw-Hill, Toronto, 1965, p. 5 0 . 7. LOC. CIT. 8. Officer And Smith, 1970, p. 2 2 , 2 3 . 9. Ibid., p. 2 3 10. Ibid., p. 1 6 . 11. Committee on The Working of The Monetary System, "The Influence of Monetary Measures," Canadian Banking and Monetary Policy, McGraw-H i l l , Toronto, I 9 6 5 , p. 5 1 . 1 2 . Statistics Canada, Canadian S t a t i s t i c a l Review, Queen's Printer, Ottawa, Volume 4 7 , March 1972, Table 7 6 , p. 64. 13. Confidential Information from the B.C. Regional Office of C.M.H.C. in Vancouver. 14. Op.Cit., Table 2 5 , p. 2 0 , 1 5 . Ibid., Table 2 5 , p. 20 1 6 . Ibid., Table 39, p. 33. 17. Statistics Canada, Canadian S t a t i s t i c a l Review, Queen's Printer, Ottawa, Volume 4 7 , March 1972, Table 6 , p. 80. 18. Ibid., Table 2 5 , p. 2 0 . 19. Ibid., Table 8, p. 4 4 . 2 0 . Hellyer, Paul. Task Force on Housing and Urban Re-Develorment. Queen's Printer, Ottawa, January, 1969, p. 1 7 . ( 42 ) CHAPTER V - ANALYSIS OF THE SECOND HYPOTHESIS The second hypothesis states that a person with a low socio-economic index i s more l i k e l y to finance his residential purchase with an agree-ment than i s a person with a medium or a high socio-economic index and that the low index buyer i s l i k e l y to obtain more favourable terms with an agreement than with a mortgage. The hypothesis concentrates on the low socio-economic index because i t i s this group that always has problems financing house purchases. This group tends to have a larger proportion of marginal financial risks, which, in most cases means that they require more lenient financial terms especially with respect to the down-payment. To ascertain whether socio-economic status effects the relative usage of agreements, the percentage distributions by socio-economic index were computed (see Table Nine). For the total sample, 6.00% more buyers with a low socio-economic index used agreements than mort-gages. For the medium and the high indexes, there were in each case approximately fewer agreements than mortgages. Therefore, on the basis of the st a t i s t i c s offered here, the conclusion would be that for a large area with a wide variety of social and economic classes persons with a lower relative socio-economic status would be more l i k e l y to finance a residential purchase with an agreement than would those with a higher status. But i f the individual study areas are isolated from the total sample (see Table Nine) the results d i f f e r . The s t a t i s t i c a l results for the City of Vancouver are more strongly pronounced than those for the total sample. This is probably because the City has a well-mixed population vis a vis i t s socio-economic status. With a population of TABLE NINE - DISTRIBUTION OF SOCIO-ECONOMIC STATUS AMONGST STUDY AREAS - NUMBER OF TRANSACTIONS SOCIO-ECONOMIC CITY OF STATUS VANCOUVER CITY OF NORTH VANCOUVER DISTRICT OF NORTH VANC. DISTRICT OF WEST VANC. TOTAL Mortgage Agreements M. A* M. A. M. A. M. A. HIGH 319 53 5 0 45 4 119 17 488 74 MEDIUM - . 4?0 132 82 4 319 22 107 2 978 160 LOW 184 66 43 11 . 94 2 25 0 346 79 TOTAL 973 251 130 15 458 28 251 19 1812 313 HIGH 32.8% 21.0 3.8 0.0 9.8 14.3 47.4 89.5 26.9 23.1 MEDIUM - 48.4% 52.6 63.O 26.7 69.7 78.6 42.6 10.5 53.9 51. LOW 18.8% 26.4 33.2 73.3 20.5 7.1 10.0 0.0 19.2 25,: N.B. SOURCE - RESEARCH DATA ( 44 ) approximately half a million people, i t i s evenly represented by every social and economic group. The low index group has 7 . 6 * more agree-ments in i t than mortgages. It i s also significant that there are k,20% more agreements in the medium socio-economic group than mortgages. Unfortunately, the reason for this cannot be objectively explained. Coincidently, a similar result existed for the District Municipality of North Vancouver, A plausible explanation of this phenomenon! seems to be that the difference stems from purchasers who are themselves in the medium socio-economic group but are l i v i n g in low index areas. Institutional mortgages tend to generalize on the basis of geography. Although d i f f i c u l t to prove, many mortgagees are extremely hesitant to lend money to persons l i v i n g in the Strathcona area of Vancouver or for that matter, to families l i v i n g east Main Street. This bias would force some potential mortgagors to finance their home purchases with an agreement instead. Similar results were obtained in the District of North Vancouver because i t i s the only area other than Vancouver that i s almost represented in a l l the spectrums of society. It does however tend to have a larger medium range of population. The relative differences between the high and the low indexes are reversed for agreements and for mortgages. Mortgagees look upon this area very favourably, so that in the low socio-economic range there are more mortgages issued relatively than agreements. But, i n the high group, there are 4 , 5 0 * more agreements given than mortgages. This i s most li k e l y the result of mortgagees tending not to issue loans valued at greater than 50,000 dollars. Because this area does have a relatively large number of homes above this sales price level, many persons are forced to use agreements to finance the transaction. ( ^5 ) Similarly, West Vancouver with i t s exceptionally high proportion of wealthy families tends to have many of i t s homes valued at greater than $50 ,000 . For mortgages, the s p l i t between high and medium socio-economic status i s f a i r l y similar with the high taking precedence by 4 .8* , But for agreements, the s p l i t i s 79,0% between the two levels with the high predominating. By a factor of nearly two, the percentage of agreements i n the high socio-economic range exceeded that of mort-gages. It seems that mortgage financing accounted for most of the property sales while the agreements took care of the marginal sales with exceptionally large sales prices. In conclusion, the socio-economic status of the buyer seemed significant i n determining the possib i l i t y that the sale may be f i n -anced with an agreement. Buyers with a low index are more l i k e l y to have used an agreement than are high index purchasers except for the sales involving a loan of greater than $50,000 in which case, the buyer was also more l i k e l y to use an agreement. This section endeavours to indicate the effect of a buyer's socio-economic status on the terms charged under a mortgage and an agreement for sale contract. The basic approach of the analysis i s to compare the s t a t i s t i c a l results applicable to mortgages to those of agreements by socio-economic index. Basically, the loan-to-value ratios as separated by socio-economic group f e l l into the same pattern as do the results for the entire sample. For each class, the mean ratio applicable to agreements exceeded that applicable to mortgages by about 5.5%. (See Table Ten) In addition, the standard deviation of this mean for mortgages exceeded that for agreements by about 2 0 . 0 * which meant that mortgages are distributed ( ^ ) in a much wider pattern than are agreements, (see Table Eleven) How-ever, to understand the effect of the socio-economic index on the resp-ective terms, a measure of the terms sensitivity to the index must be computed. This was calculated in a rather gross fashion on Table Twelve. For the change from the high to the low socio-economic index the app-ropriate change in the average term was measured and converted to a percentage figure. This was done for both agreements and mortgages. For the loan-to-value ratio, mortgages underwent the greater change than agreements by 3>9% with a positive trend. This, in effect, meant that a change i n the index had a stronger effect on mortgages than on agreements with respect to loan-to-value ratios. Interest rates as separated by socio-economic group also di s -played the same trends as did the to t a l sample. For a l l three ranges, there was approximately a 1.00% interest rate difference between the two sources of finance with mortgages having the highest average rates. As opposed to the results for the loan-to-value ratios, the standard deviations as seen on Table Eleven for mortgages exceeded those for agreements. The concentration of interest rates around the mean for mortgages was much less than that displayed for agreements. As was the case for the previously discussed loan-to-value ratio, the sensitivity of the interest rates to the socio-economic index was greater for mor-tgages than for agreements. In other words, an equivalent change in the index created a larger change amongst mortgages than agreements. The average length of the term for mortgages in a l l three socio-economic groups was greater than for agreements, (See Table Ten) The variation ranged from two years to four and a half years. The greatest difference occurred in the middle range with the least var-iation being in the high range. The standard deviation of the mean ( 47 ) TABLE TEN - AVERAGE TERMS BY SOCIO-ECONOMIC INDEX HIGH MEDIUM LOW TOTAL S.E. INDEX S.E. INDEX S.E.INDEX MTG. A_3 MGT. A/S MGT. A_3 MGT. A/S Mortgage Agreement for Sale LOAN/VAL. - O.65 0.71 0.69 0.74 0.74 0.78 0.72 0.75 INT. RT. - 9.775* 8.81 9.72 8.97 10.15 9.08 9.82 8.96 TERM - 21.7 yr. 19.8 21.7 17.2 20.1 16.6 21.4 17.7 SALE PR. -$41,715 37,526 28,257 25,227 20,668 19,550 30,432 26,702 LOAN AMT. -$25,866 26,219 18,861 18,231 15,592 15,128 20,123 19,337 MONTHLY -$237 260 173 180 150 165 186 195 PAYT. M.P./L.A. - 9.16* 9.8 9.16 9.9 9.6 10.9 9.2 10.1 N.B. SOURCE - RESEARCH DATA ( 48 ) TABLE ELEVEN - STANDARD DEVIATION QF THE TERMS BY SOCIO-ECONOMIC INDEX HIGH MEDIUM LOW TOTAL S.E. INDEX S.E. INDEX S.E. INDEX MGT. Mortgage A/S Agreement for sale MGT. A/S MGT. A/S MGT. A/S LOAN-TO-VALUE 0.187 0.158 0.193 0.154 0.201 0.148 O.3O7 0.155 INT. RT. - 1.22% 1.47 0.97 1.55 1.25 1.38 1.11 1.49 TERM - 4.77 yr . 