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Purchasing power by income class within the metropolitan Vancouver market for single family dwellings Rooney, William John 1970

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PURCHASING POWER BY INCOME CLASS WITHIN THE METROPOLITAN VANCOUVER MARKET FOR SINGLE FAMILY DWELLINGS by WILLIAM JOHN ROONEY Comm., U n i v e r s i t y of B r i t i s h Columbia, 1969 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE MASTER OF BUSINESS ADMINISTRATION i n the F a c u l t y of Commerce and Business A d m i n i s t r a t i o n We accept t h i s t h e s i s as conforming to the r e q u i r e d standard THE UNIVERSITY OF BRITISH COLUMBIA May, 1970 In present ing th i s thes i s in p a r t i a l f u l f i l m e n t o f the requirements fo 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 ib ra ry sha l l make i t f r e e l y a v a i l a b l e fo r reference and study. I f u r ther agree that permiss ion for extens ive copying o f t h i s thes i s fo r s cho l a r l y purposes may be granted by the Head of my Department or by h i s representa t i ves . It i s understood that copying or p u b l i c a t i o n o f th i s thes i s f o r f i n a n c i a l gain sha l l not be allowed without my wr i t ten permiss ion. Department The Un i ve r s i t y o f B r i t i s h Columbia Vancouver 8, Canada ABSTRACT The urban market f o r detached homes, i n comparison w i t h most other commercial and i n d u s t r i a l markets, i s h i g h l y d e c e n t r a l i z e d . T y p i c a l l y , no s i n g l e f i r m c o n t r o l s more than a s m a l l p o r t i o n of the t o t a l market. Therefore t y p i c a l f i r m s w i t h i n the market possess n e i t h e r the resources nor the m o t i v a t i o n necessary f o r the undertaking of e x t e n s i v e market s t u d i e s . The r e s u l t i s th a t e m p i r i c a l d e s c r i p t i v e data r e l a t i n g to these markets i s almost t o t a l l y l a c k i n g . M e t r o p o l i t a n Vancouver i s no e x c e p t i o n to t h i s g e n e r a l p a t t e r n . This study i s designed to f u r n i s h e m p i r i c a l data r e l a t i n g to the M e t r o p o l i t a n Vancouver market f o r detached d w e l l i n g s . H o p e f u l l y , the a n a l y s i s contained h e r e i n w i l l permit some i n s i g h t i n t o the above market. i TABLE OF CONTENTS CHAPTER Page Preface i i L i s t of Tables v L i s t of I l l u s t r a t i o n s v i i I n t r o d u c t i o n . 1 I . M.L.S. Sales and T o t a l Market Sales 5 I I . The M e t r o p o l i t a n Vancouver Housing Supply 28 I I I . Income Requirements f o r Home Purchase 44 IV. P o l i c y Recommendations 65 Appendix I 90 Conclusions 97 Glossary o f A b b r e v i a t i o n s 98 B i b l i o g r a p h y 99 PREFACE Table 1 r e v e a l s t h a t , d u r i n g the 15 year p e r i o d 1951-66, < M e t r o p o l i t a n Vancouver experienced an annual p o p u l a t i o n growth r a t e which exceeded by 50 percent the n a t i o n a l average. Urban areas which experience d i f f e r e n t i a l l y r a p i d r a t e s of p o p u l a t i o n growth a l s o e x p e r i e n c e , c e t e r i s p a r i b u s , d i f f e r e n t i a l l y heavy housing demand. This heavy demand i s however, exerted upon a r e l a t i v e l y f i x e d housing supply. The r e s u l t , at l e a s t i n the short r u n , i s that r a p i d l y growing urban areas are charac-t e r i z e d by r e l a t i v e l y h i g h housing p r i c e s . Given a p e r s i s t e n t l y r a p i d r a t e of p o p u l a t i o n i n c r e a s e , such as t h a t c h a r a c t e r i z i n g M e t r o p o l i t a n Vancouver d u r i n g the past 20 y e a r s , these " s h o r t r u n " p r i c e l e v e l s assume an aura of permanence. R e l a t i v e l y h i g h housing p r i c e s are not, i n themselves, s i g n i f i c a n t . More important i s the f a c t t h a t , although a l l urban d w e l l e r s r e q u i r e accommodation, a l l may not possess incomes adequate to meet the h i g h s h e l t e r costs induced by r a p i d r a t e s of p o p u l a t i o n i n c r e a s e . One reason f o r t h i s study i s t h e r e f o r e to determine i f the c u r r e n t v a l u e p r o f i l e o f detached d w e l l i n g s w i t h i n M e t r o p o l i t a n Vancouver i s such t h a t the popu-l a t i o n could e f f e c t home purchase under c u r r e n t market c o n d i t i o n s . The q u a l i t y of housing determines to a l a r g e degree the p h y s i c a l and mental w e l f a r e of those occupying that housing. I t i s t h e r e f o r e c l e a r t h a t housing q u a l i t y i s of paramount importance. However, "housing q u a l i t y " i s an inexact term. Consequently "housing q u a l i t y " i s extremely i i i Table 1 RATES OF POPULATION INCREASE 1951-66 SELECTED METROPOLITAN AREAS AND CANADA Vancouver Winnipeg H a l i f a x Canada 1951 530,728 354,069 133,931 14,009,429 1956 665,017 409,121 164,200 16,080,791 1961 790,165 475,989 183,946 18,238,247 1966 892,286 508,759 198,193 20,014,880 Average Annual Increase 24,104 10,312 4,284 400,297 Average Annual Rate of 4.5% 3.0% 3.2% 2.9% Increase Sources: Canada, Dominion Bureau of S t a t i s t i c s , Census of Canada  Populat ion and Housing C h a r a c t e r i s t i c s by Census T r a c t . Ottawa: The Queen's P r i n t e r ( for the years and metropo l i tan areas i nd i ca ted above) . Canada, Dominion Bureau of S t a t i s t i c s , Canada Year Book 1969 . Ottawa: The Queen's P r i n t e r , 1969. p. 155. d i f f i c u l t to measure. R e g r e t t a b l y , cost c o n s i d e r a t i o n s precluded an i n v e s t i g a t i o n i n t o the q u a l i t y of the M e t r o p o l i t a n Vancouver housing supply being undertaken during t h i s study. Another important l i m i t i n g f a c t o r i s the l a c k of c u r r e n t adequate f a m i l y income data p e r t a i n i n g to M e t r o p o l i t a n Vancouver. Estimates of p o t e n t i a l housing demand were, as a consequence, based upon i n d i r e c t evidence. Although the absence of income data was r e g r e t t a b l e , t h i s l a c k d i d not v i t i a t e the c o n c l u s i o n s drawn. The w r i t e r wishes to express h i s g r a t i t u d e to P r o f e s s o r S. W. Hamilton of the U n i v e r s i t y of B r i t i s h Columbia f o r the many p e r c e p t i v e comments which he o f f e r e d d u r i n g the p r e p a r a t i o n of t h i s study. V LIST OF TABLES TABLE Page 1 Rates of P o p u l a t i o n Increase 1951-66: S e l e c t e d M e t r o p o l i t a n Areas and Canada i i i .2 Comparison of Market Coverage of M.L.S. and T .M.S . Data 11 3 Frequency D i s t r i b u t i o n : T.M.S. Data 13 4 Frequency D i s t r i b u t i o n : M.L.S. Data 15 5 R e l a t i v e Frequency D i s t r i b u t i o n : T.M.S. Data ( H o r i z o n t a l Percentage) 16 6. R e l a t i v e Frequency D i s t r i b u t i o n : M.L.S. Data ( H o r i z o n t a l Percentage) 17 7 Comparative S t a t i s t i c s : T.M.S. and M.L.S. Data 23 8 Estimated S i n g l e Family D w e l l i n g Stock W i t h i n M e t r o p o l i t a n Vancouver, by M u n i c i p a l i t y 30 9 Sample Sales Frequency D i s t r i b u t i o n by Area 31 10 R e l a t i v e Sales Frequency D i s t r i b u t i o n by Area 33 11 R e s i d e n t i a l Property Value P r o f i l e : M e t r o p o l i t a n Vancouver, ( u n i t s ) 34 12 Estimated S i n g l e Family Housing Turnover Rate: M e t r o p o l i t a n Vancouver 37 13 M e t r o p o l i t a n Vancouver Housing Supply: Annual Flow Concept 39 14 Maximum N.H.A. Insured Mortgage Loans: by Prope r t y Value and Property Type 51 15 Monthly Payments to Amortize a Mortgage of $11,600*.... 52 15(a) Annual Income Required to S e r v i c e a Mortgage of $11,600 52 16 Monthly Payments to Amortize a Mortgage of $15,400* ... 53 16(a) Annual Income Required to S e r v i c e a Mortgage of $15,400 53 L i s t of Tables (Con't) Table Page 17 Monthly Payments to Amortize a Mortgage of $17,800*.... 54 17(a) Annual Income Required to S e r v i c e a Mortgage of $17,800 54 18 Monthly Payments to Amortize a Mortgage of $18,000*.... 55 18(a) Annual Income Required to S e r v i c e a Mortgage of $18,000 55 19 Monthly Payments to Amortize a .Mortgage of $20,000*.... 56 19(a) Annual Income Required to S e r v i c e a Mortgage of $20,000 56 20 Schedule of Monthly A m o r t i z a t i o n Costs per $1,000 Borrowed 71 21 Home Purchasing Power by Income Class 72 22 R e l a t i v e A b i l i t y of Low Income F a m i l i e s to Purchase A v a i l a b l e Inexpensive Housing Under Proposed P l a n , Given Current P r i c e s 76 23 D i s t r i b u t i o n o f Non-Farm F a m i l i e s by Income C l a s s , • Canada 91 24 D i s t r i b u t i o n o f Non-Farm Family Income Before Tax 93 25 D i s t r i b u t i o n o f Family Disposable Income, M e t r o p o l i t a n Vancouver 1969 (Percentage) 95 Tables 15-19 i n c l u s i v e c o n t a i n the monthly a m o r t i z a t i o n payments necessary to r e t i r e a mortgage loan of the s t a t e d amount at v a r i o u s r a t e s of i n t e r e s t and f o r v a r y i n g loan terms. v i i LIST OF ILLUSTRATIONS GRAPH Page 1 Re l a t i ve Frequency D i s t r i b u t i o n s of M.L.S. and T.M.S. data: Quarter 1, 1969 ' 18A 2 Re l a t i ve Frequency D i s t r i b u t i o n s of M.L.S. and T.M.S. Data: Quarter 3, 1969 18B 3 Re l a t i ve Frequency D i s t r i b u t i o n s o f M.L.S. and T.M.S. data: Quarters 1 and 3, 1969 18C INTRODUCTION This study i s an attempt to d i s c o v e r whether the value d i s t r i b u t i o n of detached d w e l l i n g s w i t h i n M e t r o p o l i t a n Vancouver i s such that the po p u l a t i o n can e f f e c t home purchase under cur r e n t c o n d i t i o n s . I f the above i s not the case, we would expect low income f a m i l i e s , as a r e s u l t of t h e i r r e l a t i v e l y weak purchasing power, would be the most s e v e r e l y disadvantaged. In order to answer the above q u e s t i o n , i t i s o b v i o u s l y necessary to determine the c o n d i t i o n s c u r r e n t l y p r e v a i l i n g w i t h i n the M e t r o p o l i t a n Vancouver s i n g l e f a m i l y d w e l l i n g market. The M e t r o p o l i t a n Vancouver market f o r detached d w e l l i n g s i s l a r g e and d i v e r s e . Therefore the conducting of a market census i n order to determine c u r r e n t c o n d i t i o n s was r e j e c t e d as both too c o s t l y and unneces-s a r y . A r e p r e s e n t a t i v e sample of home s a l e s r a t h e r than a housing census was t h e r e f o r e used. Once the d e c i s i o n to take a sample of home s a l e s had been made, the q u e s t i o n of which data base from which to draw the s a l e s sample remained. I n i t i a l l y i t was decided to u t i l i z e m u l t i p l e l i s t i n g s a l e s data p e r t a i n i n g to M e t r o p o l i t a n Vancouver as a data base. However, i t was not p o s s i b l e to proceed w i t h a n a l y s i s u n t i l i t had been ascer-t a i n e d t h a t the s e l e c t e d data base was r e p r e s e n t a t i v e of the market from which i t was drawn. In Chapter I the r e p r e s e n t a t i v e n e s s o f m u l t i p l e l i s t i n g data i s t e s t e d . A n a l y s i s contained t h e r e i n i n d i c a t e s t h a t marked and i r r e m e d i a l biases e x i s t w i t h i n m u l t i p l e l i s t i n g d ata. Consequently i t was decided to draw the home s a l e s sample upon which t h i s study i s based from a source other than the m u l t i p l e l i s t i n g s e r v i c e . Because m u l t i p l e l i s t i n g data had been demonstrated to be bi a s e d beyond adjustment, i t was decided to draw the u n d e r l y i n g home s a l e s sample from data contained i n the Teela Market Survey, a data source which r e f l e c t e d t o t a l market a c t i v i t y . From t h i s source was drawn a property sample of 5,620 housing u n i t s which approximates the t o t a l of a l l s a l e s of detached d w e l l i n g s e f f e c t e d w i t h i n M e t r o p o l i t a n Vancouver during the f i r s t and t h i r d quarters of 1969. Chapter I I comprises an a n a l y s i s of t h i s sample. The s a l e s sample was c l a s s i f i e d both by s a l e s area and by amount. From t h i s c l a s s i f i c a t i o n a sample s a l e s frequency was c o n s t r u c t e d . This sample s a l e s frequency was then converted to a r e l a t i v e sample s a l e s frequency by area and by value c l a s s . Next, the cu r r e n t M e t r o p o l i t a n Vancouver detached housing stock by area was estimated. Through comparison of the above stock estimate w i t h the r e l a t i v e sample s a l e s frequency by area and value c l a s s , a valu e p r o f i l e of r e s i d e n t i a l property w i t h i n M e t r o p o l i t a n Vancouver was c o n s t r u c t e d . F i n a l l y , both the magnitude of the annual detached housing flow w i t h i n M e t r o p o l i t a n Vancouver and the M e t r o p o l i t a n Vancouver detached housing turnover r a t e was est i m a t e d . The a n a l y s i s c a r r i e d out i n Chapter I I i l l u m i n a t e d the c o n d i t i o n s c u r r e n t l y p r e v a i l i n g w i t h i n the M e t r o p o l i t a n Vancouver market f o r detached d w e l l i n g s . However, i n order to a s c e r t a i n the purchasing power of t y p i c a l f a m i l i e s w i t h i n t h i s market, an a n a l y s i s of c u r r e n t home f i n a n c i n g c o n d i t i o n s was a l s o necessary. Due to a l a c k of cu r r e n t adequate f a m i l y income data p e r t a i n i n g to M e t r o p o l i t a n Vancouver, the home purchasing power of the f a m i l i e s w i t h i n the m e t r o p o l i s could not, however, be d i r e c t l y measured. Chapter I I I , by a p p l y i n g the cu r r e n t N.H.A. mortgage f i n a n c i n g r e g u l a t i o n s p e r t a i n i n g to e x i s t i n g p r o p e r t i e s to the M e t r o p o l i t a n Vancouver property v a l u e p r o f i l e d e r i v e d i n Chapter I I , makes e x p l i c i t the income r e q u i r e d f o r the purchase of the l e a s t expensive housing u n i t s c u r r e n t l y a v a i l a b l e . As s t a t e d p r e v i o u s l y , adequate c u r r e n t f a m i l y income data per-t a i n i n g to M e t r o p o l i t a n Vancouver does not e x i s t . However, i n Appendix I , the a v a i l a b l e income data are presented. Although these data are f a r from adequate, when analysed and compared w i t h the home purchase income requirements d e r i v e d i n Chapter I I I , they i n d i c a t e that low income f a m i l i e s cannot purchase standard detached d w e l l i n g s w i t h i n M e t r o p o l i t a n Vancouver under c u r r e n t market c o n d i t i o n s . Chapter IV comprises a f i n a n c i n g scheme under which home purchase by low income f a m i l i e s would be f a c i l i t a t e d through the g r a n t i n g of an i n t e r e s t s u b s i d y . Contemporaneously, Chapter IV proposes a r a d i c a l change i n p u b l i c p o l i c y w i t h r e s p e c t to the approval of N.H.A. insu r e d mortgage loan a p p l i c a t i o n s . This change i n v o l v e s the establishment of an income c e i l i n g above which mortgage a p p l i c a n t s would be i n e l i g i b l e f o r N.H.A. insured mortgage f i n a n c i n g . Subsequent to t h i s proposed change i t i s expected that the b e n e f i t s of N.H.A. insu r e d mortgage f i n a n c i n g , which c u r r e n t l y accrue to middle and upper income groups, would be r e d i r e c t e d to p r o s p e c t i v e low income home purchasers. Due to a l a c k of adequate income dat a , a r e l i a b l e estimate of the subsidy