9.21 4.60 6.05 4.53 4.95 4.68 7.24 SALE PR. - $19,570 17,855 11,016 9,091 18,283 9,372 16,956 13,473 LOAN AMT. - $11,000 13,518 6,336 6072 6,294 6,557 8,688 9,444 MONTHLY PAYT. - $93.09 176.09 58.63 55.93 6O.38 87.09 76.90 110.35 N.B. SOURCE - RESEARCH DATA ( ^9 ) TABLE TWELVE - THE DIFFERENCE IN THE TERMS (MEAN) BETWEEN THE HIGH AND LOW SOCIO-ECONOMIC INDEX HIGH TO LOW  SOCIO-EC. INDEX Mortgage Agreement Mortgage Agreement LOAN-TO-VALUE - 0.09 0.07 13.8* 9.9* INTEREST RATE - 0.37* 0.27* 3.8* 3.1* TERM (5 - 6 yr.) (3.2 yr.) (25.8*) (16.2*) SALES PRICE ($21,04?) ($17,976) (50.4*) (47.8*) OUTSTANDING PRINCIPAL ($10,2?4) ($11,091) (39.7*) (42.2*) MONTHLY PAYMENT ($87.00) ($95.00) (36.7*) (36.5*) N.B. - Original figures taken from Table Twelve - Numbers inside the brackets are negative - Source - Research Data ( 50 ) term varied only a l i t t l e for mortgages but for agreements i t went from 9.21 years in the high group to 4 .95 years in the low one. This d i f f -erence probably stemmed from the institutional resistance applied both publicly and privately to the mortgage market. In other words, the length of the term tended to be f a i r l y standardized for residential mortgages. For agreements, however, there were institutional con-ventions; each transaction was quite separate with few outside inter-ferences. Once again, the mortgages displayed much greater sensitivity to changes in the socio-economic index. Under similar conditions, mortgages underwent a 2 5 . 8 * negative change while agreements only had a 1 6 . 2 * negative change i n the length of their respective terms. The sales price of the average transaction in each group was at i t s peak in the high socio-economic index and at i t s lowest point for the low index. The difference i n price between mortgages and agreements varied from $4181 in the high index group and to $1118 i n the low index group. In a l l three levels, the sales price of the average mortgage was greater than the price of the average agreement. Furthermore, the standard deviation of the mortgages exceeded that of the agreements in a l l three groups. In the low socio-economic index, the standard deviation of the mortgages was 9 5 . 0 * greater than that of the agreements while i n the other two the difference was only 9 . 5 * and 21.5*» respect-ively. In addition, the mortgages had a 2 . 6 * greater change than the agreements from the high to the low socio-economic index. Therefore mortgages showed a greater drop in sales prices than did agreements as the socio-economic index decreased. The loan amount or the outstanding principal, as i t i s more commonly known, had no real consistent pattern. For the high socio-( 51 ) economic index, the average for the agreements was the larger one by $353 but for the medium and low indices the larger one was the mortgage group by $631 and $464, respectively. The relative closeness of the absolute figures as compared to the previously discussed figures was understandable given the higher loan-to-value ratios (see Table Ten). For each of the three indices, the standard deviations had only slight differences between mortgages and agreements. On the whole, the d i f f -erences were not significant. It i s interesting to note that only in this category were agreements more sensitive to changes in the socio-economic index than were mortgages. As the index decreased, the out-standing principal on an agreement reduced more than i t did on a mortgage, The average monthly payments in each of the three index groups followed the same pattern as existed for the total sample of this study. The average monthly payment for agreements exceeded that of mortgages in each of the three classes by 9.7%, 4,5%, and 10.0%, respectively. It has also decreased in dollar value as the index has gone from high to low. The standard deviation of the mean monthly payments for agreements exceeded that of mortgages by 89.2% and by 41,8%, respectively in the high and low socio-economic index, while for the medium range, the variation was marginal. As opposed to the previously discussed five terms, the monthly payment for both mortgages and agreements showed very similar sensitivity to changes in the socio-economic index. The difference in the changes (see Table Twelve) was only 0,2% which is an insignificant variation. ( 52 ) LIMITATIONS OF THE SOCIO-ECONOMIC INDEX Before discussing the conclusions on the basis of the previous analysis of the results in this chapter, the limitations of the socio-economic index as i t i s used in this study should be delineated. F i r s t , although i t purports to include many variables, i t was entirely based on personal income levels as they were reported in the 196l Canada census. Factors, such as, the type of employment, the kind of area that the house i s located i n , the quality of the house, et cetera, were a l l ignored i n the formation of the socio-economic index. They were, of course, extremely d i f f i c u l t to quantify and then to combine a l l in one index. Because of this latter problem, one i s forced to base such an index on personal income levels. Secondly, the problem of applying I96I averages to 1971 was extremely d i f f i c u l t to circumvent. This point has been discussed i n a previous chapter and the use of old data for the present has been defended, but i t remains a problem affecting the results of this study. Unfortunately, obtaining more recent data was impossible. The 1971 census figures on personal incomes by census tract w i l l not be a v a i l -able t i l l very late i n 1973« Furthermore, i t seems from the author's own investigations that no other bodies, either private or public, keep such information up-dated to the present. They a l l depend, also, on the Census, Thirdly, the numerical values for each socio-economic index were only gross ranges. They were a l l averages of the data collected in 1961. Unfortunately applying averages to specific data created i n -accuries in the f i n a l results. Again, however, this was the only way that such an undertaking as this study could be managed. The ideal ( 53 ) procedure would be to obtain the actual personal income level from each mortgagor and purchaser by direct questioning. This method would be extremely time-consuming and costly. ( 54 ) CONCLUSIONS The socio-economic index as i t i s used in this study was sup-posed to be a gross measure of the level of personal collateral that a purchaser could offer. It indirectly was a measure of the risk that a person was to a vendor or a mortgagee. The lower was the socio-economic index, the higher, supposedly, was the risk and vica versa for a high index. Therefore, such an index should have implications for the terms charged i n an agreement for sale and in a mortgage. It has already been shown (see Table Nine) that a person with a low socio-economic status was more l i k e l y to use an agreement and conversely for a person with a high index. Now, what effect, in to t a l , did socio-economic status have on the terms charged? The f i r s t conclusion was that as the socio-economic index de-creased, that i s as personal incomes decrease, the loan-to-value ratio and the interest rate were l i k e l y to increase and the length of the term was l i k e l y to decrease. Although the trends were similar for both mortgages and agreements, the relative levels of the afore-mentioned terms for each was different. For mortgages and agreements, the mean loan-to-value ratio was higher for the low index group. Comparing the two means of finance, agreements had the higher ratio which meant that a vendor in the low socio-economic group could borrow more using an agreement than using a mortgage. This followed because the more mar-ginal financial risk would have to use an agreement probably because he could not amass a large enough down-payment to use a mortgage. As the socio-economic index decreased, the interest rates for both means of finance increased. This was partially a reflection of the higher risk involved in lending to a low socio-economic status person. The interest rate differentials between mortgages and ( 55 ) agreements resulted because of the shorter term for agreements and the higher mean monthly payments. The term was shorter for the low socio-economic group and therefore s t i f f e r (larger periodic payments). The relatively larger monthly payment could be observed when the monthly payments were related to the outstanding principal. For both mortgages and agreements, the low socio-economic group had the highest monthly payments in terms of the amount borrowed (see Table Ten). Given the higher interest rate and shorter term, such a large propor-tion was appropriate. In addition, this proportion was relatively larger for agreements. This was mainly the result of the very short term of amortization for agreements vis a vis mortgages. Therefore, i t could be concluded that the socio-economic level of a borrower definitely affected the likelihood of using an agreement and also the terms charged, A high socio-economic group, would have to pay less periodically for a loan outstanding than would a low index group. Similarly, this group would receive lower interest rates and longer terms, but, i t s loan-to-value ratios would be higher. In other words, i t would have to come up with more of i t s own equity. ( 56 ) CHAPTER VI - ANALYSIS OF THE THIRD HYPOTHESIS The under-riding purpose of this study i s to understand why agreements for sale are used to finance residential property purchases as opposed to mortgaging the property. For this reason the hypothesis to be studied in this chapter states that the terms on agreements show a greater variation than those on mortgages and that the variation i s a direct reflection of quality differences with respect to the borrower and his financial collateral. Specifically, the terms of both these means of finance are analyzed together. By understanding the differences, especially with respect to their financial severity, i t i s determined deductively why agreements would be used rather than the traditional mortgage. Furthermore, by regressing the six major variables in various combinations, the relationship between the variables i s derived. The regression equations drawn for the mortgages and for the agreements are compared to further assist understanding why one means of finance i s used in place of the other. Therefore, by supplanting the original s t a t i s t i c s with the regression equations, the motivations to use agree-ments for sale can be much better understood. Basically, the following discussion analyzes the s t a t i s t i c a l differences between mortgages and agreements and then i t endeavours to formulate logical reasons for these variations. ( 57 ) TABLE THIRTEEN- AVERAGE TERMS - AGREEMENTS FOR SALE & MORTGAGES VANCOUVER NORTH NORTH WEST TOTAL VAN CITY VAN DIST. VAN LOAN/VALUE AGREEMENT - 0 .739 0.821 O.765 0.724 0.745 MORTGAGE - 0 .689 0.698 0.779 0.713 0.715 INT. RATE A/S - 8.847* 9.717 9.518 9.053 8.961 MTGE - 9.852 10.157 9.633 9.833 9.816 TERM A/S - 16.56 yr 21 .49 2 2 . 4 9 22.27 17 .6?4 MTGE - 2 0 . 6 3 2 0 . 7 9 2 3 . 0 2 21 .86 21.42 SALE PRICE A/S - $26,046 21,100 27,404 38,763 26,702 MTGE - $28,085 27,861 29,931 41,779 30,432 LOAN AMT. A/S - $18,?06 17,299 20,673 27 ,308 19,337 MTGE - $18,158 17,613 21,325 26,851 20,123 MONTHLY PAYT. A/S - $193.54 160.13 186.46 255.58 195.07 MTGE - $170.97 171.55 188.98 245.59 185.90 N.B. SOURCE - RESEARCH DATA ( 58 ) TABLE FOURTEEN - STANDARD DEVIATIONS - AGREEMENTS & MORTGAGES VANCOUVER NORTH NORTH VAN CITY VAN DIST. WEST VAN TOTAL LOAN-TO-VALUE -AGREEMENTS - 0.159 MORTGAGES - 0.20-3 0.123 0.377 0.128 0.408 0.137 0.364 0.155 O.307 INT. RATE A/S MTGE 1.605% 1.050 0.576 1.434 0.738 1.115 0.705 1.093 1.492 1.112 TERM A/S MTGE 6.580 y r . 4.614 4.621 4.688 6.722 4.110 11.190 5.053 7.242 4.675 SALE PRICE A/S MTGE $13,689 $16,794 4,460 21,258 8,137 10,329 14,981 19,985 13,473 16,956 LOAN AMT. A/S MTGE $9,663 $7,719 3,693 7,459 6,315 7,196 9,565 11,157 9,444 8,688 MONTHLY PAYT. A/S MTGE $118.02 $70.53 34.36 87.61 46.90 60.11 87.58 91.09 110.35 76.91 N.B. SOURCE - RESEARCH DATA ( 59 ) ANALYSIS OF STATISTICAL RSSULTS; For the total sample, the average loan-to-value ratio for agree-ments was 3-00* larger than that for mortgages. As can be seen on Table Thirteen, Vancouver, which has the vast majority of agreements and mortgages transacted, has an average loan-to-value ratio 5 .00* greater for agreements than for mortgages. The other three areas have only a small difference among their respective loan-to-value ratios. It i s interesting to note that the latter three areas have more than a one hundred percent difference in their standard deviations for their average ratios while Vancouver, which had a large gap between the average ratios for agreements and mortgages, has only a one-third difference in the standard deviations, (see Table Fourteen). In addition the standard deviation of the mean loan-to-value ratio for the mortgages was twice that for the agreements. In other words, the spread of ratios was twice as concentrated for mortgages as for agreements. Graph D il l u s t r a t e s clearly the separate distributions for mort-gages and agreements of their loan-to-value ratios. Their curves were very similar with respect to their peaked natures. However, i t should be noted that mortgages did spread out further for the lower loan-to-value ratios while the agreements distributed themselves toward the higher end of the scale in relatively larger numbers. In fact, 2 1 . 4 * of a l l mortgages had a loan-to-value ratio of less than 6 0 . 0 ^ while only 1 5 « 3 * of a l l agreements were in the same range. On the other hand, 2 7 . 5 * of a l l agreements had a loan-to-value ratio of greater than 85.0% while only 6 . 7 * of a l l mortgages had ratios that f a l l within this range. In addition, both the medians and the modes had similar d i f f — erences. For the mortgages, they were in the range of ? 0 , 0 * to 7 5 . 0 * ( 61 ) while for agreements they were in the 7 5 . 0 * to 80 .0* range. On the whole, a prospective home buyer could make a smaller down-payment by using an agreement than i f he used a mortgage to finance his purchase. The average interest rates for the whole sample varied by app-roximately one percent between mortgages and agreements. As i s evident on Table Thirteen, the interest rates charged by mortgagees exceeded that charged by vendors by 0 .955* . Except for the District Municipality of North Vancouver, this size of spread applied to a l l of the study areas. Unfortunately, the differences between areas could not be easily explained. It might be that the vendors in one area might be more knowledgeable about the existing market conditions than in another. It i s interesting to note that the standard deviation of the average interest rate was significantly larger (anywhere from 0 ,30* up to 0.86*) for mortgages than for agreements. Although there was almost a one percent spread between the average interest rates charged by mortgagees and by vendors, the modal interest rates were identical. They both were i n the range of 9 .00* to 9 .50* (see Graph E). However, the median interest rates did d i f f e r . For mortgages, i t was i n the range of 9 .50* to 10 ,00* and for agreements, i t was in the 9 .00* to 9 .50* segment. On the whole, interest rates on mortgages were higher than for agreements. Furthermore, i t seems from Graph E that the interest rates for agreements tended to be distributed in larger numbers at the lower end of the scale than were mortgages. Conversely, the interest rates for mortgages were more heavily d i s t -ributed at the upper end of the graph. In fact 2 0 , 4 * of a l l the agree-ments in the sample had an interest rate lower than 9,. 00* while only 0 ,72* of a l l the mortgages were in that category. However, in the t I 1 I ' 1 ! l i I TT" I ! MORTGAGES I i i • i i 1 ! 1 ! § o h < 1/7 < u. o .Ui;. i i i i 1 ! ( 63 ) range greater than 9 . 5 0 * , there were respectively 4,2* agreements and 18,0* mortgages. Therefore, interest rates for agreements tended to be heavily distributed in the high rate area. Although there was considerable variation between the four sampled areas, especially amongst the three North Shore communities with r e l -atively small sample sizes the total sample of agreements tended to have on the average a term which was 3.75 years shorter than that applicable for mortgages (see Table Thirteen). The three North Shore areas, i n effect, had no substantial differences in the length of the term allowed. The term for agreements was for Vancouver, on the average, 4 ,07 years.shorter than that for mortgages. By area there was no uniformity i n the standard deviations. However, for the total sample, which was dominated by the City of Van-couver's sample, the standard deviation of the mean for the agreements was less than that for the mortgages by 2,5? years (see Table Fourteen), The shorter length of term that was usually found in agreements relative to mortgages was clearly illustrated in Graph F. The modal term for agreements was only in the 12,5 to 17.5 years range while for mortgages i t was in the 22.5 to 2?.5 years range. Similarily, the medians were spread in approximately the same pattern. Although both curves were strongly concentrated around the means they were very different with respect to the over-all distribution of their terms. Nineteen and a half percent of a l l the agreements had a term of less than 12.5 years while only 5.01* of a l l the mortgages f e l l into this