cost of t h i s f i n a n c i n g scheme was imp o s s i b l e to d e r i v e . However, other problems l i k e l y to be induced by the implementation of the proposed home f i n a n c i n g subsudy scheme are di s c u s s e d at c o n s i d e r a b l e l e n g t h . CHAPTER I M.L.S. SALES AND TOTAL MARKET SALES I n t r o d u c t ion In order to estimate the number of "low income" housing u n i t s i n M e t r o p o l i t a n Vancouver, i t i s necessary to f i r s t c o n s t r u c t a housing v a l u e p r o f i l e . Of n e c e s s i t y , t h i s value p r o f i l e must be based upon the e x i s t i n g housing stock or some proxy f o r th a t s t o c k . E x c e s s i v e cost precluded the t a k i n g of a M e t r o p o l i t a n Vancouver housing census, there-f o r e s e l e c t i o n of a s u i t a b l e housing stock proxy i s necessary. M e t r o p o l i t a n Vancouver i s served by a m u l t i p l e l i s t i n g s e r v i c e ( m . l . s . ) . This s e r v i c e i s extended by the r e a l e s t a t e boards of Greater Vancouver and the County of New Westminster. At f i r s t g l a n c e , m.l.s. seemed the i d e a l housing stock proxy f o r the f o l l o w i n g reasons: a) Data, because they were c o l l e c t e d and t a b u l a t e d by c e n t r a l a gencies, were extremely easy to c o l l e c t . As a consequence, data c o l l e c t i o n c o s t s were low. b) The m.l.s. coverage was s p a t i a l l y comprehensive, a l l areas o f the m e t r o p o l i s , as d e f i n e d , being i n c l u d e d . c) The i n f o r m a t i o n content of i n d i v i d u a l l i s t i n g s was h i g h . In a d d i t i o n to property s a l e s p r i c e , each l i s t i n g gave a complete d e s c r i p t i o n , l e g a l and p h y s i c a l , of the property being s o l d . Notwithstanding the above advantages, m.l.s. data could not be u t i l i z e d as a housing stock proxy u n t i l i t s i n t e r n a l c o n s i s t e n c y had been checked. Simple o b s e r v a t i o n had y i e l d e d the hypothesis that m.l.s. data over-represented p r o p e r t i e s i n the low v a l u e ranges, and under-represented more expensive p r o p e r t i e s . A p o s s i b l e e x p l a n a t i o n of t h i s phenomenon a r i s e s from the r e a l e s t a t e commission s t r u c t u r e c u r r e n t l y operant w i t h i n M e t r o p o l i t a n Vancouver. At p r e s e n t , the gross s a l e s commission o b t a i n i n g i n the case of a s a l e through the m u l t i p l e l i s t i n g s e r v i c e i s 7 percent of the property s a l e s p r i c e . Of t h i s amount, 3k percent i s p a i d to the l i s t i n g agent, 3% percent to the s e l l i n g agent, w h i l e the remaining \ of 1 percent accrues to the r e l e v a n t r e a l e s t a t e board as payment f o r the use of i t s m u l t i p l e l i s t i n g s e r v i c e . In the case of an e x c l u s i v e agency s a l e , the s p e c i f i e d commission r a t e i s 5 percent of the property s a l e s p r i c e . Assuming that agent c o o p e r a t i o n occurs on an e x c l u s i v e agency l i s t i n g , the l i s t i n g agent i s p a i d 2\ per-cent, w h i l e the s e l l i n g agent i s paid the remaining 2% p e r c e n t . In t h i s i n s t a n c e , because the m u l t i p l e l i s t i n g s e r v i c e i s not u t i l i z e d , the r e a l e s t a t e board i s paid n o t h i n g . However, i n most cases, agent coop e r a t i o n on e x c l u s i v e agency l i s t i n g s i s not popular. S u p e r f i c i a l l y , there appears to be an i n c e n t i v e f o r a r e a l e s t a t e salesman to l i s t e x c l u s i v e r a t h e r than m u l t i p l e . T h e o r e t i c a l l y , he would p r e f e r a h i g h p r o b a b i l i t y of a 5 percent commission coupled w i t h a lower p r o b a b i l i t y of a 2% percent commission i n the e x c l u s i v e agency case, to a high probability of a 3% percent commission coupled with a low proba-bility of a 6% percent commission in the multiple listing case. This incentive is however more apparent than real as an exclusive listing is exclusive to the agent rather than to the salesman. In the aggregate, given the above, the typical real estate salesman prefers to l i s t multiple, that is, he prefers a high probability of a 3% percent commission coupled with a low probability of a 6^  percent commission, to an indeterminate probability of a 2\ percent or 5 percent commission. This indeterminacy arises for the following reasons: a) The listing is exclusive to the agent. Therefore, the probability of a salesman selling his own listing depends both upon the number of salesmen in the employ of his agent, and the attitude of his agent with regard to cooperation on exclusive listings. b) Although ceteris paribus, the probability of selling one's own listing is higher in the case of an exclusively as opposed to a multiple listed sale, and hence the probability of collecting both the listing and the selling commission is higher; due to the greater coverage of m.l.s., the probability of a multiple listing actually selling is greater than in the case of an exclusive listing. Given the above commission structure real estate salesmen usually press prospective vendors to l i s t their properties through the multiple listing service. Vendors of commonplace, inexpensive properties, in order to secure the wider coverage which the m.l.s. provides, usually agree. However, in the case of expensive properties, vendor resistance 8. a r i s e s f o r two reasons: a) For expensive p r o p e r t i e s a 7 percent s a l e s commission represents a h i g h s e l l i n g cost i n absolute terms. b) Because expensive p r o p e r t i e s are c l u s t e r e d i n t o s p e c i f i c areas and because some r e a l e s t a t e companies s p e c i a l i z e i n the s a l e s of expensive p r o p e r t i e s , a metropolis-wide m u l t i p l e l i s t i n g s e r v i c e i s of l i m i t e d v a l u e to a vendor of expensive housing. For the above reasons, vendors of expensive r e s i d e n t i a l p r o p e r t i e s tend to r e s i s t the salesman's suggestion t h a t they l i s t m u l t i p l e , and i n s i s t t h a t t h e i r p r o p e r t y be s o l d on an e x c l u s i v e agency b a s i s . A second cause f o r b i a s i n m.l.s. data a r i s e s from the i n f l u e n c e of p r i v a t e s a l e s . I t i s hypothesized that there would be a g r e a t e r p r o b a b i l i t y of expensive, as opposed to inexpensive homes being s o l d p r i v a t e l y f o r the f o l l o w i n g reasons: a) As noted above, expensive p r o p e r t i e s are g e o g r a p h i c a l l y c l u s t e r e d . This creates a more p e r f e c t market s i t u a t i o n than t h a t o b t a i n i n g i n the r e a l e s t a t e market at l a r g e . Hence owners of expensive-property can more e a s i l y arrange f o r the p r i v a t e s a l e of t h e i r property than could owners of more commonplace, g e o g r a p h i c a l l y d i s p e r s e d p r o p e r t i e s . b) Wealthy people tend to be b e t t e r informed and more s o p h i s t i c a t e d than the non-wealthy. Hence the wealthy are b e t t e r a b l e to t r a n s f e r property without the a i d of a r e a l e s t a t e agent. c) A commission of even 5 percent of the property s a l e s p r i c e represents a h i g h absolute s e l l i n g cost i n the case of expensive p r o p e r t y . The presence of t h i s l a r g e a b s o l u t e s e l l i n g cost c o n s t i t u t e s a d i r e c t i n c e n t i v e f o r the wealthy to t r a n s f e r p r o p e r t y by other means, which u n l i k e lower income c l a s s e s , they have at t h e i r d i s p o s a l . I f the above i s indeed the case, unadjusted m.l.s. data i s c l e a r l y i n a p p r o p r i a t e as a housing stock proxy. This chapter i s devoted to the t e s t i n g of the above h y p o t h e s i s . The T e s t i n g Technique M e t r o p o l i t a n Vancouver, i n a d d i t i o n to b e i n g served by m.l.s. i s a l s o served by the Teela Market Survey (t.m.s.). The l a t t e r s e r v i c e i s extended by a p r i v a t e company. As a data source t.m.s. has two major disadvantages: a) The i n f o r m a t i o n content i s l e s s than t h a t of m.l.s. b) The cost i s much g r e a t e r . While the c o s t of a two quarter M e t r o p o l i t a n Vancouver m.l.s. sample i s ze r o , the cost of a comparable t.m.s. sample equals $720.00.^ $720 r e f e r s to the cost of purchase of a two q u a r t e r t.m.s. data sample c o v e r i n g M e t r o p o l i t a n Vancouver. In a d d i t i o n , u n l i k e m.l.s. d a t a , t.m.s. data are not recorded on I.B.M. cards . Hence, upon c o l -l e c t i o n they r e q u i r e keypunching. Therefore, the d i f f e r e n t i a l cost a s s o c i a t e d w i t h u s i n g a two quarter t.m.s. sample r a t h e r than a comparable m.l.s. sample i s c o n s i d e r a b l y h i g h e r than $720. 10. T.M.S. however possesses one s i g n i f i c a n t advantage over m.l.s.: i t records a l l property s a l e s w i t h i n a given area d u r i n g a given p e r i o d . This i s so because the data from which t.m.s. i s compiled are drawn d i r e c t l y from evidence of property t r a n s f e r s recorded i n l o c a l land r e g i s t r y o f f i c e s . In comparison, m.l.s. i s not n e a r l y so broad i n coverage. Only p r o p e r t i e s s o l d v i a m.l.s. are recorded i n m.l.s. s t a t i s t i c s . P r o p e r t i e s s o l d e i t h e r p r i v a t e l y or on an e x c l u s i v e agency b a s i s are n e c e s s a r i l y o m i t t e d . The s i g n i f i c a n c e of the above d i f f e r e n c e i n data bases can be appr e c i a t e d by c o n s i d e r i n g t h a t w i t h i n Vancouver C i t y , North Vancouver and West Vancouver, during e i g h t weeks of the f i r s t q uarter and the e n t i r e t h i r d quarter of 1969, w h i l e t.m.s. l i s t e d 3,806 property t r a n s f e r s , m.l.s. l i s t e d o n l y 1,398 t r a n s f e r s , of 36.7 percent of the t.m.s. t o t a l . T his discrepancy i n market coverage i s c a l c u l a t e d i n Table 2. The m.l.s. s a l e s frequency was adjusted to m i r r o r the f a c t t h wh i l e an m.l.s. sample of two f u l l q uarters was taken, only 20 weeks of t.m.s. data proved o b t a i n a b l e . As mentioned above, t.m.s. i s c h a r a c t e r i z e d by comprehensive coverage. Given t h i s f a c t , i t i s by d e f i n i t i o n i m p ossible f o r t.m.s. to c o n t a i n a b i a s w i t h r e s p e c t to the valu e c l a s s of p r o p e r t i e s s o l d . T.M.S. was t h e r e f o r e s e l e c t e d as a datum ag a i n s t which the i n t e r n a l c o n s i s t e n c y of m.l.s. could be checked. For purposes of hypothesis t e s t i n g , a t.m.s. sample comprising a l l p r o p e r t i e s traded w i t h i n Vancouver C i t y , (subdivided i n t o "Vancouver E a s t " and "Vancouver West"), North Vancouver and West Vancouver d u r i n g Table 2 COMPARISON OF MARKET COVERAGE OF M.L.S. AND T.M.S. DATA Frequency of Sale by Value Range Value Range Sales Frequency M.L.S. T.M.S <$15,000 287 665 $15,000 - $17,500 236 297 $17,500 - $20,000 233 423 $20,000 - $22,500 182 293 $22,500 - $25,000 189 343 $25,000 - $27,500 132 286 $27,500 - $30,000 115 339 $30,000 - $32,500 92 223 $32,500 - $35,000 57 218 >$35,000 154 719 Total 1,677 3,806 Adjusted M.L.S. Total 1,677 x 5/6 = 1,398 Adjusted M.L.S. Market Coverage i n terms of T.M.S. coverage = 36.77« e i g h t -weeks of the f i r s t q u a r t e r , and the e n t i r e t h i r d quarter of 1969 was taken. T.M.S. data c o v e r i n g the e n t i r e f i r s t quarter of 1969 proved u n o b t a i n a b l e , hence the p a r t i a l f i r s t quarter sample. Instead of a c t u a l s a l e s p r i c e s being recorded, s a l e s p r i c e s were broken down by value range as shown i n Table 3. The frequency of s a l e w i t h i n each value range was a l s o recorded. In the case of the e i g h t middle v a l u e ranges, ($15,000-$17,500','$32,500-$35,000) i t was assumed t h a t the mean s a l e s p r i c e w i t h i n . each value range c o i n c i d e d w i t h the mid-range. The v a l i d i t y of t h i s assumption was checked on a sample b a s i s and found to be s u f f i c i e n t l y accurate f o r purposes o f value p r o f i l e c o n s t r u c t i o n . However, t h i s assumption d i d not h o l d i n the case of the extreme val u e ranges, (<$15,000, > $35,000) . A c c o r d i n g l y , a c t u a l s a l e s p r i c e s f a l l i n g i n t o e i t h e r of these c a t e g o r i e s were recorded and t h e i r a r i t h m e t i c mean computed. Aga i n , the frequency of s a l e was recorded. In a d d i t i o n to computing mean values and s a l e frequencies by value range f o r each of the four sample areas by q u a r t e r , the above parameters were a l s o computed f o r the sum of the sample areas by q u a r t e r . I t was f e l t t hat the above procedure would n e u t r a l i z e any p o s s i b l e i n t e r -area b i a s which might e x i s t i n the m.l.s. data. F i n a l l y , the d e r i v e d frequency d i s t r i b u t i o n s by area and quarter were summed to a r r i v e at a frequency d i s t r i b u t i o n f o r quarters 1 and 3 by area. I t was f e l t t hat t h i s procedure would n e u t r a l i z e any p o s s i b l e b i a s a r i s i n g from time-r e l a t e d market d i f f e r e n c e s . Table 3 summarizes the r e s u l t s of the above de s c r i b e d procedures. Table 3 /3 FREQUENCY DISTRIBUTION - T.M.S. DATA Av. P r i ce $15000 $17500 $20000 $22500 $25000 $27500 $30000 $32500 $35000 $35000 Area # > * X # x . # X # X # X # X # X # X VE 22S $11 90 89 $16.25 74 $18.75 39 $21.25 45 $23.75 35 $26.25 30 $28.75 19 $31.25 2 $33.75 8 $38.30 . VN 43 $12 6 10 " 38 " 29 II 37 II 33 43 . " 22 " 30 " 99 $47.40 NV 42 $11 1 21 ." 46 25 II 27 i t 45 •44 1 1 25 16 33 $46.90 WV 7 $10 6 1 " 4 " 5 II 2 II 6 9 7 " 6 53 $56.50 A l l 320 $11 So 121 " 162 " 98 n 111 n 119 126 73 " 54 193 $49.43 " VE 270 $12 3 136 " • 167 108 n 95 i t • 61 62 36 23 45 $41.40 VW 36 $10 0 13 41 50 II 70 t i 51 68 40 " 63 243 $54.90 NV 33 $11 1 22 " 46 33 II 52 II 48 69 " 56 55 ' •" . 100 $42.40 WV 6 $11 8 5 " 7 " 4 it 15 II 7 • 14 18 23 138 $52 .20 A l l 345 $11 93 176 261 195 n 232 II 167 213 150 164 526 $50.66 VE 498 $12.1 225 " 241 " 147 n 140 II 96 92 55 " 25 " 53 $40.90 VW 79 $11. 5 23 " 79 " 79 II 107 II 84 • " 111 " 62 93 . " 342 $52 .70 NV 75 $11. 1 43 92 58 II 79 II 93 113 " S l " 71 " 133 $43.50 WV 13 $11. 1 6 11 " 9 n 17 n 13 23 25 " 29 191 $53.30 A l l 665 $1.1. 89 297 . " 423 293 II 343 i t 286' 339 223 " 21S 719 $50.32 14. An m.l.s. sample covering the same areas as the above t.m.s. sample for quarters 1 and 3 of 1969 was taken. The m.l.s. data were processed in exactly the same fashion as in the case of t.m.s. The results are shown in Table 4. A dual comparison of t.m.s. and m.l.s. data was envisioned. The first was statistical in nature, comprising essentially the comparison of various measures of central tendency of the two data bodies. The second was graphical in nature, comprising essentially the comparison of sales distribution by value range for each of the two bodies of data. However, in order to negate the effect of the greater size of the t.m.s. sample in comparison to that of m.l.s., it was necessary to compute relative frequency distributions. This was done by first totalling a l l sales for each area in each period. The fraction of total sales which f e l l into each value range by period and area was then computed for t.m.s. and m.l.s. As in the case of the construction of absolute frequency distribu-tions, the relative frequency distribution for the sum of the sample areas by quarter was computed. In addition, the relative sales frequency by value range by area and quarter were summed to arrive at a relative frequency distribution for quarters 1 and 3 by area. This procedure was followed in the processing of both t.m.s. and m.l.s. data. The results are summarized in Tables 5 and 6 respectively. Table 4 FREQUENCY DISTRIBUTION - M.L.S. DATA \ Av. N P T i c e < $15000 $17500 $20000 $22500 $25000 $27500 $30000 $32500 $35000 >$35000 • Area .a X v X # X # X # X # X # x # X # X # X VE 108 $12 .99 94 $16.25 88 $18.75 62 $21.25 59 $23.75 18 $26.25 16 '$28.75 13 $31 .25 3 $33 .75 11 $37 .62 VW 7 $12 .86 4 16 15 n 23 " 16 " 14 " 14 II 11 II 25 $45.72 NV 13 $13 .13 14 " 26 " 22 II 30 • 11 27 36 25 II 16 II 29 $41.02 WV 1 $14.80 2 " 2 " 1 II 3 " 2 " 10 4 II 5 II 42 $49.56 A l l 129 $13 .01 114 132 100 II 115 " 63 " 76 . 