category. Similarly, 7,04* of a l l agreements had a term of greater than 27.5 years and only 1.2* of a l l mortgages had terms in this range. Therefore, an agreement was l i k e l y to have greater variation in i t s ( 65 ) terms as well as a shorter term. From Table Thirteen i t can be seen that there was considerable variation in sale prices by area and by means of finance. West Van-couver naturally had the highest average sale prices. It also had the largest standard deviation of a l l four sample areas (see Table Fourteen), North Vancouver (District) and the City of Vancouver had very similar average sale prices. However, their standard deviations varied con-siderably. Including both agreements and mortgages, there was a d i f f -erence of five to six thousand dollars between the two areas. Consid-ering the tremendous variety of residential property values that were available i n the City of Vancouver, i t follows that i t had the larger standard deviation in comparison to the more homogeneous Noth Vancouver Di s t r i c t , The lowest average sale prices prevailed in the City of Vancouver. The differnce in the standard deviation between agreements mortgages in North Vancouver (City) was considerable. The sale prices in transactions involving agreements varied only $4,460 while for trans-actions involving mortgages the variation was $21,258, which i s a f i v e -fold difference. For the total sample, the average sale price for a mortgage exceeded the price for an agreement by 12.6*. On the basis of the range of average sale prices, i t seemed that the standard deviations of these average prices for the whole sample varied appropriately. The distribution of sale prices between agreements and mortgages was very similar (see Graph G). The modes were the same ($20,000 to $25,000). Both curves seemed to be sloped very much alike. However, they did have different concentrations of sales especially at the limits. For transactions valued at less than $15,000, there were 10 .9* agreements ( 67 ) * while only 4.14* mortgages. On the other hand, 2 5 . 6 * of a l l the mort-gages involved transactions valued at greater than $35,000 while only 18.2* of a l l agreements were in this range. The variation in mean loan amounts between mortgages and agree-ments was quite insignificant. For the total sample, mortgage loan amounts were only 3 . 9 * more than that for agreements (see Table Thirteen). Average mortgage loan amounts were greater for both North Vancouver communities while average agreements loan amounts were greater for West Vancouver and Vancouver. In contrast, the standard deviation was just the opposite to the means. The standard deviation applicable to agreements was $756 greater than that applicable to mortgages. In other words, the distribution was slightly more concentrated around the mean for mortgages than for agreements. The similarity in the distributions of both agreements and mort-gages was clearly evident on Graph H. The mode and the median were in the same range for both distributions. In the range of loan amounts of greater than $35,000, there was, in effect, no difference in the distributions. There were 6 .02* of a l l the mortgages and 6 .07* of a l l the agreements in this high range. However, for loan amounts of less than $15,000, there was a substantial difference. In this range, there were 24.7* of a l l mortgages and 29.4* of a l l agreements. Therefore, i t could be concluded that, over the whole sample, agreements were less concentrated around the mean than are mortgages. At the lower end especially, agreements tended to be distributed in larger numbers. There was a significant difference between mortgages and agree-ments with respect to the size of the periodic monthly payment. For the total sample, the payments were 5.4* greater for agreements than for ( 69 ) mortgages (see Table Thirteen), Within the four areas, the variation in the average monthly payment was quite considerable. Vancouver, which accounted for the vast majority of the total sample, had an average monthly payment for agreements exceeding that for mortgages by 11,7*. For the Municipality of West Vancouver, the monthly pay-ment for the mortgage exceeded that for the agreement. The difference was only marginal for the District of North Vancouver but for the City of North Vancouver i t amounted to 6.4* Between the four sample areas, there was a tremendous variation in the standard deviation of the means. In Vancouver the agreements exceeded the mortgages by $48.00, but for a l l three North Shore areas the standard deviation of the mean monthly payment for mortgages was greater than that for agreements. For the total sample, agreements had a standard deviation which was $34.00 greater than that for mort-gages. With such a wide difference, the distribution for agreements was vastly less concentrated than that for mortgages. As can be seen on Graph I, the modes for both mortgages and -agreements were in exactly the same range. In addition, the medians coincided exactly in that range for both. However, as already pointed out, the distribution for agreements was considerably less concentrated than that for mortgages. At the extremes, both agreements and mort-gages were similarly distributed. For a monthly payment of less than $125,00, 2.9* of a l l agreements and 4.2* of a l l mortgages were in this range. Twenty-two and four-tenths percent of a l l agreements and 21.4* of a l l mortgages had monthly payments that exceeded $225.00, The differences in distributions were in the areas that were close to the means. This can be observed very clearly on Graph I. In the range ( T O ) ( 71 ) of S100.00 to $175.00 per month, mortgages predominated quite strongly while in the range of $175.00 to $225.00 per month, agreements pre-dominated . The following section w i l l attempt to summarize a l l the st a t i s t i c s discussed i n the previous paragraphs about means, standard deviations, and distributions. In the total sample of agreements and mortgages, the average loan-to-value ratio tended to be higher in property trans-actions involving agreements than in mortgages. However, the mortgages tended to be much less concentrated around the mean. In addition, agree-ments were distributed in larger numbers i n the range of the higher loan-to-value ratios while more mortgages than agreements had low-value loan-to-value ratios. Average interest rates were lower for agree-ments (by almost 1.00%) than for mortgages. From the calculated stan-dard deviations, interest rates on agreements tended to spread out more, while for mortgages they tended to be concentrated. In addition, agree-ments had a larger proportion of low rates and mortgages had a larger proportion of high rates. The length of the term was almost four years shorter for agreements than for mortgages. Once again they tended to be less concentrated amongst the agreements. The average sale price was $4,000 lower for agreements. Agreements had a higher concentration of sale prices in the low ranges and conversely, mortgages were in r e l -atively large numbers in the high sales price ranges. The average mort-gage loan amount was very similar to that of the agreements. Further, their standard deviations and distributions were also very much alike. Only at the lower end was there a significant difference. The agree-ments were in relatively larger numbers in the lower range than were mortgages. On the whole, the average monthly payment for agreements ( 72 ) tended to be approximately $10.00 greater in value than for mortgages. The agreements had a much wider spread than did mortgages (the standard deviation was greater by $33»44). They were also much more heavily spread at the higher ranges while mortgages were distributed in larger numbers at the lower ranges. By isolating each of the four sample areas some very interesting results were found. With the vast domination of the City of Vancouver's sample (53.°% of a l l mortgages sampled and 80.1% of a l l agreements sampled), i t s individual s t a t i s t i c s were extremely significant. As would be expected, the means of the terms for the mortgages and agree-ments issued in the City of Vancouver a l l bore a very close relation-ship to the results for the total sample. The absolute magnitude of the means were marginally different but relatively speaking they were equivalent. The results in total were, however, consistently lower in value than the other three areas and than the total sample. This was probably the effect of the east of Main Street area where incomes and property values tended to be lower. The City of North Vancouver results were significant in two areas. Compared to the total sample, the houses which were financed with agree-ments had especially low sales prices. In addition, there was trem-endous variation of the standard deviations of the six terms between agreements and mortgages. Only the length of the term had a lik e dev-iation. In the other five categories the standard deviation of the mortgage means were at least twice as large as those for the agreements. Relative to the other three sample areas and to the total sample, the District of North Vancouver had three substantially different s t a t i s t i c s . Its loan-to-value ratios for agreements and mortgages were ( 73 ) significantly higher. The average interest rate and average terms for an agreement issued in the District of North Vancouver were both sub-stantially higher than the results for the total sample of agreements. The results for West Vancouver were generally in line with the differences that prevailed in the total sample. The major divergence, of course, centered on the dollar values fo the average sales price, the loan amount, and the monthly payment. They a l l tended to be substantially higher than the other three areas by approximately 25 to 30 percent. The term for agreements was sl i g h t l y higher than that for mortgages which was the converse of the result for the total sample. Both the interest rate and the loan-to-value ratio followed the results of the total sample. ( 74 ) DERIVED REGRESSION EQUATIONS This section w i l l deal with the regression equations that were calculated for certain perscribed relationships that seemed to be important. The basic idea of this method of analysis i s to separate two variables - one is to be assumed the independent variable and the other i s to be the dependent one. A l l the observations for each of the two variables are then regressed with the help of a computer, so that an equation relating the two variables i s derived. In most situations an equation can be computed. But how sta-t i s t i c a l l y significant i s i t ? Measures of i t s s t a t i s t i c a l significance were also calculated and were included as part of the computer output. It was decided that any relationship which had a probability of less than 0 .050 , (F Probability Level), that the derived equation was random, was considered to be s t a t i s t i c a l l y significant. On this basis, the computed equations for both agreements and mortgages were analyzed. Loan-to-value was equated with the sales price of a property. The relationship for both the agreements and the mortgages were found to be significant on the basis of the FPROB LEVEL. As can be seen on the accompanying graph (Graph j ) , both relationships are inversely proportional. Both equations were very similar except that the mortgage one had a 55»4* steeper slope than the one for agreements. This meant that as the sales price increased, the loan-to-value ratio was l i k e l y to f a l l faster for mortgages than for agreements. For example, a property valued at $23,000 would have the same loan-to-value ratio however the transaction was financed, while at a value of $54,000 one could obtain 66% and 58% financing under an agree-ment and a mortgage respectively. ( 77 ) Loan-to-value was regressed with outstanding principal to ascertain i f lendors (vendors or mortgagees) tried to reduce their relative risk as the debt increased. The derived equations for agreements and mort-gages were both significant. In both situations (see Graph K) the loan-to-value ratio was directly proportional to the outstanding principal. Not only was the steepness of the slope vastly different for agreements and for mortgages by a factor of two but also the derived constants had a very large gap in value. It amounted to a y*.k% difference. Basically, the equations meant that with the same increase in the outstanding principal, the loan-to-value ratio on a mortgage was l i k e l y to increase faster than on an agreement. Further, beyond the $26,000 level, the loan-to-value ratio on a mortgage would exceed that on an agreement. Below this level an agreement was l i k e l y to have more financing relative to the amount of equity. The length of the term of each financing contract was equated to the loan-to-value ratio for that transaction, to ascertain i f the amortization period was reduced as the relative risk incurred by the lendor increased. The derived equations for agreements and for mortgages were both found to be s t a t i s t i c a l l y significant. In both relationships, the dependent variable was directly proportional to the independent one. The mortgage constant (see Graph L) was 124% greater than the one for agreements and the velocity of the slope for agreements was 300% greater than the slope of the graph for mortgages. This meant that as the loan-to-value ratio increasd on any particular financing transaction, the term would be higher in an absolute sense for the mortgage but the rate at which the term would increase as the ratio climbed would be greater for agreements. ( 80 ) The monthly payment owing on an agreement or on a mortgage was regressed with the outstanding p r i n c i p a l on the f i n a n c i a l transaction. For both means of finance the derived equations were s i g n i f i c a n t . Both equations were very s i m i l a r . Their slopes were within 2.0% of each other. The constants applicable to each equation varied considerably. The constant f o r the mortgage equation exceeded by 83.0% the constant f o r the agreement equation. B a s i c a l l y , both equations state that as the outstanding p r i n c i p a l increases, the monthly payments increase r e l a t i v e l y . At the $10,000 l e v e l of debt the monthly payment f o r an agreement was $120.99 and f o r a mortgage i s $103.85 while at the $50,000 l e v e l , i t was $4-38.19 and $428.25> respectively. From these i l l u s t r a t i o n s the r e l a t i v e rates of the slopes are evident. The rate of increase f o r mortgage periodic payments was fa s t e r than that f o r agreements. Interest rates were equated to sales price. The derived equations f o r agreements and f o r mortgages were not s t a t i s t i c a l l y s i g n i f i c a n t . The F - p r o b a b i l i t i e s were i n both cases too large. In other words too many of the observations inputed were randomly related. I t can be con-cluded from t h i s that there was no s o l i d relationship between interest rates and sales prices f o r either form of finance. Interest rates were also regressed against the outstanding p r i n c i p a l . In t h i s case, only the re l a t i o n s h i p computed f o r the mortgages was s i g n i f i c a n t . As can be observed on Graph N, the interest rates on mortgages were inversely proportional to the outstanding p r i n c i p a l while f o r agreements no relationship existed between the two variables. As the outstanding p r i n c i p a l on a mortgage increases, the interest rate decreased. However, f o r an agreement no determining relationship was found connecting these two variables. ( 83 ) When interest rates were related to the length of the term the two resulting equations were basically opposite to each other. For the agreements interest rates were directly proportional to the term, how-ever, for the mortgages, interest rates varied inversely to the term. This i s graphically displayed on Graph 0, Basically, this equation stated that as the term increases, the interest rate on a mortgage would decrease and on an agreement increase. In fact, for a term of ten years, the interest rate for a mortgage would be 10,904% and for an agreement would be 8.784% while for a term of 35 years, i t would be 8.50% and 9.359%, respectively. The relationship of interest rates to loan-to-value ratios was computed. No s t a t i s t i c a l l y significant regression equation could be derived for agreements, A significant inverse relationship between interest rates and loan-to-value ratios was derived for mortgages. It was found that as the loan-to-value ratio increased on a mortgage, the interest rate applicable decreased. For agreements, no s t a t i s t i c a l l y measurable effect on interest rates could be found with an increase in the rat i o . In addition, interest rates were regressed against monthly payments, terms, and loan-to-value ratios. Only the relationship for mortgages proved to be significant in t o t a l . The equation computed was as follows: I = 12.123 - 0.74 x 10~ 3 (K.P.) - 0.084 (T) - 0.00514 (L This i s basically an inverse relationship - as the monthly payments rise the terms increase and loan-to-values increase, the interest rates on the mortgage decrease. A l l three independent variables, in comb-ination, had no effect on the interest rate of the agreement. ( 85 ) Finally, a ratio of the monthly payment and the outstanding prin-cipal was computed. This ratio was then regressed as the independent variable against the interest rates which were the dependent variables. S t a t i s t i c a l l y , only the equation drawn for the mortgages was significant. No relationship was found which could be s t a t i s t i c a l l y derived and substantiated. The equation computed for the mortgages was as follows: I - 9.172 + 66.33 (M.P./O.P.) This basically states that as either the monthly payment increased or the outstanding principal decreased, the applicable interest rate would r i s e . To understand the relationships inter-connecting the terms of agreements and mortgages, each set of regression equations could not be considered i n isolation. The s t a t i s t i c a l significance of an equation or