56 II 35 n 107 $45.12 VE 133 $12 .80 96 67 » . 46 i t 22 " 20 11 7 " 6 II 0 II 0 0 VW 4 $11 .94 6 15 " 16 II 18 " 14 11 8 " 6 n 10 II 14 $46.25 NV 19 $13 .20 18 " 18 19 i t 30 32 23 " 19 II 9 n 15 $40.32 WV 2 $ 9 .40 2 " 1 " 1 II 4 3 " 1 " 5 II 3 n 18 $48.48 A l l 158 • -$12 7S 122 11 101 82 n 74 69 " 39 " 36 II 22 i t 47 $45.21 VE 241 $12 88 190 " 155 » 108 n 81 "" 38 23 " 19 n 3 i t 11 $37.62 VW 11 $12 52 10 31 31 II 41 30 22 " 20 II 21 II 39 $45.91 NV 32 $13 17 32 «' 44 41 n 60 " 59 " 59 44 II 25 II 44 $40.78 WV 3 $11 20 4 3 2 n 7 5 11 " 9 n> 8 i t 60 $49 .23 A l l .287 $12 88 236 " 233 " 182 n 189 " 132 115 92 n 57 i t 154 $45.14. Table 5 RELATIVE FREQUENCY DISTRIBUTION - T.M.S. DATA (HORIZONTAL PERCENTAGES) \5 AREA < $15000 $16250 $18750 $21250 $23750 $26250 $28750 $31250 $33750 >$35000 VE .40 .16 .13 .07 .08 .06 .05 .03 .00 .01 VW .11 .03 .10 .08 .10 .08 .11 .06 .08 .26 NV .13 .06 .14 .08 .08 .14 .14 .08 .05 .10 WV .07 .01 .04 .05 .02 .06 .09 .07 .06 .53 All .23 .09 .12 .07 .08 .09 .09 .05 .04 .14 VE .27 .14 .17 .10 .09 .06 .06 .04 .02 .04 VW .05 .02 .06 .07 .10 .08 .10 .06 .09 .36 NV .06 .04 .09 .06 .10 .09 .13 .11 .11 .19 WV .03 .02 .03 .02 .06 .03 .06 .07 .10 .58 All .14 .07 .11 .08 .10 .07 .09 .06 .07 .22 VE .32 ' .14 .15 .09 .09 .06 .06 .03 .02 .03 VW .07 .02 .07 .07. .10 .08 .10 .06 .09 .32 NV .09 .05 .11 .07 .09 .11 .13 .10 . .08 .16 WV - .04 .02 .03 .03 .05 .04 .07 .07 .08 .56 All .17 .08 .11 .08 .09 .07 .09 .06 .06 •19 Table 6 RELATIVE FREQUENCY DISTRIBUTION - M.L.S. DATA (HORIZONTAL PERCENTAGES) AREA <$15000 $16250 $18750 $21250 $23750 $26250 $28750 $31250 $33750 >$35000 VE .33 .24 .17 .11 .05 .05 .02 .02 .00 .00 VW .04 .05 .13 .14 .16 .13 .07 .05 .09 .13 NV .09 .09 .09 .09 .15 .16 .11 .09 .04 .07 WV .05 .05 .02 .03 .10 .07 .03 .12 .08 .45 All .21 , .16 .13 .11 .10 .09 .05 .05 .03 .06 VE .23 .20 .19 .13 .13 .04 .03 .03 .01 .02 VW .05 .03 .11 .10 .16 .11 .10 . .10 .07 .17 NV .05 .06 .11 .09 .13 .11 .15 .10 .07 .12 WV .01 .03 .03 .01 .04 .03 .14 .05 .07 .58 All .14 .12 .14 .11 .12 .07 .08 .06 .04 .12 VE .28 .22 .18 •12 .09 .04 . .03 .02 .00 .01 VW .04 .04 .12 .12 .16 .12 .09 .08 .08 .15 NV .07 .07 .10 .09 .14 .13 .13 .10 .06 .10 WV .03 .04 .03 .02 .06 .04 .10 . .08 .07 .54 All .17 .14 .14 .11 • 11 .08 .07 .05 .03 .09 18. The G r a p h i c a l Comparison As mentioned p r e v i o u s l y , a dual comparison of m.l.s. and t.m.s. data was env i s i o n e d w i t h one comparison being g r a p h i c a l i n nat u r e . In order to negate the e f f e c t of the d i f f e r e n c e i n s i z e between the m.l.s. and t.m.s. samples, i t was decided to p l o t r e l a t i v e as opposed to absolute frequency d i s t r i b u t i o n s . Such a procedure simply e n t a i l e d the p l o t t i n g of the f r a c t i o n s computed i n Tables 5 and 6. However, one t e c h n i c a l d i f f i c u l t y remained. The values to be p l o t t e d ranged i n magnitude from 0 to .58, w i t h the m a j o r i t y of the readings f a l l i n g below .10. Under these c o n d i t i o n s , use of c o n v e n t i o n a l graph paper would have r e s u l t e d i n asymmetric, undecipherable graphs. F u r t h e r , f i v e graphs were r e q u i r e d f o r each time p e r i o d examined. For the above reasons, i t was decided to sub-s t i t u t e 5 c y c l e s e m i - l o g a r i t h m i c graph paper f o r c o n v e n t i o n a l paper. To f a c i l i t a t e comparison, graphs of the r e l a t i v e frequency d i s t r i b u t i o n s of both t.m.s. and m.l.s. data f o r each area and time p e r i o d were super-imposed. R e s u l t s The f o l l o w i n g c o n c l u s i o n s can be drawn from examination of graphs 1-3: a) In the extreme low value range, ( < $15,000), the t.m.s. data has both a lower mean valu e and a hi g h e r r e l a t i v e frequency than that of the m.l.s. b) In the extreme h i g h v a l u e range, ( > $35,000), the t.m.s. data has both a higher mean valu e and a hi g h e r r e l a t i v e frequency than that fn-L.S. l l ^ Sates r i f i t g ^4eoo'>) ^ 19. of the m.l.s. c) E x c l u s i v e of the < $15,000 range, m.l.s. data has a higher r e l a t i v e frequency i n the low v a l u e ranges than does th a t of the t.m.s. This .higher r e l a t i v e frequency p e r s i s t s f o r some time as we move along the value range continuum, but e v e n t u a l l y a p o i n t i s reached at which the r e l a t i v e frequency of the m.l.s. data decreases and remains below t h a t of t.m.s. d) Although the above general p a t t e r n o b t a i n s i n a l l cases and i n a l l time p e r i o d s , s i g n i f i c a n t d i f f e r e n c e s w i t h r e s p e c t to mean values and r e l a t i v e s a l e s frequencies e x i s t between d i f f e r e n t areas w i t h i n the same time p e r i o d and between the same areas w i t h i n d i f f e r e n t time p e r i o d s . e) The magnitudes o f the above mentioned d i f f e r e n c e s appear to vary i n a random as opposed to a sy s t e m a t i c f a s h i o n . f ) Of a l l the sample areas, the g r a p h i c a l r e l a t i o n between the s a l e s frequencies of m.l.s. and t.m.s. data appeared the most e r r a t i c i n West Vancouver. Of a l l the sample areas, West Vancouver pos-sessed the s m a l l e s t number of home s a l e s and the h i g h e s t average home v a l u e . One p o s s i b l e e x p l a n a t i o n of the above mentioned e r r a t i c r e l a t i o n s h i p i s the e f f e c t of non-arms length t r a n s -2 a c t i o n s . By d e f i n i t i o n , non-arms length t r a n s a c t i o n s are arranged p r i v a t e l y . Hence they would never be recorded i n the Although d u r i n g data c o l l e c t i o n s a l e s between p a r t i e s having the same surname, and s a l e s of a s u s p i c i o u s l y low d o l l a r amount were d e l i b e r -a t e l y excluded, doubtless some non-arms l e n g t h t r a n s a c t i o n s were inad-v e r t e n t l y included i n the c o l l e c t e d d a t a . m.l.s. data. Although non-arms length transactions undoubtedly occurred in a l l other sample areas, they may have exerted an unusually powerful effect in West Vancouver due to that munici-pality's comparatively small number of home sales. The Statistical Comparison In addition to the foregoing graphical comparison, a statistical analysis, comprising essentially the comparison of various measures of central tendency of the t.m.s. and m.l.s. data,was made. Because the raw sales data had been grouped into 10 value classes, the definitions of the measures of central tendency employed differed slightly from convention. The four measures of central tendency selected were as follows: a) The Arithmetic Mean, x This statistic was defined by the following equation: The value of this statistic indicates the average property sales value within each sample area by time period and data base. The unit is Arithmetic Mean = f(x) 1 10 i=l * i f(x.> dollars. b) The Standard Deviation, vi. This statistic was defined by the following equation: Standard Deviation = 21. The value of this statistic indicates the degree of dispersion charac-terizing the associated property sales price distribution. For example, given a normal distribution, 95 percent of the values would differ by less than + 2 standard deviations from the mean value. The larger the value of the standard deviation, the more dispersed the underlying dis-tribution. The unit is again dollars. c) Alpha Three, <j-3. This statistic was defined by the following equation: ^ - 3 Alpha Three = 10 i=l.  cr 3 The value of this statistic indicates the degree of skewness charac-terizing the associated property sales price distribution. Given a perfectly symmetrical distribution, the mean, median and mode will coin-cide. Under this condition, alpha three will have a value of zero. If the value of alpha three exceeds zero we say that the underlying distri-bution is positively skewed, in our case meaning that the mean sales price exists to the left of the midrange. For values of alpha three less than zero, the distribution is said to be negatively skewed, in our case meaning that the mean sales value exists to the right of the midrange. The unit is absolute. d) Alpha Four, d* 4. This statistic is defined by the following equation: l9. - 4 i _ (X - x r f(x) Alpha Four = 10 i=l  c r 4 22. The value of this statistic indicates the degree of peakedness or kurtosis characterizing the associated property sales price distribution. Given a perfectly bell-shaped distribution, alpha four will have a value of 3. If the value of alpha four exceeds 3, the underlying distribution is said to be leptokurtic or peaked. If the value of alpha four is less than 3, the underlying distribution is said to be platykurtic or flat. The degree of "flatness" or "peakedness" of any distribution is indicated by the amount by which the value of alpha four deviates from 3. Again the unit is absolute. Values of the above statistics were computed for a l l sample areas in a l l sample periods for both the t.m.s. and the m.l.s. frequency dis-tributions. The findings are summarized in Table 7. Results. The following conclusions can be drawn from examination of Table 7. a) The x value by sample area of the t.m.s. data is consistently higher than that of the m.l.s. This supports the hypothesis that more expensive properties tend to be traded either on a private or on exclusive agency basis, rather than through a multiple fc listing service. b) The rank order of average value by sample area indicated by each data base was the same. This indicates that the tendency to trade more expensive properties either privately or on an exclusive basis is general, rather than restricted to any particular area. 23. Table 7 COMPARATIVE STATISTICS: T.M.S. AND M.L.S. DATA X 3 4 VE 17.91 6.45 .9145 3.0940 VW 29.70 11.89 .3627 1.8836 NV 25.18 9 .72 .7056 3.2283 T.M.S. WV 41.51 16.71 -.4167 1.5683 All 24.62 11.94 .9573 2.9623 VE 18.60 5.06 .6914 2.8793 VW 27.15 8.37 .8971 3.5067 M.L.S. NV 25.28 7.02 .1863 2.5705 . WV 37.89 15.80 1.6292 6.9004 Al l 21.76 8.42 1.2429 4.2970 VE 20.30 7.49 1.0264 • 3.7226 VW. 35.67 15.36 .1996 1.5475 NV 28.43 9 .05 .0290 2.2744 T.M.S . WV 41.57 13.22 -.6593 . 1.8880 .All 28.13 13.48 .6950 2.1504 VE 18.40 5.52 1.4732 5.4636 VW 28.01 10.22 .6619 2.2732 M.L.S. NV 26.21 7.92 .4177 2.4994 WV 41.73 11.59 - .9878 2.3480 Al l 24.23 9.45 .9817 3.1726 VE 19.43 7.22 1.0181 3.6987 VW 33.50 14.33 .2940 1.6501 T.M.S . NV 27 .17 9 .41 .2406 . 2.3990 WV 41.50 14.24 -.5982 1.8120 All 27.08 13.04 .7748 2.4190 VE 18.51 5.27 1.0828 4.2258 VW 27.57 9 .33 .7836 2.7917 M.L.S. NV 25.73 7.48 .3383 2.6066 WV 38.54 12.27 -.5431 1.8374 All 23.12 9.09 1.0961 3.6018 Ql c) The o value by sample area of the t.m.s. data is consistently higher than that of the m.l.s., which indicates that the t.m.s. data has the greater dispersion. This results from the fact that while the t.m.s. value continuum ranges from very inexpensive to very expensive properties, that of the m.l.s. ranges only from the very inexpensive to the moderately expensive, as noted above. d) In general, the interarea relative rankings with respect to dis-persion remained the same under both data bases. e) Generally, the cr- 3 values of the t.m.s. data more closely approached zero than did those of the m.l.s. data. This, by definition, means that the t.m.s. value distribution is more symmetrical, (or less skewed), than that of m.l.s. The above constitutes further proof that expensive properties are under-represented in the m.l.s. data. f) In the case of both data bases, while the value distributions of Vancouver East, Vancouver West, and North Vancouver were positively skewed, that of West Vancouver was negatively skewed. This is a consequence of the unusually high proportion of expensive proper-ties which exists in West Vancouver. g) The interarea relative rankings with respect to skewedness remained the same under both data bases. h) Generally, the t.m.s. Ch 4 values were lower than those of the m.l.s. data. With respect to a l l sample areas during both quarters, the amount by which 3 exceeded the average t.m.s.cj- 4 value approximated the amount by which the average m.l.s. d~ 4 value exceeded 3. This indicates that in general, t.m.s. value d i s t r i b u t i o n s are " f l a t " whereas m.l.s. value d i s t r i b u t i o n s are "peaked" f o r the same area. F u r t h e r , w i t h respect to our p a r t i c u l a r sample, the degree o f " f l a t n e s s " c h a r a c t e r i z i n g the t.m.s. v a l u e d i s t r i b u t i o n s approximated the degree of "peakedness" a s s o c i a t e d w i t h the corresponding m.l.s. d i s t r i b u t i o n s . The above i s a f u n c t i o n of the s m a l l e r v a l u e ranges a s s o c i a t e d w i t h the m.l.s. data. i ) The i n t e r a r e a r e l a t i v e rankings w i t h r e s p e c t to k u r t o s i s d i f f e r e d under each data base. Conclus ions As h y p o t h e s i z e d , the m.l.s. data were b i a s e d w i t h r e s p e c t to the va l u e of p r o p e r t i e s t r a d e d . The g r a p h i c a l and the s t a t i s t i c a l analyses y i e l d e d the f o l l o w i n g s p e c i f i c f i n d i n g s : a) P r o p e r t i e s under $15,000 i n value are under-represented by m.l.s. .data. b) E x c l u s i v e of the under $15,000 v a l u e c l a s s , inexpensive p r o p e r t i e s are over-represented by m.l.s. d a t a . Although t h i s o v e r - r e p r e s e n t a -t i o n p e r s i s t s over some p o r t i o n of the value range, i n v a r i a b l y a po i n t i s reached on the value range continuum at which the r e l a t i v e s a l e s frequency a s s o c i a t e d w i t h the m.l.s. data drops and remains below that a s s o c i a t e d w i t h the t.m.s. da t a . c) This " c r o s s - o v e r " p o i n t v a r i e s by both sample area and by time p e r i o d ; i t i s t h e r e f o r e i m p o s s i b l e to a d j u s t f o r the above d i f f e r e n -t i a l . 