lack of i t and the relative variables of the equations a l l were important in understanding both means of residential finance. The f i r s t conclusion to be drawn i s that sales price i s an insig-nificant variable in determining the applicable interest rate on either an agreement or mortgage. If the interest rate was part i a l l y a measure of r i s k , the size of sales price could be directly translated into a factor; these probably dwell on the person borrowing - his character and financial collateral. Continuing this discussion of interest rates, i t i s important to note that only one regression employing interest rates as a dependent variable was significant for agreements. A l l the others proved to be s t a t i s t i c a l l y insignificant. Yet, in every equation (exception already discussed) derived for mortgages involving interest rates, the relation-ship was significant. Every regression involving outstanding principal, loan-to-value ratio and monthly payment was s t a t i s t i c a l l y insignificant ( 86 ) for agreements and significant for mortgages. Interest rates in bus-iness usually are a measure of risk indirectly. The greater the risk, the higher the interest rate and vica versa for a lower risk. On this basis, i t follows that the regression equations derived for the mort-gages were significant. The mortgagees which, in the vast majority of cases,were financial institutions such as credit unions, banks, mort-gage companies, or l i f e insurance companies are profit making ventures. Their livelihood depends on the interest payment received for each mortgage. Therefore, risk as created by the terms, payments, the loan-to-value ratio, the term, etc., i s measured in terms of an interest rate charged. On the other hand, the vendor i n a sale transaction involving an agreement i s relatively unsophisticated i n measuring the risk applicable to the sale and the financial terms and i s probably not consciously profit maximizing. He merely wants to f a c i l i t a t e the sale i n as short a time as possible, hence, the lack of s t a t i s t i c a l significance i n those regression equations involving interest rates. However, there i s one set of equations which were significant for agreements and mortgages and both involve interest rates as dependent variables. This i s the relationship of the interest rate to the length of the term. It i s very interesting because the equation applicable to mortgages varied inversely, while the equation for agreements implied that i f the term was lengthened then a larger proportion of each monthly payment had to be allocated to the interest charge. This was assuming that the schedule and size of monthly payments was set. Since the outstanding principal was constant once agreed upon, then given a longer time to amortize the debt, a larger proportion of each periodic payment had to be allocated to the interest payment. On the other hand, ( 8? ) the equation for mortgages implied that i f the term was lengthened then the interest rates charged decreased. The only reason that could be deduced by the author was that the mortgagees had very long-term comm-ittments, so that, they preferred to have their income generating projects on the same time-horizon. This would be the case for trust companies and l i f e insurance companies. The other reason stemmed from the recent introduction of the five-year c a l l provision which permits a mortgagee not to be concerned about the future beyond five years because the interest rates can be adjusted to future market conditions. It i s interesting to note that the relationship of the term to the loan-to-value ratio for both agreements and mortgages was very similar. The terms were directly proportional to the ratio. This, of course, followed because as the debt increased i t would seem very plausible that the term would increase. In addition, the inverse relationship of interest rates to loan-to-value ratio stated that the greater the relative amount of debt, the smaller was the interest rate. If both these two relationships just described in this paragraph were combined for mortgages, the relationship of interest rate to term as previously analyzed would result. However, this same process could not be undertaken for agree-ments because interest rates were directly proportional to the term, (rather than inversely proportional) and because the relationship of interest rates to loan-to-value ratio was s t a t i s t i c a l l y insignificant. Amongst a l l the regressions computed for agreements and mortgages there was only one equation which could really be considered to.be similar. As can be seen on Graph M, the relationship of the monthly payment to the outstanding principal for both means of finance were almost equivalent. The implications for both equations were also the ( 88 ) same as a larger outstanding debt required greater periodic (monthly) payments to amortize the principal. Of course, variations in the term and the interest rate would also affect this relationship. By comparing the relationship of loan-to-value to outstanding principal and to sales price, an interesting analysis would result. Basically, this combined set of relationships stated that as the sales price increased, the loan-to-value and similarly, the outstanding principal decreased. This implied that buyers of more expensive homes tended to have larger relative equity investments in their homes. This probably resulted from their high personal incomes. It also arose because of the effect of National Housing Act legislation which insures mortgages up to a value of $25 ,000. It permits a loan-to-value of 95-0* up to this value while the private market only allows up to a maximum of 7 5 . 0 * . Normally, the ratio i s even lower - around 7 0 . 0 * . With these institutional restrictions built into the system, a mortgagee would be reluctant to acquire higher absolute risks by permitting large outstanding principals. Coincidently, the mortgage curve on Graph K tops out at a level of $50,000 of debt at 100* loan-to-value. Similarly, as the sale price increased (see Graph j ) , the loan-to-value ratio dropped much more quickly for mortgages than for agreements. On both Graphs J and K, i t can be seen that i t was possible under an agreement to obtain more debt absolutely and relatively than i t was possible with a mortgage. ( 89 ) CHAPTER SUMMARY To understand why agreements for sale are used as a source of financing residential purchases, the institutional mortgage market must be understood. For reasons previously discussed, residential buyers i n i t i a l l y approach mortgagees to borrow funds. The mortgagees, especially the financial institutions, have quite s t r i c t c r i t e r i a which must be met before the loan i s approved. These c r i t e r i a deal with the buyer's personal income, collateral, type and security of employment quality and location of the house, and many others. If a buyer i s refused a mortgage, then to finance the purchase he has l i t t l e choice but to persuade the vendor to give an agreement. There were, of course, many reasons for refusing to give a mort-gage, however, probably the most common one was that the buyer cannot come up with an adequate down-payment. This, as verified by Table Thirteen and Graphs J and K, seemed to be one of the main reasons for using an agreement. It was s t a t i s t i c a l l y proven by the results as a l -ready set out. Agreements had on the average higher loan-to-value ratios and relatively larger outstanding principals given lower average sales prices, Further, as both sales prices and outstanding principals increased (see Graphs J and K), the loan-to-value ratios for agreements were l i k e l y to be higher than those for mortgages. In addition, the mean length of the term was shorter for agreements. It seemed that a purchaser could amortize his debt faster, so that, his equity invest-ment in the property increased faster with an agreement than with a mortgage, At the time of purchase, the financial restrictions on the buyer are relatively fixed. The sales price i s already agreed to, his down-payment i s fixed by his level of savings at that time, and his personal ( 90 ) income determines what he can afford to pay as monthly payments to-ward the interest charge and principal amortization. Given Graph H, i t seemed that within certain bounds the affordable monthly payment did vary. Euyers were wil l i n g to adjust upwards the monthly payment by as much as $18.00 per month. The only terms not established were the interest rates and the length of the term. On the basis of the regression equations derived, i t seemed that the term i s agreed to f i r s t and then, the interest rate merely f a l l s into place logically. A l l the regressions relating the interest rate on the agreements to the sales price, outstanding principal, monthly payment, and loan-to-value ratio were s t a t i s t i c a l l y insignificant. Conversely, they were, on the whole, significant for the mortgages. But the mortgage market i s known to be very interest elastic. Further-more, interest rates on agreements varied directly with the term. Similarly, the term varied proportionately to the loan-to-value ratio ( s t a t i s t i c a l l y insignificant). On the whole, the interest rate on an agreement was sensitive to only the term; a l l the other relationships were insignificant. Therefore, the logical conclusion is that the term i s agreed to f i r s t and then the interest rate logically follows, A mortgagee uses the interest rate as a direct measure of the risk inherent in loaning the funds to the borrower. The risk may be measured in terms of the level of the outstanding principal (see Graph N) of the size of the loan-to-value ratio (see Graph P), As already noted, a vendor does not measure the risk in terms of the interest rate. Rather the interest rate i s the logical result given a l l the agreed to terms. On this basis, the mortgagee would seem to be more financially sophisticated because he i s not excluding the risks inherent in the loan from the decision-making process. ( 91-) A point that should be noted about the shorter average amort-ization periods that are permitted for agreements, i s that when this s t a t i s t i c i s combined with the higher mean monthly payments and the lower average interest rates for agreements, the purchaser in absolute dollar magnitude probably paid an equivalent amount in interest pay-ments to that which he would have paid under a mortgage contract. ( 92 ) CHAPTER VII - SUMMARY AND CONCLUSIONS  Limitations and Weaknesses: Before concluding this study, the limitations and weaknesses should be summarized. F i r s t , from personal experience and observations, the Teela Market Surveys could not be considered a tot a l l y reliable source of information, especially since i t was basically an intermediary source. Its accuracy, unfortunately, could be quantified. To collect the actual data i t would be necessary to go directly to the primary source which i n this case would be the Land Registry records. The f i r s t hypothesis dealing with the state of the economy and i t s effect of the usage and terms charged for agreements could have feasibly only included a two year time horizon. To arrive at a much more accurate relationship measuring the affect of the state of the economy, a time horizon of 4 to 5 years would have been appropriate. It should have spanned at least one complete economic or business cycle. This would have permitted a more intensive analysis of the effect of the general state of the economy on agreements and mortgages (their relative usage and terms charged). As pointed out i n an earlier chapter, the socio-economic index used in this project was f i r s t l y , very one sided and secondly, very gross. It was only a measure of mean personal income per census tract. The other factors such as personal character, social class, culture, et cetera were not computed in this index. Furthermore, i t was only a mean measure. In other words, large physical areas were averaged. Any variations beyond this mean figure were ignored. It seems entirely feasible that there were families within census tracts that did not f i t the average category. The mean s t a t i s t i c should also be questioned between mortgages ( 93 ) and agreements. Any variations outside the mean were ignored. To alleviate this problem, the author endeavoured to bring into the discussion and analysis other s t a t i s t i c a l measures, such as medians, modes, d i s t r i -butions, and standard deviation. Finally, i t should be pointed out that in judging the s t a t i s t i c a l significance of the regression equations, many measures were ignored. Probably, the most important one was the R-square computation. Only the F-probability was used because the derived equations were not going to be used to project into the future. They were merely u t i l i z e d as another means of comparing agreements and mortgages. The absolute accuracy of the f i t of each derived regression equations was unimportant. The significant point was the relative accuracy; that i s , was the equation derived for agreements s t a t i s t i c a l l y more significant than i t was for mortgages? On such a basis, the two sources of residential finance could have been compared. ( 94 ) SUMMARY OF RESULTS Hypothesis; That during a period of economic recession, agree-ments for sale are more prevalent than during a period of expansion in the economy. Unfortunately, in Chapter Four i t was not possible to derive a direct relationship between the level of the economy and the usage of agreements. In other words, an equation explaining the connection between the two could not be derived quantitativley. To circumvent this deficiency, a relationship was derived by inference. This means that the changes i n the economy and the changes that the usage of agree-ments separately underwent were subjectively related, so that the inter-connection could be drawn. On this basis i t was concluded that the level of the economy on a national as well as on a lo c a l scale did affect the usage of agreements. In 1970 when the economy was in the midst of a recession, the ratio of the number of agreements given to the tot a l number of residential sales transacted was substantially higher than i n 1971 when the economy was well into the recovery stage. In 1970 there were relatively more-agreements given than in 1971. Similarly, the terms charged in 1970 were harsher than those in 1971, This result applied to agreements and mortgages. For both agree-ments and mortgages, interest rates and the length of the terms tended to be lower while loan-to-value ratios tended to be higher in 1971 than in 1970. During a time of expansion in the economy, the relative usage of agreements tended to decrease and the terms charge would have been relaxed, so that more money could be borrowed and at a lower interest rate. ( 9 5 ) Conversely, during a time of economic recession, relatively more agreement would be issued but at much s t i f f e r terms requiring larger down-payments and higher interest rates, and shorter terms. Hypothesis: That a person with a low socio-economic index i s more l i k e l y to finance his residential purchase with an agreement than i s a person with a medium or high socio-economic index and that the low index purchaser i s l i k e l y to obtain more favourable terms with an agree-ment than with a mortgage. Once again i n Chapter Five the relationship between the soci-economic index of the buyer and the usage of agreements could only be derived by inference, that i s , an equation relating the two variables could not be computed. However, i t was possible to categorize the number of agreements and their average terms by socio-economic level. Persons and families with a low socio-economic index were more l i k e l y to use agreements than were persons with a medium or high index rating. In addition, the low index group tended to have easier terms than the medium or high socio-economic group, that is,the length of the terms were longer, the interest rates were higher, and the loan-to-value ratios tended to be higher. Hypothesis: That the terms on agreements for sale show a greater variation than those on mortgages and that the variation i s a direct reflection of quality differences with respect to the borrower and his financial collateral. This paper in Chapter Six undertook a comparison of the terms charged for agreements and for mortgages. I t was found that agreements had larger loan-to-value ratios than did mortgages while mortgages had higher interest rates and longer terms than agreements. In dollar amounts, mortgages tended to have higher sales prices while agreements ( 96 ) had greater outstanding principals and monthly payments. Naturally, there was some variation amongst the four study areas: Vancouver, City of North Vancouver, District Municipality of North Vancouver, and West Vancouver. The over a l l results were mostly rep-resentative of Vancouver because i t dominated the total sample of agree-ments and mortgages used in this project. On the North Shore, the City of North Vancouver had the largest relative usage of agreements. Sig-nificantly, in West Vancouver and the District Municipality of North Vancouver, amongst those transactions involving outstanding principals of greater than $50,000, agreements tended to increase in usage relative to the sample studied. A similar result existed for these kinds of transactions for the City of Vancouver and therefore, for the total sample. ( 97 ) CONCLUSIONS The underlying purpose of this project had a two fold nature. Fi r s t , i t was to discover the number of agreements for sale being used to finance residential purposes and the terms being charged. The results of the research for this part of the project have been desc-ribed in the previous section of this chapter. The second reason for this research into agreements was to understand why they are used and how the terms are derived. The conclusions to the second purpose of this paper are partly deduced from this previous section and also from certain regression equations computed from the research data. In normal circumstances, a vendor