26. d) The average value of p r o p e r t i e s traded through the medium of m.l.s. was c o n s i s t e n t l y lower by area and through time than the c o r r e s -ponding v a l u e recorded by the t.m.s. data. F u r t h e r , the rank order of average val u e by sample area i n d i c a t e d by each data base was the same. The fo r e g o i n g supports the hypothesis that expensive p r o p e r t i e s tend to be traded e i t h e r p r i v a t e l y or on an e x c l u s i v e agency b a s i s , and f u r t h e r , that t h i s tendency i s g e n e r a l , r a t h e r than r e s t r i c t e d to a p a r t i c u l a r area. e) Due to the g r e a t e r range of the t.m.s. dat a , t h e i r d i s p e r s i o n i s gr e a t e r than t h a t of the m.l.s. d a t a . f ) . T.M.S. value d i s t r i b u t i o n s are l e s s skewed than corresponding m.l.s. d i s t r i b u t i o n s . Again, t h i s i s a f u n c t i o n of the g r e a t e r range of t.m.s. data. g) T.M.S. value d i s t r i b u t i o n s tend towards the p l a t y k u r t i c , w h i l e those o f m.l.s. tend to be l e p t o k u r t i c . This g r e a t e r degree of "peakedness" e x h i b i t e d by m.l.s. data i s once again a consequence of t h e i r comparatively narrow v a l u e range. h) Although i n g e n e r a l , i n t e r a r e a rank orders a s s o c i a t e d w i t h d i s p e r -s i o n , symmetry, and k u r t o s i s remained s i m i l a r w i t h r e s p e c t to data base, s i g n i f i c a n t d i f f e r e n c e s i n magnitude e x i s t e d w i t h rank o r d e r s . No p a t t e r n was evident i n the manner by which the above mentioned d i f f e r e n c e s v a r i e d by data base, i t i s t h e r e f o r e i m p o s s i b l e to adjus t f o r the above i n t e r - d a t a base d i f f e r e n t i a l s . . i ) Because s e v e r a l b i a s e s e x i s t i n the m.l.s. data, and because these b i a s e s do not lend themselves to adjustment, i t i s concluded t h a t m.l.s. data c o n s t i t u t e s a poor proxy f o r the M e t r o p o l i t a n Vancouver housing s t o c k . ) In order to determine whether the above bi a s e s remain constant w i t h respect to time, i t would be necessary to take sample data from a year d i f f e r e n t from 1969 and repeat the f o r e g o i n g a n a l y s i s . Comparison of r e s u l t s would e i t h e r c o n f i r m or r e f u t e the hypothesis t h a t the m.l.s. data b i a s e s are constant w i t h r e s p e c t to time. CHAPTER II THE METROPOLITAN VANCOUVER HOUSING SUPPLY Intr o d u c t ion The preceding chapter i l l u s t r a t e d the inadequacy of m.l.s. data as a proxy f o r the M e t r o p o l i t a n Vancouver housing supply. However, i f the a b i l i t y of low income r e c i p i e n t s to purchase standard detached d w e l l i n g s i n M e t r o p o l i t a n Vancouver under present, (1970), market condi-t i o n s i s to be measured, i t i s necessary t h a t a v a l u e p r o f i l e of the e x i s t i n g housing stock be c o n s t r u c t e d . However, a housing census had been precluded due to e x c e s s i v e c o s t . In a d d i t i o n , m.l.s. data had been proven b i a s e d beyond adjustment. I t was t h e r e f o r e decided to u t i l i z e t.m.s. data as a housing supply proxy. This chapter comprises an examina-t i o n of the M e t r o p o l i t a n Vancouver housing supply, i n terms of both stock and of f l o w . The Housing Stock Although, as p r e v i o u s l y mentioned, the t a k i n g of a housing census was precluded due to e x c e s s i v e c o s t , an estimate of the number of detached housing u n i t s w i t h i n M e t r o p o l i t a n Vancouver was r e l a t i v e l y easy to d e r i v e . The p r o p e r t y tax r o l l and the r e c o r d of water connections of each l o c a l governmental u n i t w i t h i n M e t r o p o l i t a n Vancouver as d e f i n e d were examined. 29. The t o t a l number of s i n g l e f a m i l y d w e l l i n g s w i t h i n each l o c a l u n i t was i n t h i s manner determined. Through a d d i t i o n of the t o t a l s a r r i v e d at i n the above de s c r i b e d manner, a M e t r o p o l i t a n Vancouver housing stock estimate of 190,724 u n i t s was d e r i v e d . The component t o t a l s by area are contained i n Table 8. The Value D i s t r i b u t i o n of the Housing Stock Although the above procedure measured the magnitude of the Metro-p o l i t a n Vancouver housing s t o c k , i t i n d i c a t e d n othing of i t s composition. In order to g a i n some i n s i g h t i n t o the v a l u e d i s t r i b u t i o n o f the Metro-p o l i t a n Vancouver housing s t o c k , a sample of t.m.s. data was taken. This sample comprised a l l s i n g l e f a m i l y d w e l l i n g s which were s o l d d u r i n g e i g h t weeks o f the f i r s t , and the e n t i r e t h i r d q u a r t e r of 1969 w i t h i n Vancouver C i t y , North Vancouver and West Vancouver. In a d d i t i o n , the sample i n c l u d e d a l l s i n g l e f a m i l y d w e l l i n g s s o l d d u r i n g the e n t i r e f i r s t and t h i r d q u arters of 1969 w i t h i n the balance o f M e t r o p o l i t a n Vancouver. Instead of a c t u a l s a l e s p r i c e s being recorded, s a l e s p r i c e s were broken down by value range as shown i n Table 9. The frequency of s a l e w i t h i n each val u e range was recorded. In the case of the e i g h t middle v a l u e ranges, i t was assumed that the mean s a l e s p r i c e w i t h i n each v a l u e range c o i n c i d e d w i t h the midrange. This assumption was checked on a sample b a s i s and found to be s u f f i c i e n t l y accurate f o r purposes of valu e p r o f i l e c o n s t r u c t i o n . The above assumption d i d not, however, h o l d i n the case of the extreme val u e ranges. A c c o r d i n g l y , a c t u a l s a l e s p r i c e s f a l l i n g i n t o e i t h e r extreme range were recorded and t h e i r a r i t h m e t i c mean 30. Table 8 ESTIMATED SINGLE FAMILY DWELLING STOCK WITHIN METROPOLITAN VANCOUVER BY MUNICIPALITY Municipality Single Family Dwelling Stock City of New Westminster 6,740 City of North Vancouver 5,167 City of Port Coquitlam 3,515 City of Port Moody 1,917 City of Vancouver 72,961 Corporation of Burnaby 25,869 District of North Vancouver 13,350 Municipality of Coquitlam 9,486 Municipality of Delta 7,794 Municipality of Richmond 12,960 Municipality of Surrey 22,411 Municipality of West Vancouver 8,564 Total 190,724 Source: The property tax rolls and record of water connections for each of the local government units contained within Metropolitan Vancouver, as defined. Table 9 SAMPLE SALES FREQUENCY DISTRIBUTION BY AREA S s\-Yalue C l a s s $15000 • $15000-$17500 $17500-$20000 $20000-$22500 $22500-$25000 $25000-$27500 $27500-$30000 $30000-$32500 $32500-$35000 $35000 Area JL It X v X # X # x # X # x # x # X # X # X BN 63 $12.80 41 $16.25 29 $18.75 40 $21.25 39 $23.75 46 $26.25 50 $28.75 25 $31.25 18 $33.75 48 $42.74 NW 9 $12.37 5 " 8 " 4 II 2 " .4 " 0 " 1 11 1 " 5 $42.60 SU 109 $13.28 S8 " 70 " 54 27 " 18 16 8 8 " 10 $41.65 RI 22 $13.33 18 " 33 " 41 " 54 " ' 41 34 " 11 " 7 " 20 $41.23 PM 7 $14.22 17 " 4 " 5 " 13 " 10 13 " 4 3 " 1 $35.32 PQ 5 $12.61 1 " 4 " 11 15 " 6 " 3 • " 1 " 0 " 1 $40.00 COQ 19 $13.03 9 II 12 " 24 23 " 34 " 21 " 11 " 13 " 14 $44.88 DA 25 $13.29 29 59 " 77 72 " 41 32 16 15 " 27 $41.45 VC 577 $12.02 24S " 320 " 226 247 " 180 " 203 " 117 " 118 " 395 $51.12 NV 75 $11 .10 43 92 " 58 " 79 93 113 81 71 133 $43.50 WV 13 $11.10 6 11 " 9 " 17 . " 13 23 25 " 29 191 $53.30 A l l 924 $12 .23 505 " 642 " 549 " " 588 11 486 ." 508 " 300 283 " 845 $49 .12 Source: T e e l a Market Survey. M e t r o p o l i t a n Vancouver and New Westminster County Quarters 1 and 3, 1969 .32. computed. Again, the s a l e s frequencies were recorded. The above d e s c r i b e d t a b l e y i e l d e d the absolute sample s a l e s frequency by area and v a l u e c l a s s f o r the f i r s t and t h i r d q u arters of 1969. However, before a v a l u e p r o f i l e c ould be c o n s t r u c t e d , the above absolute s a l e s frequencies had to be converted i n t o r e l a t i v e s a l e s frequencies by area and v a l u e c l a s s . This was done. The s a l e s f o r each area were t o t a l l e d and the f r a c t i o n f a l l i n g i n t o each v a l u e c l a s s w i t h i n each area was computed. The r e s u l t was a r e l a t i v e s a l e s frequency d i s -t r i b u t i o n of the sample by area and i s shown i n Table 10. F i n a l l y , the r e l a t i v e s a l e s frequencies by v a l u e c l a s s and area were m u l t i p l i e d by the stock estimates by area g i v e n i n Table 8. The r e s u l t i s the r e s i d e n -t i a l p roperty v a l u e p r o f i l e f o r M e t r o p o l i t a n Vancouver shown i n Table 11. S e v e r a l assumptions u n d e r l i e the above r e s i d e n t i a l property v a l u e p r o f i l e and should at t h i s time be made e x p l i c i t . They are as f o l l o w s : a) That 1969 was a " r e p r e s e n t a t i v e " year w i t h r e s p e c t to the v a l u e d i s t r i b u t i o n of r e s i d e n t i a l p r o p e r t i e s s o l d . This assumption i s important as the sample val u e d i s t r i b u t i o n serves as a b a s i s f o r the d e r i v e d r e s i d e n t i a l p r o p e r t y v a l u e p r o f i l e . b) That the p r o b a b i l i t y of a s i n g l e f a m i l y d w e l l i n g b e i n g s o l d d u r i n g the f i r s t and t h i r d quarters i s equal to t h a t o b t a i n i n g d u r i n g the second and f o u r t h q uarters of any y e a r . I t w i l l be remembered tha t the sample upon which our supply v a l u e d i s t r i b u t i o n estimate i s based comprised a l l r e s i d e n t i a l p r o p e r t i e s traded w i t h i n M e t r o p o l i t a n Vancouver d u r i n g the f i r s t and t h i r d q u a r t e r s of 1969 . Table 10 RELATIVE SALES FREQUENCY DISTRIBUTION BY AREA • N V A U ' - l t : <$15000 $15000-$17500 $17500-$20000 $20000-$22500 $22500-$25000 $25000-$27500 $27500-$30000 $30000-$32500 $32500-$35000 > $35000 Total 1 BN .16 .10 .07 .10 .10 .11 .13 .06 .04 .12 1.00 NW .23 .13 .20 .10 .05 .10 0 .03 .02 .14 1.00 SU .27 .21 .17 .13. .07 .04 .04 .02 .02 .02 1.00 RI .08 .06 .12 .14 .19 .14 .12 .04 .03 .07 1.00 PM .09 .22 .05 .06 .17 .13 .17 .05 .04 .01 1.00 PQ .11 .02 .08 .23 .32 .13 .06 .02 0 .02 1.00 COQ .10 .05 .07 .13 .13 .19 .12 .06 .07 .08 1.00 DA .06 .07 .15 .19 .18 .10 .08 .05 .04 .07 1.00 VC .22 .09 .12 .09 .09 .07 .08 .04 .04 .15 1.00 NV .09 .05 .11 .07 .09 .11 .13 .10 .08 .16 1.00 WV .04 .02 .03 .03 .05 .04 .07 .07 .08 .56 1.00 Al l .16 .09 .11 .10 .10 .09 .09 .05 .05 •15 1.00 Source: Table 9 "^Sortie totals do not sum to 1.00 due to round ing. Table 11 RESIDENTIAL PROPERTY VALUE PROFILE: METROPOLITAN VANCOUVER ( UNITS) <$15000 $15000-$17500 $17500-$20000 $20000-$22500 $22500-$25000 $25000-$27500 $27500-$30000 $30000-$32500 $32500-$35000 >$35000 Total 2 B.N 4,139 2,587 1,811 2,587 2,587 2,846 3,363 1,552 1,035 3,104 25,611 NW 1,550 876 1,348 674 337 674 0 202 135 944 6,740 SU 6,051 4,706 3,810 2,913 1,569 896 896 448 448 448 22,185 Rl 1,037 778 1,555 1,814 2,462 1,814 1,555 518 389 907 12,829 PM 172 422 96 115 326 249 326 96 77 19 1,898 PQ 387 70 281 808 1,125 457 211 70 0 70 3,479 COQ 949 474 664 1,233 1,233 1,802 1,138 569 .664 759 9,485 DA 468 546 1,169 1,481 1,403 780 624 390 312 546 7,719 VC 16,051 6,566 8,755 6,566 6,566 5,107 5,837 2,918 2,918 10,944 72,228 NV 1,666 925 2,036 1,295 1,666 2,036 2,406 1,851 1,481 2,961 18,323 WV 343 171 257 257 428 343 599 599 685 _ 4,796 8,478 All 32,813. 18,121 21,782 19,743 19,702 17,004 16,955 9,213 8,144 25,498 188,975 Sources: Tables 8 and 10 2 Some totals by area do not agree with area housing stock estimates previously derived due to rounding. 35. I f there i s a d i f f e r e n t i a l p r o b a b i l i t y of homes being s o l d d u r i n g the second and f o u r t h quarters as opposed to the f i r s t and t h i r d q uarters of any y e a r , such a d i f f e r e n t i a l p r o b a b i l i t y would o b v i o u s l y d i s t o r t and perhaps v i t i a t e our supply v a l u e d i s t r i b u -t i o n e s t i m a t e . c) That the s a l e s v e l o c i t y of s i n g l e f a m i l y d w e l l i n g s w i t h i n Metro-p o l i t a n Vancouver i s constant w i t h respect to valu e c l a s s . The r e s i d e n t i a l p r o p e r t y v a l u e p r o f i l e was co n s t r u c t e d by m u l t i p l y i n g the r e l a t i v e sample s a l e s frequency d i s t r i b u t i o n by area and v a l u e c l a s s , by the estimated r e s i d e n t i a l housing stock by area. I f homes of d i f f e r e n t v a l u e c l a s s e s possessed d i f f e r e n t s a l e s v e l o c i -t i e s , the r e s u l t a n t v a l u e p r o f i l e would be h o p e l e s s l y d i s t o r t e d . This i s so because homes c h a r a c t e r i z e d by h i g h s a l e s v e l o c i t i e s would be over r e p r e s e n t e d , and those having low s a l e s v e l o c i t i e s would be under represented i n the f i n a l p roperty v a l u e p r o f i l e . P r e l i m i n a r y f i n d i n g s of another housing study c u r r e n t l y underway at the U n i v e r s i t y of B r i t i s h Columbia suggest t h a t d i f f e r e n t i a l s a l e s v e l o c i t i e s by valu e c l a s s may w e l l e x i s t f o r detached housing i n the M e t r o p o l i t a n Vancouver a r e a . These f i n d i n g s however, g i v e no adequate measure of how s a l e s v e l o c i t y v a r i e s i n e i t h e r magnitude or d i r e c t i o n w i t h changes i n v a l u e . I t i s too e a r l y to i n c o r p o r a t e the f i n a l con-c l u s i o n s of the above study i n the present paper. T h e r e f o r e , the assump-t i o n that no d i f f e r e n t i a l s a l e s v e l o c i t y e x i s t s w i t h r e s p e c t to the v a l u e of r e s i d e n t i a l p r o p e r t i e s w i t h i n M e t r o p o l i t a n Vancouver w i l l be maintained. 36. The Turnover Rate As mentioned at the beginning of t h i s chapter, the magnitude of the M e t r o p o l i t a n Vancouver detached housing stock was estimated to be 190,724 u n i t s . The number of s i n g l e f a m i l y d w e l l i n g s a l e s recorded i n our t.m.s. sample was 5,630, comprising 3,806 s a l e s w i t h i n Vancouver C i t y , North Vancouver, and West Vancouver, and 1,824 s a l e s w i t h i n the p e r i p h e r a l areas of the M e t r o p o l i s . I t w i l l be remembered t h a t due to u n a v a i l a b i l i t y of complete da t a , the s a l e s sample p e r t a i n i n g to Vancouver C i t y , North Vancouver and West Vancouver covered only 20 weeks r a t h e r than two f u l l q u a r t e r s . Compensating f o r t h i s f a c t , and assuming t h a t p r o p e r t y s a l e s are evenly d i s t r i b u t e d w i t h respect to time, we a r r i v e at an adjusted s a l e s sample s i z e f o r Vancouver C i t y , North Vancouver and West Vancouver of 4,567 u n i t s , and consequently, an adjusted t o t a l s a l e s sample s i z e of 6,391 u n i t s . Using t h i s adjusted sample s i z e we f i n d t h a t the two quarter s a l e s sample comprises 3.35 percent of the t o t a l s t o c k e s t i m a t e . This i n f e r s t h a t the "average" house w i t h i n M e t r o p o l i t a n Vancouver i s s o l d every 14.92 y e a r s . This estimate conforms w i t h the c o n v e n t i o n a l wisdom w i t h r e s p e c t to turnover r a t e and lends some support to the f i r s t two assumptions made e x p l i c i t i n the previous s e c t i o n . Table 12 c o n t a i n s the f i g u r e s upon which the above argument i s based. The Housing Supply: Flow Concept There are e s s e n t i a l l y two concepts of housing supply: that which e x i s t s and t h a t which i s a v a i l a b l e f o r purchase. U n t i l now, we have been e x c l u s i v e l y concerned w i t h the former. Table 12 ESTIMATED SINGLE FAMILY HOUSING TURNOVER RATE - METROPOLITAN VANCOUVER Units Sample S i ze , Ql + 3 of 1969, per iphera l reg ions : . 1,824 Sample S ize 20 weeks of Ql + 3 of 1969; V .C . , N.V., W.V.,: 3,806 Adjusted Sample S i ze , Ql + 3 of 1969; V .C . , N.V., W.V.: (3806 x 6/5) 4,567 Adjusted To ta l Sample S i ze , Q 1 + 3 of 1969 6,391 Adjusted To ta l Sample S i ze , 1969 12,782 Sample as a f r a c t i o n of estimated housing stock: Estimated S ingle Family Housing Turnover Rate: 12,782 1 9 0 ^ 4 - 0 6 7 0 • ^ 7 0 ' 14.92 yrs Sources: Tables 8 and 9. 38. There are two p o s s i b l e measures of " t h a t which i s a v a i l a b l e f o r purchase" i n any p e r i o d , the number of homes l i s t e d f o r s a l e , and the number of homes a c t u a l l y s o l d . I t could not be a s c e r t a i n e d whether homes l i s t e d but not s o l d d u r i n g the f i r s t and t h i r d q u arters o f 1969 f a i l e d to s e l l because they were "unreasonably" p r i c e d . Therefore, i t was decided to ignore property l i s t i n g per se du r i n g the sample p e r i o d . C l e a r l y , p r o p e r t i e s p r i c e d f a r above market c o n t r i b u t e n o t h i n g to the housing f l o w , as no reasonable person would purchase under these condi-t i o n s . On the theory t h a t l i s t i n g s which are s o l d are those which are "reasonably" p r i c e d , i t was decided to u t i l i z e as a measure of housing f l o w those p r o p e r t i e s a c t u a l l y s o l d r a t h e r than those merely l i s t e d d u r i n g the f i r s t and t h i r d quarters of 1969 w i t h i n M e t r o p o l i t a n Vancouver. By the above d e f i n i t i o n , the t.m.s. data sample taken measured the f l o w of housing w i t h i n M e t r o p o l i t a n Vancouver d u r i n g the sample p e r i o d . The s a l e s contained w i t h i n t h i s sample were broken down by area and by value c l a s s . In order to d e r i v e a measure of the annual housing supply f l o w w i t h i n M e t r o p o l i t a n Vancouver, s a l e s i n c i d e n c e by v a l u e c l a s s w i t h i n the p e r i p h e r a l areas o f the M e t r o p o l i s was doubled w h i l e s a l e s i n c i d e n c e by v a l u e c l a s s w i t h i n Vancouver C i t y , North Vancouver, and West Vancouver was m u l t i p l i e d by a f a c t o r of 2.2. This was done to compensate f o r the f a c t t h a t w h i l e the s a l e s sample p e r t a i n i n g to the p e r i p h e r a l areas covered two f u l l q u a r t e r s , t h a t p e r t a i n i n g to the c e n t r a l areas of the M e t r o p o l i s covered only 20 weeks. From the above procedure was d e r i v e d a measure of the annual housing f l o w w i t h i n M e t r o p o l i t a n Vancouver. This estimate comprises Table 13. Table 13 METROPOLITAN VANCOUVER HOUSING SUPPLY - ANNUAL FLOW CONCEPT \ C L '1SS <$15000 $15000-$17500 $17500-$20000 $20000-$22500 $22500-$25000 $25000-$27500 $27500-$30000 $30000-$32500 $32500-$35000 >$35000 Total BN 126 82 58 80 78 92 100 50 36 96 798 NW 18 10 16 8 4 8 0 2 2 10 78 SU 218 176 140 108 - 54 36 32 16 16 20 816 R.i '44 36 66 82 108 82 68 22 14 40 562 PM 14 34 8 10 26 20 26 8 6 2 154 PQ 10 . 2 8 22 30 12 6 2 0 2 94 COQ 38 18 24 48 46 68 42 22 26 28 360 DA 50 58 118 154 144 82 64 32 30 54 786 VC 1269 546 704 497 543 396 447 257 260 869 5788 NV 165 95 202 128 174 205 249 178 156 293 1845 WV 29 13 24 20 37 29 51 55 64 420 741 All 1981 1070 1368 1157 1244 1030 1085 644 610 1834 12023 Source: Table 9 vo AO. The L o c a t i o n of Inexpensive Housing Reference to Tables 11 and 13 r e v e a l s t h a t r e l a t i v e l y inexpensive p r o p e r t i e s are concentrated i n Vancouver C i t y , Burnaby, and Surrey. A p h y s i c a l i n s p e c t i o n of the housing u n i t s contained i n the sample was not made, and t h e r e f o r e any e x p l a n a t i o n of the above phenomenon i s bound to be a p r i o r i i n n a t u r e . However, the above p a t t e r n of c o n c e n t r a t i o n of inexpensive p r o p e r t i e s was expected. I t was hypothesized that Vancouver and Burnaby, being two of the o l d e s t s e t t l e d areas of the M e t r o p o l i s , and having comparatively l a r g e housing s t o c k s , (see Table 8 ) , would, possess the g r e a t e s t p r o p o r t i o n o f e l d e r l y , obsolescent housing u n i t s . Because these u n i t s are r e l a t i v e l y u n a t t r a c t i v e i n comparison w i t h more r e c e n t l y c o n s t r u c t e d u n i t s , c e t e r i s p a r i b u s , they command a lower p r i c e . Hence the c o n c e n t r a t i o n of inexpensive housing i n Vancouver and Burnaby comes as no s u r p r i s e . The c o n c e n t r a t i o n of inexpensive housing w i t h i n Surrey stems from d i f f e r e n t reasons. They are as f o l l o w s : a) Surrey's housing stock d i f f e r s from t h a t of other suburban areas i n t h a t a s i g n i f i c a n t number c o n s t i t u t e s t e r e o t y p e d , 3 bedroom, non-basement homes. Due to both the absence of a basement and the c l o s e s i m i l a r i t y between a l a r g e number of homes l o c a t e d t h e r e , the average home s a l e s v a l u e i s lower i n Surrey than i n the other suburbs. b) An u n u s u a l l y l a r g e number of Surrey p r o p e r t i e s are s e r v i c e d by s e p t i c tank r a t h e r than by sewer. This f a c t has a dual d e p r e s s i v e e f f e c t upon Surrey home p r i c e s . F i r s t , home buyers p r e f e r sewered l o t s , hence they w i l l t y p i c a l l y b i d l e s s f o r p r o p e r t i e s s e r v i c e d by septic tank. Second, when mortgage funds are scarce, as is currently, (1970), the case, mortgage companies typically cut the supply of residential mortgage funds on unsewered properties before those serviced by sewer. In addition, under current lending regulations, unsewered properties are ineligible for N.H.A. insured mortgage financing. Unsewered properties form a dispropor-tionately large fraction of the Surrey residential housing stock; therefore the reduction in the supply of mortgage funds flowing to the Surrey area has been disproportionately severe. This dis-proportionate reduction in mortgage financing has had the effect of further lowering the average home sales value in Surrey, through decreasing effective housing demand, c) Surrey is the area in which low cost condominium developments have been concentrated. These condominium units, which sell for considerably less than conventional single family dwellings, have had the effect of absorbing the housing demand which would normally be exerted on the Surrey single family dwelling stock.- One result has been to lower the price of conventional housing within the area. The Possibility of Seasonal Bias The annual flow estimate of the Metropolitan Vancouver housing supply was derived from a two quarter data sample. Therefore the possibility of seasonal bias within the sample exists. It will be remembered that the sales sample upon which the housing flow estimate was based included a l l residential properties traded within Metropolitan Vancouver during the first and third quarters of 1969. It is therefore possible that the sales pattern obtaining 42. d u r i n g that p e r i o d d i d not a c c u r a t e l y represent the s a l e s p a t t e r n of 1969 taken as a whole, and consequently our annual housing f l o w estimate i s s e a s o n a l l y b i a s e d . Although the above p o s s i b i l i t y e x i s t s , i t s probable e f f e c t upon our housing flow estimate i s minimal. This i s true'because, f o r a v a r i e t y of reasons, a l a g of indeterminate l e n g t h occurs between ,the time a s a l e i s made and the time i t i s recorded by the T e e l a Market Survey. Because of the above " a d m i n i s t r a t i v e l a g , " a two quarter data sample a c t u a l l y " s t r a d d l e s " two q u a r t e r s . Hence any seasonal b i a s present i n the data tends to be dampened. Evidence s u p p o r t i n g t h i s p o i n t i s f u r n i s h e d by the estimate of the M e t r o p o l i t a n Vancouver housing turnover r a t e p r e v i o u s l y d e r i v e d . Had a marked seasonal b i a s been present i n the d a t a , the d e r i v e d r a t e of turnover estimate could not have c o r r e s -ponded so c l o s e l y w i t h t h a t g e n e r a l l y accepted by those i n the f i e l d . Seasonal b i a s could have been precluded by t a k i n g a f u l l year's data sample r a t h e r than one comprising two q u a r t e r s . Due to the e x c e s s i v e cost a s s o c i a t e d w i t h the above, and due to the minimal e f f e c t which s e a s o n a l i t y i s thought to exert on a two q u a r t e r sample, t h i s procedure was r e j e c t e d as being unnecessary. Conclusions 1. The e x i s t i n g s i n g l e f a m i l y housing stock w i t h i n M e t r o p o l i t a n Vancouver i s estimated to be 190,724 u n i t s . 2. Of the above s t o c k , i t i s estimated t h a t 6.7 percent or a p p r o x i -• mately 12,780 u n i t s were traded i n 1969. This flow estimate i n c l u d e s both the t r a d i n g of e x i s t i n g homes and the s a l e of newly 43. constructed units. 3. The above flow estimate infers that the "average" Metropolitan Vancouver single family dwelling unit is sold every 14.92 years. 4. Of the annual housing flow estimate within Metropolitan Vancouver during 1969, 5,578 units or approximately 46.3 percent of the total sold for less than $22,500. 5. Relatively inexpensive housing was found to be concentrated in Vancouver City, Burnaby, and Surrey. This concentration within the former two municipalities is thought to be a result of the large numbers of elderly homes situated there. The concentration of inexpensive housing within Surrey results from the following conditions which obtain there: a) A concentration of stereotyped, 3 bedroom, non-basement homes, b) A disproportionate number of properties serviced by septic tank, rather than "sanitary sewer" systems, c) A concentration of low-cost condominium developments. 6. Although the possibility of seasonal bias within the underlying sales sample exists, the probable impact of seasonality upon the derived housing flow estimate is minimal. CHAPTER III INCOME REQUIREMENTS FOR HOME PURCHASE In t roduct ion The s tated o b j e c t i v e of t h i s study i s to d i s cover whether the va lue d i s t r i b u t i o n of homes i n Met ropo l i t an Vancouver is such that low income f a m i l i e s can purchase detached housing g iven c u r r e n t , (1970), market c o n d i t i o n s . During the p lanning stages i t was assumed that the above quest ion could be answered by: a) Const ruct ing a va lue d i s t r i b u t i o n of the Met ropo l i t an Vancouver housing supply, def ined both i n terms of stock and of f low. b) Der iv ing the fami ly income d i s t r i b u t i o n of Met ropo l i t an Vancouver. c) Matching the der ived fami ly income d i s t r i b u t i o n and the va lue d i s t r i b u t i o n of the housing supply w i t h i n the context of e x i s t i n g N.H.A. f i nanc ing r e g u l a t i o n s . The above procedure, i t was f e l t , would f u r n i s h the answer to the quest ion posed. However, a major f law ex i s ted in the proposed p l an : the fami ly income d i s t r i b u t i o n for Met ropo l i t an Vancouver proved unobta inab le . O r i g i n a l l y , i t had been intended that the requ i red income d i s -t r i b u t i o n be der ived from a random sample of 2,401 persona l income tax r e t u r n s . A 2,401 sample s i z e ensured a maximum e r r o r of only + 2 percent at a 95 percent l e v e l of confidence. However, the secrecy p r o v i s i o n s of The Income Tax Act precluded such a random sample being taken. When i t became apparent that income tax r e t u r n s could not be u t i l i z e d , the w r i t e r r e s o r t e d to other p o t e n t i a l income data s o u r c e s . The data p u b l i s h e d by the Dominion Bureau of S t a t i s t i c s proved u s e l e s s f o r purposes of d e r i v i n g the M e t r o p o l i t a n Vancouver f a m i l y income d i s t r i b u t i o n f o r the f o l l o w i n g reasons: a) The most r e c e n t l y p u b l i s h e d income i n f o r m a t i o n p e r t a i n s to 1961, consequently the a v a i l a b l e f i g u r e s are s e r i o u s l y out of date. b) No d i s t r i b u t i o n o f f a m i l y income i s g i v e n f o r the M e t r o p o l i s , i n s t e a d a s i n g l e f i g u r e ; "average wage and s a l a r y income of f a m i l y head" i s f u r n i s h e d . c) The s o l e income d i s t r i b u t i o n g i v e n i s a d i s c r e t e d i s t r i b u t i o n of i n d i v i d u a l incomes by census t r a c t . These d i s t r i b u t i o n s could not, however, be aggregated i n t o a f a m i l y income d i s t r i b u t i o n f o r the m e t r o p o l i s , as the number of wage earners per f a m i l y was unknown. d) Even i f aggregation had been p o s s i b l e , the d e r i v e d f a m i l y income d i s t r i b u t i o n would have been suspect. The u n d e r l y i n g data are nine years o l d , and t h e r e f o r e s h i f t s i n p o p u l a t i o n d e n s i t y and r e l a t i v e earning power which have occurred w i t h i n M e t r o p o l i t a n Vancouver s i n c e 1961 would have gone undetected. Consequently, the r e s u l t a n t income d i s t r i b u t i o n would have been of l i m i t e d v a l u e . 46. F i n a l l y , Taxation S t a t i s t i c s , published by the Income Tax Depart-ment was consulted. Although the above source contained a wealth of information concerning aggregate taxable income, gross deductions, and gross investment income e t c . , no information p e r t a i n i n g to the d i s t r i b u t i o n of family income w i t h i n Metropolitan Vancouver was furnished. Due to the t o t a l lack of adequate family income data, i t became obvious that the procedure o u t l i n e d at the beginning of t h i s chapter was unworkable. An a l t e r n a t i v e procedure was therefore formulated. Instead of matching the value p r o f i l e of the Metropolitan Vancouver housing supply and the Metropolitan Vancouver family income d i s t r i b u t i o n w i t h i n the context of N.H.A. fin a n c i n g r e g u l a t i o n s , i t was decided to match the value p r o f i l e of the housing supply with the income required to finance t h i s supply under current N.H.A. fi n a n c i n g r e g u l a t i o n s . As a consequence of the above procedural change, the goal of t h i s study changed. Rather than a r r i v i n g at an estimate of the a b i l i t y of low income f a m i l i e s to purchase standard detached dwellings w i t h i n Metropolitan Vancouver under current market conditions as o r i g i n a l l y planned, the goal of t h i s study became the d e r i v a t i o n of the family income d i s t r i b u t i o n Which must obtain w i t h i n Metropolitan Vancouver i f home purchase i s to be e f f e c t e d by low income f a m i l i e s under present market.conditions. Although due to a paucity of data, the question of whether the necessary income d i s t r i b u t i o n a c t u a l l y e x i s t s cannot be answered at t h i s time, i t might be answered by some future w r i t e r using income information p o s s i b l y contained i n the 1971 Census of Canada. 47. This chapter comprises an examination of N.H.A. f i n a n c i n g regu-l a t i o n s and the income requirements which they imply must e x i s t i f the housing u n i t s contained w i t h i n the f i r s t four v a l u e c l a s s e s of the d e r i v e d M e t r o p o l i t a n Vancouver housing supply v a l u e p r o f i l e are financed at v a r i o u s r a t e s of i n t e r e s t . Current N.H.A. F i n a n c i n g Regulations The c u r r e n t r e g u l a t i o n s o b t a i n i n g w i t h r e s p e c t to the mortgage f i n a n c i n g of s i n g l e f a m i l y d w e l l i n g s by an approved lender under the N.H.A. f o r e c l o s u r e insurance scheme are as f o l l o w s : a) With respect to e x i s t i n g homes, a maximum loan/value r a t i o of .95 o b t a i n s . This r a t i o i s a p p l i e d to the va l u e o f the e x i s t i n g home up to and i n c l u d i n g a maximum loan o f $18,000. b) With r e s p e c t to new homes, the maximum loan/value r a t i o granted i s .95 of the f i r s t $20,000 and .80 of the balance up to and i n c l u d i n g a maximum loan of $25,000. c) To q u a l i f y f o r N.H.A. insu r e d f i n a n c i n g , the d w e l l i n g must be s e r v i c e d by a " s a n i t a r y sewer"; a s e p t i c tank system i s unacceptable. d) I r r e s p e c t i v e o f whether or not the property i n qu e s t i o n has been newly c o n s t r u c t e d , a maximum gross debt s e r v i c e r a t i o of .27 o b t a i n s . When d e f i n i n g "income" the borrower i s permitted to i n c l u d e h a l f h i s w i f e ' s income i n a d d i t i o n to h i s own, i f necessary. "Debt S e r v i c e " i n c l u d e s , i n a d d i t i o n to the a m o r t i z a t i o n o f the f i r s t mortgage loan i n t e r e s t and p r i n c i p a l , the property tax l e v y and any second mortgage debt s e r v i c e which may e x i s t . 