would demand that the sale of his home be financed with a lump-sum payment covering the entire sale price. This means that the buyer had to either entirely use his own equity to finance the purchase or arrange a mortgage from an institution. The many situations that may force the use of an agreement for sale in a residential purchase were described in Chapter Two. This section w i l l only deal with those studied in the research data and computations. There were individuals who could only obtain mortgage financing in times of economic recovery or when the economy was healthy. They were seen as marginal risks who met the requirements of institutional mortgagees only when credit was not restricted. Therefore, the marginal risks in times of economic recession were forced to use agreements for sale to finance their residential purchase. This was borne out by the research data where in 1970 "when a recession did exist larger numbers of agreements were given than in 1971 when the economy was in the process of recovery. On the same basis, people and families with a low socio-economic status had a tougher time to meet the c r i t e r i a of a mortgage because ( 98 ) these institutions would translate the socio-economic index into a measure of risk. Therefore, the lower the socio-economic index, the greater was the perceived risk in the eyes of the institutional mort-gage companies. These people, hence, had a tougher time to obtain mortgage financing and many more were perceived as marginal credit risks. As a result, i t followed that a larger proportion of people with a low socio-economic index had to resort to agreements to finance their res-idential purchases. The institutions that issued mortgage money determined the terms charged in light of the sale price and the perceived risk. Accordingly, they set the interest rate charged, the down-payment owed and the monthly amounts paid. If the mortgagor did not meet these obligations, the mortgage company did not give him any credit. It seemed that most re-fusals arose because the purchaser's equity or personal annual income was too low. As a matter of fact, the loan-to-value ratios were sub-stantially higher than those for mortgages and the length of the terms were much shorter for agreements than for mortgages. From this research, the interest rate on an agreement seemed to be the last term arrived at by the vendor and the purchaser. The equity, the sales price, and the monthly payment were established almost before the transaction was completed leaving onlythe term and the interest rate to be set. In every case except one, the regression equations computed for agreements with the interest rate as the dependent variable proved to be s t a t i s t i c a l l y insignificant. Conversely, for mortgages they proved to be significant. In addition, the one equation that was significant had the term as the dependent variable. Therefore,the interest rate on an agreement seemed to be the resulting factor after a l l the other terms were determined. ( 99 ) Institutional mortgages used the interest rate on a mortgage as a measure of the risk inherent in the transaction. It seemed very r e a l i s t i c that in a credit transaction, the risk should have been measurable and should have affected the other terms charged. However, in a property sale involving an agreement for sale, the interest rate was the last term established. In other words, the element of risk in the sale and credit arrangement was ignored in an agreement. ( 100 ) IMPLICATIONS FOR FURTHER STUDY There are two obvious areas for further research and study. 3oth are suggested by the section in this chapter discussing "Limitations and Weaknesses", Fi r s t , research material should be collected for a longer time horizon, In this project, the effect of the state of the economy was measured only for two years, 1970 and 1971. The better way would be to delineate a complete business cycle i n the late 1960*s and early 1970*s. Then, for the time period of this business cycle the necessary research data would be collected. This would f a c i l i t a t e a better understanding of the effect of business conditions on residential finance. In other words, i t would be possible to see the effect of any phase of the economy. On this basis, a much more accurate analysis could be undertaken. This project has endeavoured to explain s t a t i s t i c a l l y why people use agreements for sale to finance their residential purchases. A much better and more accurate method would be to either send questionaires, or have personal interviews with people who are using or have used agree-ments. These persons or families would be directly asked why they used agreements. To complete the entire process, the vendors and i n s t i -tutional mortgagees would also have to be questioned either by mail or personally to discover their reasons for permitting the use of an agree-ment and for refusing to give a mortgage, respectively. In addition, this method would alleviate the problem connected with the use of the socio-economic index as a measure of ris k , The purchasers could be asked directly what their incomes were and what savings they had amassed. And the mortgagees could be asked the same questions about their mortgagors. This direct method is a much better way to understand why agreements are used to finance residential purchases than the one used in this study (St a t i s t i c a l Inference)„ ( 101 ) IMPLICATIONS FOR RESIDENTIAL FINANCE As a result of the analysis and study undertaken in this project, i t seems to me, as the author of this report, that the use of agreements for sale to finance residential purchases should be encouraged. Using this means of finance, i t i s possible to obtain cheaper credit (lower interest rates) and to borrow more money (higher loan-to-value ratios) than by giving a mortgage. By increasing the use of agreements, some of the pressure i s taken off the institutional mortgagees to provide funds to the resid-ential market. The entire market mechanism i s diversified. There i s much less reliance oh a few mortgagees, A very feasible way to encourage the use of agreements i s for an insurance scheme to be provided for vendors who have accepted agreements in l i e u of a lump-sum purchase payment via a mortgage company. This would be very similar to the one that exists today under the Federal Government sponsored National Housing Act insured mortgages. This insurance would reduce the vendor's risk in case of default and hope-f u l l y , would encourage the use of agreements to finance residential purchases. ( 102 ) BIBLIOGRAPHY A. Anger, H.D. and Honsberger, J.D., Canadian Law Of Real Property, Canada Law Book Company, Toronto, 1959t B. -Canadian Abridgement, Burroughs and Company (Easter) Ltd., Toronto, 1943, Vol. 32. C. Cheshire, G.C., The Modern Law of Real Property, Butterworths, London, 19^2, 9th Edition. D. Committee On The Working Of The Monetary System, "The Influence Of Monetary Measures," in J.P. Cairns and H.H. Binhammer, Canadian  Banking And Monetary Policy, McGraw-Hill, Toronto, 1965. E. D.B.S., Employment Indexes and Average Weekly Wages And Salaries, Queen's Printer, Ottawa, No. 8003-512, A p r i l , 1966. F. Hellyer, Paul, Task Force On Housing and Urban Development, Queen's Printer, Ottawa, January, 1969. G. Land Registry Act, R.S.B.C. I960, Ch. 208, Queen's Printer. Victoria. H. Maisel, S.J., Financing Real Estate, McGraw-Hill, Toronto, I 9 6 5 . I. Marriott, A.S., The Practice in Mortgage Actions in Ontario, Carswell Company, Toronto, 3rd Edition, 1971. J, Officer, L.H. and Smith, L.B."Stabilization Policy In The Post-War Period, " In L.H. Officer and L.B. Smith, Canadian Economic Problems  And Prospects, McGraw-Hill, Toronto, 1970. K. Rat c l i f f , R.U., Real Estate Analysis, McGraw-Hill, Toronto, 1961. L, Semenow, R.W., Questions and Answers on Real Estate, Prentice-Hall, Englewood, New Jersey, 1961, 4th Edition. M. Simmons, J.W., "Voting Behaviour and Socio-Economic Characteristics, The Middlesex East Federal Elections, 1965" Canadian Journal of  Economics and P o l i t i c a l Science, Vol., XXXIII, August, 1967. N, Statistics Canada, Bm-ployment Earnings and Hours, Queen's Printer, Ottawa, No. 72-002, November, 1971. 0, Sinclair, A.M., Introduction to Real Property Law, Butterworths, Toronto, 1969. ( 103 ) APPENDIX RELATIONSHIP F(PROBABILITY) AGREEMENTS MORTGAGES  FOR SALE 1. Interest Rate vs. Sales Price 0.928? 0.3377 2. Interest Rate vs. Loan Amount 0.9160 0.00 3. Interest Rate vs, Term 0.4578 X 10" -1 0.00 4. Interest Rate vs. Loan-to-Value 0.9172 0.00 5. Loan-to-Value vs. Sales Price 0.6586 x 10" •5 0.00 6. Loan-to-Value vs. Loan Amount 0.1516 X 10" -2 0.00 7. Term vs. Loan--to-Value 0.1222 X 10" -5 0.00 8. Monthly Payment vs. Loan Amount 0.00 0.00 9. Interest Rate vs. Monthly Payment - 0.9186 0.00 Loan Amount 10, Agreement for Sale: Interest Rate vs. Monthly Payment, Term, Loan-to-Value F-Prob. Level - 0.6522, 0.0458, 0.5308 10A. Mortgage: Interest Rate vs. Monthly Payment, Term, Loan-to-Value F-Prob. Level - 0.0173, 0.00, 0,00 

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