1 •^ •The above i n f o r m a t i o n r e g a r d i n g c u r r e n t N.H.A. f i n a n c i n g r e g u l a t i o n s was gleaned d u r i n g an i n t e r v i e w w i t h a C.M.H.C. loa n o f f i c e r at the B.C. r e g i o n a l o f f i c e o f C.M.H.C. du r i n g A p r i l , 1970. 48. The f i n d i n g s o f the previous chapter r e v e a l that approximately 46 percent of the estimated 1969 M e t r o p o l i t a n Vancouver housing f l o w s o l d f o r l e s s than $22,500. Due to the N.H.A. .27 gross debt s e r v i c e r a t i o c o n s t r a i n t , $22,500 was s e l e c t e d as the va l u e c e i l i n g towards which p o t e n t i a l low income home purchasers could reasonably a s p i r e . New homes do not c u r r e n t l y s e l l f o r l e s s than $22,500 w i t h i n M e t r o p o l i t a n Vancouver. The above c o n s t r a i n t t h e r e f o r e i m p l i e s t h a t i f low income r e c i p i e n t s are to purchase an y t h i n g , they must purchase e x i s t i n g housing. As noted above, the maximum N.H.A. insu r e d loan a v a i l a b l e f o r the purchase of e x i s t i n g housing i s $18,000. This maximum loa n c o n s t r a i n t i n f e r s t h a t the home buyer can arrange, from h i s own r e s o u r c e s , f o r a downpayment of $4,500 when purchasing an e x i s t i n g home valued at $22,500. The $4,500 downpayment must be d e r i v e d from the perso n a l resources o f the borrower as secondary f i n a n c i n g i s not f e a s i b l e . The t y p i c a l low income r e c i p i e n t , by d e f i n i t i o n , could not make both f i r s t and second mortgage payments w h i l e s i m u l t a n e o u s l y s a t i s f y i n g the N.H.A. maximum gross debt s e r v i c e r a t i o of .27. N.H.A. Insured Conventional Maximum Loan/Value R a t i o .95 .75 Maximum Gross Debt S e r v i c e R a t i o .27 .25 Approximate Current Annual I n t e r e s t Charge .10125 .10750 The above t a b l e makes e x p l i c i t the s u b s i d i e s inherent i n N.H.A. insur e d f i n a n c i n g . Due to the N.H.A. commitment to indemnify lenders f o r 49. losses a r i s i n g from f o r e c l o s u r e , the N.H.A. insured mortgage ra te i s . t y p i c a l l y from % to 3/4 of one percent below that of the convent iona l market. In a d d i t i o n , whi le a .95 loan/va lue r a t i o c u r r e n t l y ex i s t s with respect to the purchase o f e x i s t i n g housing under N.H.A. insurance, the maximum loan/va lue r a t i o c u r r e n t l y obta inab le i n the convent iona l market i s .75. Any home purchaser who borrows in the convent iona l market must t h e r e f o r e , c e t e r i s par ibus , arrange f o r a l a r ge r downpayment, and/or a . l a r ge r second mortgage than would be the case were he to borrow under the aegis of N.H.A. F i n a l l y , whi le a gross debt s e r v i ce r a t i o of .27 obta ins under N.H.A. insured f i n a n c i n g , the corresponding f i g u r e i n the convent iona l market i s .25. The e f f e c t of t h i s d iscrepancy i s that g iven a s p e c i f i e d income, a mortgage loan app l i cant i s e l i g i b l e to buy a home of greater va lue under N.H.A. insured f i nanc ing than would be the case i f he were se rv i ced by the convent iona l market. For the above reasons the fo l l ow ing d i s cu s s i on i s couched in terms of N.H.A. insured f i n a n c i n g . Due to the subs id ies inherent i n t h i s form of f i n a n c i n g , i t was f e l t that i f p o t e n t i a l low income home purchasers f a i l e d ,to q u a l i f y for mortgage f i nanc ing under the N.H.A. insurance scheme, they would most assuredly f a i l to q u a l i f y in the convent iona l 2 market. 2 White, de s c r i b i n g cond i t ions w i t h i n the Vancouver r e s i d e n t i a l mortgage market dur ing the ea r l y 1960's , notes that the urban poor are d i s c r im ina ted against by mortgage l ender s . He demonstrates the ex i s tence of an inverse r e l a t i o n s h i p between income l e v e l and the r a t e of i n t e r e s t charged on r e s i d e n t i a l mortgage loans. In a d d i t i o n , he d i scovers that low income f a m i l i e s are t y p i c a l l y o f f e red lower loan/va lue r a t i o s and shor ter amort iza t ion per iods than t h e i r more a f f l u e n t counterparts . See P. H. White, Prologue to an Ana ly s i s of the R e s i d e n t i a l Mortgage Market  i n Vancouver. Vancouver: The U n i v e r s i t y of B r i t i s h Columbia, 1965, (unpublished) pp. 9-14. 50. Income Requirements for Home Purchase As mentioned previously, $22,500 was selected as the value ceiling towards which potential low income home purchasers could reasonably aspire. Reference to Table 11 reveals that four value classes as defined in the derived housing supply value profile exist below $22,500. The mean sales value of each of these value classes was noted. By applying the current N.H.A. maximum loan/value ratio and maximum loan constraints to each of the noted mean values, the maximum N.H.A. insured mortgage loans obtainable under current regulations on new and existing properties of the stated values were derived. Although as previously mentioned, few new properties currently sell within Metropolitan Vancouver for less than $22,500, the maximum N.H.A. insured mortgage loans obtainable on newly constructed property of the stated values was, for purposes of comparison, neverthe-less calculated. This schedule comprises Table 14. For each of the maximum mortgage loans derived in the above manner a schedule of monthly payments amortizing both interest and principal at rates of interest ranging from 6.0 to 10.5 percent and for terms of 20, 25 and 35 years was prepared. These schedules comprise Tables 15 to 19 inclus ive. Using the N.H.A. gross debt service ratio of .27, the above amortization schedules were then converted into required income schedules. This was accomplished by dividing the required monthly amortization payment by .27 to arrive at the monthly income required under N.H.A. regulations to service the mortgage loan. This figure was then multiplied by 12 to derive 51. Table 14 MAXIMUM N.H.A. INSURED MORTGAGE LOANS BY PROPERTY VALUE AND PROPERTY TYPE Value Class Mean Value Within Class Maximum N.H.A. Insured Mortgage Loan3  Existing New Property Property < $15,000 $12,230 $11,600 $11,600 $15,000 - $17,500 $16,250 $15,400 $15,400 $17,500 - $20,000 $18,750 $17,800 $17,800 $20,000 - $22,500 $21,250 $18,000 $20,000 In order to simplify calculations, the maximum mortgage loans derived above are to the nearest $100. Sources: Table 9, interview held with a C.M.H.C. loan officer C.M.H.C. B.C. regional office, April, 1970. at the Table 15-MONTHLY PAYMENTS TO AMORTIZE A MORTGAGE OF $11,600 ^\Loan ^Term Rate \ . of Interest^. 20 Years 25 Years 35 Years 6.0% $82.62 $74.22 $65.57 6.5% • $85.90 $77.70 $69.40 7.0% $89.25 $81.25 $73.30 7.5% $92.64 $84.87 $77.27 8.0% $96.09 $88.54 $81.30 8 .5% $99.60 $92.27 $85.39 9 .0% $103.15 $96.05 $89.53 9 .5% $106.75 $99.88 $93.71 10.0% $110.40 $103.77 $97.94 10.5% $114.10 $107.69 $102.20 Table 15(a) ANNUAL INCOME REQUIRED TO SERVICE A MORTGAGE OF $11,600 *\^Loan Term Rate ^ -s. of Interest^ 20 Years 25 Years 35 Years 6.0% • $3,672 $3,298 $2,914 6.5% $3,817 $3,453 $3,084 ' 7.0% $3,966 $3,610 ' $3,257 7.5% . $4,117 $3,772 $3,434 8.0% $4,270 $3,935 $3,613 8.5% $4,426 $4,100 $3,795 9.0% $4,584 $4,268 $3,979 9 .5% $4,584 $4,339 $4,164 10.0% $4,906 $4,611 $4,352 10.5% $5,071 $4,786 $4,542 Table 15(a) assumes the existence of a maximum 27 percent gross debt service ratio and ignores the effect of property taxes. Table 16 MONTHLY PAYMENTS TO AMORTIZE A MORTGAGE OF $15,400 \Loan Term Rate of Interests. 20 Years 25 Years 35 Years 6.0% $109.68 $ 98.54 $ 87.05 6.5% $114.04 $103.16 $ 92.13 7.0% $118.48 $107.87 $ 97.31 7.5% $122.99 $112.66 $102.58 8.0% $127.57 $117.54 $107.93 8.5% $132.32 $122.49 $113 .36 9.0% $136.36 $127.51 $118.85 9 .5% $141.72 $132.60 $124.41 10.0% $146.56 $137.76 $130.02 10.5% $151.47 $142.97 $135.67 Table 16(a) ANNUAL INCOME REQUIRED TO SERVICE A MORTGAGE OF $15,400 \iLoan Term Rate ^ v \ v ^ of Interest^. 20 Years 25 Years 35 Years 6.0% $4,874 $4,379 $3,869 6.5% $5,068 $4,584 $4,094 7.0% $5,265 ' $4,794 $4,324 7.5% $5,466 $5,007 $4,559 8.0% $5,669 $5,223 $4,796 8.5% $5,876 $5,443 $5,038 9 .0% $6,060 $5,667 $5,282 9.5% $6,298 $5,893 $5,529 10.0% $6,513 $6,122 $5,778 10.5% $6,731 $6,354 $6,029 Table 16(a) assumes the existence of a maximum 27 percent gross debt service ratio and ignores the effect of property taxes. Table 1 7 MONTHLY PAYMENTS TO AMORTIZE A MORTGAGE OF $ 1 7 , 8 0 0 \Loan Terra Rate of Interest^ 2 0 Years 2 5 Years 3 5 Years 6.0% • $ 1 2 6 . 7 7 : . $ 1 1 3 . 8 9 $ 1 0 0 . 6 2 6 . 5 7 , $ 1 3 1 . 8 1 $ 1 1 9 . 2 3 $ 1 0 6 . 4 9 7 . 0 7 o $ 1 3 6 . 9 4 $ 1 2 4 . 6 8 $ 1 1 2 . 4 8 7 . 5 7 . $ 1 4 2 . 1 6 $ 1 3 0 . 2 2 " $ 1 1 8 . 5 2 8 . 0 7 o $ 1 4 7 . 4 5 $ 1 3 5 . 8 6 $ 1 2 4 . 7 5 8 . 5 7 o $ 1 5 2 . 8 3 $ 1 4 1 . 5 8 $ 1 3 1 . 0 2 9 . 0 7 o $ 1 5 8 . 2 8 $ 1 4 7 . 3 8 $ 1 3 7 . 3 7 9 . 5 7 o $ 1 6 3 . 8 1 $ 1 5 3 . 2 7 $ 1 4 3 . 8 0 1 0 . 0 7 . $ 1 6 9 . 4 0 $ 1 5 9 . 2 2 $ 1 5 0 . 2 8 1 0 . 5 7 . $ 1 7 5 . 0 7 $ 1 6 5 . 2 5 $ 1 5 6 . 8 2 Table 17(a) ANNUAL INCOME REQUIRED TO SERVICE A MORTGAGE OF $ 1 7 , 8 0 0 ^^.Loan Term Rate of Interest**^ 20 Years 25 Years 35 Years 6.07. $5,634 $5,061 $4,472 6.57. $5,858 $5,299 $4,732 7.07. $6,086 $5,541 $4,999 7.57. $6,318 $5,787 $5,269 . 8.07. $6,553 $6,038 $5,544 8.57. $6,792 $6,292 $5,823 9.07. $7,034 $6,550 $6,105 9.57. $7,280 $6,811 $6,390 10.07. $7,528 $7,076 $6,698 10.57. $7,780 $7,344 $6,969 Table 17(a) assumes the existence of a maximum 27 percent gross debt service ratio and ignores the effect of property taxes. Table 18 MONTHLY PAYMENTS TO AMORTIZE A MORTGAGE OF $18,000 ^^Loan Term Rate of Interest\ 20 Years 25 Years 35 Years 6.0% $128.20 $115.17 $101.75 6.5% $133.20 $120.57 $107.69 ' 7.0% $138.48 $126.08 $113.74 7.5% $143.75 $131.68 $119 .90 8.0% $149.11 $137.38 $126.15 8 .5% $154.55 $143.17 $132.50 9.0% $160.06 $149.04 $138.92 9 .5% $165.65 $154.99 $145.41 10.0% $171.30 $161.01 $151.97 10.5% $177.03 $167.10 $158.58 Table 18(a) ANNUAL INCOME REQUIRED TO SERVICE A MORTGAGE OF $18,000 \Loan Term Rate ^ -v. of Interest\^ 20 Years 25 Years 35 Years 6.0% $5,697 $5,118 $4,522 6.5% $5,924 $5,358 $4,786 7.0% $6,154 $5,603 $5,055 7 .5% $6,388 $5,852 $5,328 8.0% $6,626 $6,105 $5,606 8.5% $6,868 $6,362 $5,888 9.0% $7,113 $6,623 $6,174 9.5% $7,361 $6,888 $6,462 10.0% $7,613 $7,155 $6,754 10.5% $7,867 $7,426 $7,047 Table 18(a) assumes the existence of a maximum 27 percent gross debt service ratio and ignores the effect of property taxes. Table 19 MONTHLY PAYMENTS TO AMORTIZE A MORTGAGE OF $20,000 \Loan Term Rate of Interests^ 20 Years 25 Years 35 Years 6.0% $142.44 $127.97 $113.06 6.5% $148.11 $133.97 $119.65 7.0% $153.87 $140.09 $126.38 7.5% $159.73 $146.32 $133.22 8.0% $165.68 $152.65 $140.17 8.5% $171.72 $159.08 $147.22 9.0% $177 .84 $165.60 $154.35 9 .5% $184.05 $172.21 $161.57 10.0% $190.34 $178.90 $168.85 10.5% $196.70 $185.67 $176.20 Table 19(a) ANNUAL INCOME REQUIRED TO SERVICE A MORTGAGE OF $20,000 '^^Loan Term Rate \ ^ of In teres t \ ^ 20 Years 25 Years 35 Years 6.0% $6,330 $5,687 $5,024 6.5% $6,582 $5,954 $5,317 7.0% $6,838 $6,226 $5,616 7.5% $7,098 $6,502 $5,920 8.0% $7,363 $6,784 $6,229 8.5% $7,631 $7,069 $6,542 9.0% $7,903 $7,359 $6,859 9.5% $8,179 $7,653 $7,180 10.0% $8,459 $7,950 $7,504 10.5% $8,741 $8,251 $7,830 Table 19(a) assumes the existence of a maximum 27 percent gross debt service ratio and ignores the effect of property taxes. 57. the r e q u i r e d annual income. The above r e q u i r e d income schedules comprise Tables 15(a) to 19(a) i n c l u s i v e . The income requirements d e r i v e d above are und e r s t a t e d . Pursuant to N.H.A. f i n a n c i n g r e g u l a t i o n s , the annual property tax le v y must be inc l u d e d i n the numerator of the gross debt s e r v i c e r a t i o . I t was, however, decided to omit pro p e r t y t a x c o n s i d e r a t i o n s when c o n s t r u c t i n g the schedules of r e q u i r e d income. To c a l c u l a t e the income r e q u i r e d to f i n a n c e a s p e c i f i c home under N.H.A., i t i s merely necessary to d i v i d e the annual property t a x l e v y i n qu e s t i o n by .27, and add t h i s amount to the annual income requirement d e r i v e d i n the aforementioned manner. For example, an annual property tax le v y of $300 would, under the maximum N.H.A. gross debt s e r -v i c e c o n s t r a i n t , r e q u i r e $1,111 o f annual income i n a d d i t i o n to the income r e q u i r e d to s e r v i c e the mortgage debt. This $1,111 c o n s t i t u t e s a b l a n k e t income requirement, and i s u n a f f e c t e d by e i t h e r the term o f the mortgage loan or the r a t e of i n t e r e s t charged. The e f f e c t o f the property t a x l e v y was not i n c o r p o r a t e d i n t o the de r i v e d income requirement schedules f o r the f o l l o w i n g reasons: a) The Teela Market Survey, from which the s a l e s data were c o l l e c t e d , f u r n i s h e d no i n f o r m a t i o n as to the property tax burden of the p r o p e r t i e s s o l d . b) I t was not f e a s i b l e to apply some "average" p r o p e r t y tax burden to a l l of the sample p r o p e r t i e s as the sample was drawn from twelve d i f f e r e n t m u n i c i p a l i t i e s . Each m u n i c i p a l i t y d i f f e r s i n both assessment procedure and f i s c a l requirement, t h e r e f o r e any "average" property tax burden imputed to the sample as a whole would be, of n e c e s s i t y , i n a p p r o p r i a t e . 58. FAMILY INCOME DISTRIBUTION REQUIREMENTS Value Class Cumulative Distribution Mean Value Within Class Maximum N.H.A. Mortgage Loan Obtainable Hous ing Income 3 Requirement <$15,000 .16 $12,230 $11,600 $5,611 $15,000-$17,500 .25 $16,250 $15,400 $7,122 $17,500-$20,000 .36 $18,750 $17,800 $8,076 $20,000-$22,500 .46 $21,250 $18,000 $8,155 The calculated annual income requirements are based upon the amortization of a 25 year N.H.A. insured mortgage loan on an existing property written at 10 percent. It is also assumed that the property in question bears an annual property tax burden of $270. Sources: Tables 9, 14, 15(a), 16(a), 17(a), 18(a). As mentioned earlier in this chapter, due to a lack of adequate income data, the ability of low income families to purchase standard detached housing within Metropolitan Vancouver under present market conditions could not be directly measured. As a result, it was decided to derive the family income distribution which must currently obtain within Metropolitan Vancouver i f the cheaper units contained within the current housing flow are to be financed by low income home purchasers. Reference to the table above reveals that homes in the first four value classes of the derived Metropolitan Vancouver housing value profile had a cumulative distribution of .46. Assuming that a l l properties falling below this cumulative probability bore a uniform annual property tax 59. 4 burden of $270, (a patently a r t i f i c i a l assumption), we derive the income distribution which must currently prevail within Metropolitan Vancouver if homes in the first four value classes are to be financed by low income families. The table above can be interpreted in the following manner: If no more than 46 percent of the current Metropolitan Vancouver family income distribution falls below $8,155 per annum, and i f the lower 46 percent of the family income distribution corresponds with the income required to finance the lower 46 percent of the current housing supply, then those families falling into the lower 46 percent of the Metropolitan Vancouver family income distribution are financially capable of purchasing the lower 46 percent of the current housing flow provided that: a) they are successful in securing the maximum N.H.A. insured mortgage loan obtainable under current regulations, b) this mortgage loan is written at no more than 10 percent interest per annum, and c) a property tax burden not exceeding $270 per annum prevails upon the relevant properties. fc. Two comments should be made on the above statement. First, the above merely states a necessary financial condition. It says nothing as 4 The figure of $270 was chosen as a hypothetical uniform property tax burden as $270 divided by .27, the N.H.A. gross debt service ratio, equals $1,000. $1,000, under these conditions, represents the income required to finance the property tax levy in addition to that required to service the mortgage. 60. to whether this condition in fact, exists. As previously mentioned, due to a lack of adequate income data, the existence of the required Metropoli-tan Vancouver family income distribution can at present be neither proved nor disproved. Second, the present existence of such an income distribution would not necessarily mean that low income recipients would purchase single family dwellings, i t would merely mean that they could, i f they so desired. Reference to Tables 15 to 19 and Tables 15(a) to 19(a) inclusive, reveals the following facts concerning the financing of single family dwellings: a) The major determinant of the financing cost, and therefore the income required for home purchase, is of course the interest rate charged. Under current N.H.A. regulations, an insured $18,000 mortgage loan payable over 25 years at a 6 percent annual interest rate requires a monthly amortization payment of $115.17 and an annual income, (neglecting property tax considerations), of $5,118. However, when the interest rate charged is increased to 10 percent, the corresponding figures increase to $161.01 and $7,155 respectively. b) Increasing the mortgage term exerts only a marginal effect. As stated above, an $18,000 25 year mortgage loan written at 10 percent requires a monthly amortization payment of $161.01 and an annual income, neglecting property tax considerations, of $7,155. When the mortgage term is increased from 25 to 35 years the corres-ponding figures are reduced to $151.97 and $6,754 respectively. In other words, by increasing the mortgage term from 25 to 35-61. years we lower the required monthly amortization payment by only $9.04 and the required annual income by only $401. On the other hand, the borrower remains in debt an additional 10 years. It is therefore clear that lengthening the mortgage term from 25 to 35 years will render acceptable only those mortgage applicants who were marginally unacceptable under a 25 year mortgage loan arrange-ment . c) Under current N.H.A. regulations a maximum loan/value ratio of 95 percent obtains. Clearly, l i t t l e can be done to further liberalize this constraint. Assuming that the loan/value constraint were abolished and homeowners were lent 100 percent of home value up to the present loan maximum of $18,000, the effective increase in purchasing power realized by successful mortgage applicants would be insignificant. Reference to Table 14 reveals that elimination of the 95 percent loan/value ratio coupled with retention of the $18,000 maximum loan constraint would have resulted in increased loans of $630, $850, and $200 on average value homes within value classes 1, 2, and 3 respectively of the 1969 Metropolitan Vancouver housing supply profile. Due to the $18,000 maximum loan constraint, the elimination of the 95 percent loan/value ratio requirement would have exerted no effect in the case of average value homes within the fourth value Cilass . Conclus ions 1. N.H.A. insured mortgage financing constitutes, from the borrowers viewpoint, a more desirable financing medium than that represented 62. by the conventional market. N.H.A. insured lending terms are the more attractive because, in comparison to the conventional market: a) the gross debt service ratio and the loan/value ratio con-straints are more liberal, and b) due to the N.H.A. foreclosure insurance scheme, annual interest charges are typically from \ to 3/4 of one percent below the rate prevailing in the conventional market. 2. Under current N.H.A. financing regulations, assuming an annual property tax burden not exceeding $270, and a maximum 25 year mortgage loan written at 10 percent, not more than 46 percent of • the current Metropolitan Vancouver family income distribution can t f a l l below $8,155 if the homes contained within the first four value classes of the 1969 Metropolitan Vancouver housing flow are to be financed by those in the lower 46 percent of the income distribution. 3. The mortgage loan interest rate charged is the main determinant of financing costs and hence, given the other lending constraints, the main determinant of the income required for home purchase. 4. At interest rates in the neighborhood of 10 percent, increasing the mortgage loan term from 25 to 35 years or over, effects only a marginal increase in the el i g i b i l i t y of mortgage loan applicants. It is questionable if this marginal increase in loan el i g i b i l i t y warrants the concomitant increased time period during which the borrower remains in debt. The present N.H.A. loan/value ratio is already, at 95 percent, close to the maximum possible. Further liberalization of this constraint would exert only a marginal increase in home purchasing ability. CHAPTER IV POLICY RECOMMENDATIONS Introduction The preceding chapter examined current N.H.A. financing regulations and made explicit the income required to finance the lower 46 percent of the 1969 Metropolitan Vancouver housing flow under current market condi-tions. Due to a lack of adequate data, the ability of those families in the lower 46 percent of the current Metropolitan Vancouver family income distribution to finance homes within the lower 46 percent of the current housing flow could not be directly measured. Nevertheless analysis of the fragmentary data contained in Appendix I suggests that typical low income recipients cannot purchase standard detached housing within Metropolitan Vancouver under current market conditions. This chapter contains suggestions as to how the above situation can be ameliorated through changes in N.H.A. home financing policy. However, these suggested policy changes are not costless. Hence in addition to suggesting policy changes, this chapter also discusses the problems which are likely to be induced by changes in policy. The Present Framework N.H.A. mortgage loan applications with respect to existing properties are winnowed through application of the following requirements: 65. a) a maximum loan/value ratio of .95 b) a maximum loan of $18,000 c) a maximum gross debt service ratio of .27 d) a mortgage term of 25 years with provision for extension to 40 years in special circumstances. The combined findings of Chapter III and Appendix I suggest that the effect of the above winnowing process is to effectively preclude low income recipients purchasing homes, given current market conditions. It was also noted in the previous chapter that: a) The rate of interest charged is the main determinant of mortgage loan costs and hence, given the present regulatory framework, of income requirements for home purchase. b) That l i t t l e benefit would accrue to the typical low income mortgage applicant by further relaxing the loan/value ratio requirements or further increasing the mortgage loan term. In view of the above, i f the ability of low income recipients to purchase detached housing is to be increased through changes in N.H.A. policy, attention must be directed to the loan constraints heretofore not considered and to the interest rate charged. The $18,000 Mortgage Loan Maximum Under current N.H.A. regulations the maximum loan granted with respect to an existing single family dwelling is $18,000. Because existing homes within Metropolitan Vancouver typically sell for more than $18,000, (see Table 10), at first glance i t would appear to be in the 66. interest of prospective low income home purchasers that this maximum be raised. Such an action, superficially at least, would seem to benefit the low income home purchaser by relieving him of the necessity of arranging a sizable downpayment from his own resources. However, as pointed out in the previous chapter, the monthly payment necessary to amortize an $18,000 mortgage loan over 25 years at an interest rate of 10 percent is $161.01. Given the existing 27 percent gross debt service ratio, and assuming an annual property tax levy of $270, the annual family income required to service the above loan is $8,155. Given the current Metropolitan Vancouver family income distribution, any family having an annual income of $8,155 is,.by definition, middle rather than low income. Further, i f the maximum loan available on existing properties were raised, the monthly amortization payment and the annual housing income requirement would, ceteris paribus, also rise. It is clear from the above, that given the current gross income constraint and current interest rates, any benefit derived from increasing the maximum mortgage loan obtainable on existing detached dwellings would accrue to middle and upper income groups rather than to potential low income home purchasers. The Gross Debt Service Ratio Under current regulations N.H.A. mortgage loan applicants cannot devote more than 27 percent of their income at the time of application to debt service. "Income" as defined includes, in addition to the gross income of the loan applicant, 50 percent of the income of his wife. "Debt Service" as defined includes, in addition to the amortization of the first mortgage loan principal and interest, the annual property tax 67. levy and any second mortgage debt service as may exist. The above gross debt service ratio discriminates against the poor. This discrimination, although inadvertent, is nevertheless real. Due to the N.H.A. gross debt service constraint, a low income family in possession of a down payment which would suffice in the case of a mortgage loan application by a middle or upper income family is, because of inadequate income, denied a loan. That the low income mortgage applicant is willing to devote more than 27 percent of his annual income to debt service is considered irrelevant. Denied N.H.A. mortgage financing, the low income family has no choice but to enter the rental market. Ironically, upon entry into this market, the same family may pay considerably more than 27 percent of its annual income in order to secure adequate accom-modation. Further, because i t rents rather than amortizing a mortgage loan, this family is denied the privilege of building a home equity. In this manner the relative poverty from which i t suffers is perpetuated. The function of the gross debt service ratio is to minimize risk in mortgage lending. The underlying rationale is that i f borrowers possess an income sufficiently in excess of their annual housing costs, their ability to meet these annual housing costs will be sufficiently great to preclude loan default and consequent mortgage foreclosure. Because N.H.A. insured mortgage loans are funded by the private as opposed to the public sector, i t is felt that the above gross debt service ratio is necessary to attract private funds into the insured mortgage market. The above argument, while intuitively appealing, fails to recognize two facts: 68. a) The government, through the N.H.A. foreclosure insurance scheme, guarantees that private lenders will be recompensed in f u l l for any loss arising from loan default and consequent foreclosure. Additional lender protection in the form of a low maximum gross debt service ratio is therefore superfluous. b) The annual rate of foreclosure on N.H.A. insured mortgages during the interval 1954-69 has been minimal. This fact was recognized by the government on June 27, 1969 when i t voluntarily reduced the foreclosure insurance premium from 2 percent to 1 percent of i n i t i a l . . . 1 mortgage loan principal. There is no reason to believe that liberalizing the gross debt service ratio will result in an increased rate of foreclosure of N.H.A. insured mortgages. However, liberalization of the above constraint would mean that given any interest rate, many potential low income home purchasers currently denied N.H.A. mortgage financing on the grounds of inadequate income would qualify. For example, assuming an interest rate of 10 percent and an annual property tax levy of $270, and further assuming a-:gross debt service ratio of 35 percent rather than 27 percent, although the monthly payment required to amortize an $18,000 mortgage loan over 25 years would remain unchanged at $161.01, the annual income required for home purchase would shrink from $8,155 to $6,291. Adequate current family income data pertaining to Metropolitan Vancouver is not available: i t is therefore impossible to predict how many low income Metropolitan Vancouver families would benefit from the above $1,864 reduction in the annual income require-ment for home purchase, but no doubt the number would be substantial. ^Central Mortgage and Housing Corporation, Canadian Housing  Statistics, The Queen's Printer, Ottawa: March, 1970, p. xvi. 6 9 . The Interest Rate As noted previously, the main determinant of mortgage loan costs and hence, given the present N.H.A. regulatory framework, of the income required for home purchase, is the interest rate charged. Given this fact, it is logical to state that the most direct method of assisting low income families in home purchase, other than actually granting cash, is through a system of interest rate subsidy. At present N.H.A. financing is theoretically available to a l l home purchasers in Canada, irrespective of income class. However, as we have seen, due to the dual effect of the current 27 percent gross debt service ratio and high interest rates, N.H.A. financing is effectively denied to low income families. Thus we find ourselves in the anomalous situation in which a government insured mortgage market characterized by favourable borrowing terms with respect to the conventional market exists, but the benefit of these favourable terms is effectively restricted to the middle and upper income classes. The above situation is absurd for two reasons: a) The home ownership aspirations of low income families who, by definition need the most assistance, are being ignored by the government, while b) The benefits of the N.H.A. insured mortgage market are accruing to middle and upper income groups who, by definition, have the least need for financial assistance. 70. The purpose of this section is to suggest a system of interest rate subsidy which would reverse the above described situation and place the benefit of N.H.A. insured mortgage financing where i t rightfully belongs: with the low income family. More specifically, this section proposes a system of financing subsidy which would enable a l l but the lowest family income groups within Metropolitan Vancouver to qualify for the purchase of those homes contained in the lower 46 percent of the 1969 Metropolitan Vancouver housing flow, given current market conditions. The system proposed is characterized by the following salient features: a) N.H.A. insured mortgage financing is rendered unavailable to middle and upper income groups: only families designated as "low income" qualify. b) For those families qualifying, the interest subsidy is not uniform but graduated, the graduation being inversely correlated to family income. Table 20 comprises a schedule of monthly amortization costs per $1,000 borrowed at various rates of interest on a mortgage loan having a term of 25 years. Table 21 illustrates the home purchasing power which would be enjoyed by the various income groups given a gross debt service ratio of 35 percent, an annual property tax levy of $270, a 25 year mort-gage loan, and an interest subsidy inversely correlated to family income. The interest rate chosen for each income class is that which would enable those in the income class in question to approximate as closely as possible 71. Table 2 0 SCHEDULE OF MONTHLY AMORTIZATION COSTS PER $ 1 , 0 0 0 BORROWED' Annual Rate Monthly Amortization Annual Rate Monthly Amorti-of Interest Cost per $ 1 , 0 0 0 of Interest zation Cost per $ 1 , 0 0 0 % of .11 • $ 3 . 5 4 6 7 , $ 6 . 3 9 17. $ 3 . 7 7 6 i ; % $ 6 . 6 9 ik% $ 3 . 9 9 7 7 , $ 7 . 0 0 2% $ 4 . 2 3 ' 7%% $ 7 . 3 1 2h% $ 4 . 4 8 87o $ 7 . 6 3 3% $ 4 . 7 3 • 8%7o $ 7 . 9 5 3h7o $ 4 . 9 9 • 9 7 » $ 8 . 2 8 ' 47o $ 5 . 2 6 9%7o $ 8 . 6 1 4%% $ 5 . 5 3 1 0 7 » $ 8 . 9 4 57o $ 5 . 8 1 10%7c $ 9 . 2 7 5%%' $ 6 . 1 0 Source: P. M. Hummel and C. L. Seeback, Mathematics of Finance (New York: McGraw-Hill Book Company, Inc., 1 9 5 6 ) , pp. 2 6 7 and 3 3 9 et seq. 7' "Table 20 assumes a mortgage loan term of 25 years. Table 21 HOME PURCHASING POWER BY INCOME CLASS10 Income Average Maximum Income Maximum Income Annual Monthly Loan Maximum Loan Inferred Class Monthly Which could be Which could be Interest Amortization Which can be Maximum Income Devoted to Devoted to Rate Cost per Serviced Property Debt Service Loan Amorti- Charged $1,000 Price zation <1$2,000 $81.33 $29 .17 $6.67 \ of 1% $3.54 $1,884 $1,983 $2,000-$3,000 $125.00 $43.75 $21.25 h of 1% $3.54 $6,003 $6,315 $3,000-$4,000 $291.66 $102 .08 $79.58 7.0% $7.00 $11,368 $11,966 $4,000-$5,000 $375.00 $131.25 $108.75 •7.0% $7.00 $15,536 $16,353 $5,000-$6,000 $458.33 $160.42 $137.92 8.5% $7.95 $17,348 $18,261 $6,000-$7,000 $541.66 $189.58 $167.08 10% $8.94 $18,689 $19,673 Source: Table 20. Table 21 assumes a a 25 year mortgage gross debt loan term, service ratio of 35 percent, an annual property and an interest subsidy inversely correlated to tax levy of $270, annual income. 73. the purchasing power required to buy those homes contained in the first four value classes of the 1969 Metropolitan Vancouver residential property value profile derived in Chapter III. In general, it was attempted to place families in the position of being able to purchase properties falling into the same relative position on the residential property value profile as the families themselves occupied in the income distri-bution . Table 21 was constructed in the following manner: a) Each family income class up to and including the $6,000-$7,000 range was listed, together with the average monthly income received by those in each class . b) Because a gross debt service ratio of 35 percent was hypothesized, each monthly income derived was multiplied by .35 to arrive at the maximum monthly income which could be devoted to debt service. c) An annual property tax levy of $270, or $22.50 per month was hypothesized. Hence $22.50 was deducted from the maximum monthly income which could be devoted to debt service to arrive at the maximum monthly income which could be devoted to loan amortization. d) For each income class," the interest rate was selected which would as closely as possible enable those families within the income class to purchase properties contained within the relevant value class of the 1969 residential property value profile. e) The maximum income which could be devoted to loan amortization for each income class was then divided by the monthly loan amortization cost per $1,000 borrowed, inferred by the interest rate chosen, to 74. arrive at the maximum mortgage loan which could be serviced by those families within the income class in question, f) Finally, the maximum mortgage loan which could be serviced was divided by .95, (the existing N.H.A. loan/value ratio), to arrive at the inferred maximum price of property which could be purchased under current market conditions, given the hypothetical financing arrangements. From examination of Table 21, two facts are immediately apparent: a) Even given a gross debt service ratio of 35 percent and an essentially interest-free loan, those families having annual incomes of less than $3,000 will not be helped by the proposed plan. Table 21 reveals that under the proposed plan the families in the lowest two income classes can afford to borrow $1,983 and $6,315 respec-tively. Reference to Table 9 reveals that in 1969 the average value of homes sold with Metropolitan Vancouver in the <$15,000 price range was $12,230. Thus i t is clear that even under the most generous lending terms, families in the extreme low income classes within Metropolitan Vancouver cannot afford to purchase their own homes. This is essentially because their incomes are insufficient to repay, over 25 years, even the principal of a loan sufficiently large to enable them to purchase the cheapest home currently available within Metropolitan Vancouver. b) Given a gross debt service ratio of 35 percent, families having an annual income of $6,500 or more can afford to pay an interest rate of 10 percent and at the same time qualify for the purchase 75. of housing in the $20,000 range. This infers that families having annual incomes above $7,000 have no real need for N.H.A. insured mortgage financing and should instead be serviced by the conven-tional market. This statement, of course, is made in the context of current market conditions. Should conventional mortgage interest rates continue to spiral as they have done in the recent past, families having annual incomes in excess of $7,000 could conceivably in the future be denied conventional mortgage financing on grounds of inadequate income. Table 22 illustrates the net effect which the proposed plan exerts on the ability of families having annual incomes in the $3,000-$7,000 range to purchase available inexpensive housing. Assuming the existence of a 25 year mortgage loan, a 95 percent loan/value ratio, a 35 percent gross debt service ratio, and a current conventional mortgage interest rate approximating 10.5 percent per annum, the illustrated interest subsidy schedule will enable those families having annual incomes between $3,000 and $7,000 to purchase those homes falling into the lower 46 percent of the 1969 Metropolitan Vancouver residential property value profile, given current prices. As indicated at the beginning of this chapter, the proposal contained herein is far from a housing panacea. Discussion of the more obvious problems follows. Table 22 RELATIVE ABILITY OF LOW INCOME FAMILIES TO PURCHASE AVAILABLE INEXPENSIVE HOUSING UNDER PROPOSED PLAN GIVEN .CURRENT PRICES Income Interest Maximum Ceiling Present Maximum Maximum Class Rate Loan Price of Price by N.H.A. Proposed Charged Obtain- Property Value Loans Loan as Per able Which Class of Currently a Per-Annum Under Could be Available Available centage Proposal Purchased Property on These of Properties Available Loan $3000-$4000 $4000-$5000 $5000-$6000 $6000-$7000 7.0% $11,368 $11,996 $12,230 $11,600 98% 7.0% $15,536 $16,353 $16,250 $15,400 100.8% 8.5% $17,348 $18,261 $18,750 $17,800 97.4% 10.0% $18,689 $19,673 $21,250 $18,000 103.8% Source: Table 14. 77. Interest Subsidy Costs There is l i t t l e doubt that the plan described above, i f imple-mented, would involve considerable cost. Table 22 proposes an average annual interest subsidy of 2.5 percent on an average loan of $14,750. This schedule necessitates an approximate dollar subsidy, over a 25 year term, of $7,242 per mortgage application approved. Moreover, because of the configuration of the mortgage loan amortization curve, these costs would not be evenly spread over the 25 year term, but would be concen-trated in the i n i t i a l years. The plan, if instituted, would therefore entail relatively heavy startup costs. Because no reliable estimate exists of the number of low income families who would apply for mortgage financing were the plan to be effected, no reliable estimate of the probable total dollar cost can be made. Nevertheless, the cost would no doubt be substantial. In fiscal 1969 Central Mortgage and Housing Corporation spent . 2 $12,600,000 on rental subsidies pertaining to public housing projects. If the proposed interest subsidy plan were implemented, no doubt some families currently living in government subsidized rental housing would be enabled to purchase their own housing. In so far as this is true, the cost of the proposed plan would represent a reallocation of govern-mental resources rather than a net increase in cost. Public housing projects induce the following problems in those communities in which they are located: 2 Ibid ., p . 35 . 78. a) The poor are concentrated in specific areas within the community. Therefore residents of public housing projects are denied the benefits of a heterogenous social environment. Further, because poor families suffer from a high incidence of divorce, inadequate education and other social i l l s , the schools adjacent to public housing projects tend to be overwhelmed with "problem children." Although the average school can absorb a limited number of "problem children" with no apparent ill-effects, when this limited number is exceeded, the efficiency of the school declines. The net result of large numbers of "problem children" devolving upon a particular school is therefore a decrease in the quality of education which the students of that school receive. A sound education is a prerequisite for success in later l i f e . Therefore the inadequate schooling resulting from the concentration of the poor in public housing projects tends to perpetuate poverty in the children of the poor. b) Public housing projects are architecturally distinctive; therefore those living in these projects are easily identifiable as "welfare cases." Such easy identification precludes the poor from escaping the stigma attached to those receiving government assistance. c) As mentioned previously, poor people living in rental accommoda-tion, albeit subsidized, are denied the privilege of building a home equity. Because they are denied the opportunity of owning property, the relative poverty from which these people suffer is perpetuated. 79 . Several points should be made with reference to the above argument. First, no rational person would hold that enabling low income groups to purchase housing will solve the "poverty problem." However, i f low income families were enabled to purchase, their homes would be indis-tinguishable from those of their neighbours. Hence the problem of social stigma, inherent in public housing projects, would largely disappear. In addition, the poor would be dispersed throughout, rather than con-centrated in specific housing projects within,the community. Hence the induced problems pertaining to the education of the young would tend to be ameliorated. Finally, by definition, those low income families purchasing homes would become property owners, enjoying the benefits of an equity buildup and the inflationary hedge which their properties would represent. For the above reasons, although enabling the poor to purchase housing is no panacea, it certainly appears a necessary first step in alleviating the condition of the poor. The above is not, however, a call for the complete abolition of public housing. Earlier in this chapter i t was demonstrated that there are some annual incomes which are simply too small, even given the most generous borrowing terms, to repay a 25 year mortgage loan sufficiently large to purchase the least expensive housing currently available within Metropolitan Vancouver. With respect to this group, there is perhaps no alternative to public housing. However, consideration of that question is beyond the scope of this study. To sum up: i f the proposed interest subsidy plan were instituted, i t would no doubt entail heavy cost, particularly in the early years. Due to a lack of data pertaining to potential demand, i t is impossible to forecast with precision the probable cost entailed. However, in so far as low income families currently accommodated in public housing projects were enabled to purchase, the outlay would represent a re-allocation of governmental resources currently devoted to rental sub-sidies rather than a net new cost. Due to the social problems induced by public housing, and the promise which low income home ownership bears for the amelioration of these problems, public funds spent on interest subsidies for the poor could yield a high future social return. Administrative Costs The proposed interest subsidy plan is far from immutable. Because specific interest subsidies are determined by both the current level of interest rates and the mortgage applicants' income level, the interest subsidies granted will require periodic adjustment. Such a requirement presupposes certain administrative costs. The writer has no reliable estimate of either the internal cost structure of Central Mortgage and Housing Corporation or the volume of mortgage applications which would be induced by institution of the proposed interest subsidy plan. Therefore no reliable estimate can be made of the plan's administrative cost. There is no reason to suppose, however, that the above cost would prove exorbitant. The interest subsidy relevant to each mortgage loan outstanding could be adjusted annually. Such adjustment;would, given adequate information, be a 81. routine clerical task. To ensure that adequate income information is furnished, low income mortgagors could be required to f i l e a statement of income with C.M.H.C. annually. False income declarations could be penalized by revocation of mortgage loan coverage. The administrators of the proposed interest subsidy plan would, of course, be intimately familiar with the current residential mortgage interest rate at a l l times. Flow of Mortgage Funds N.H.A. insured mortgage loans are currently funded by the private sector. This would also be the case under the proposed interest subsidy plan. In fact, funding by the private sector is necessary for the ultimate success of the plan. This requirement however poses certain difficulties for the plan's successful implementation. Mortgage lenders are notoriously conservative. The plan described calls for a relaxation of the gross debt service ratio from 27 percent to 35 percent. In addition, under the plan, N.H.A. insured financing will be restricted to low income families. Therefore, the "quality" of insured mortgage loans, measured in terms of "times debt service covered by income," will decline. Private lenders are likely to disapprove of this decline in loan quality, and if this were the sole consideration, we would expect the supply of private funds flowing into N.H.A. insured mortgages to decrease markedly. This however, is not the sole considera-tion. Under the proposed plan the government guarantee to fully indemnify mortgage lenders from loss arising from foreclosure will remain in effect. 82. Further, the private lender will continue to earn the f u l l rate of return • on his investment. However, instead of deriving the entire interest revenue from the mortgagor, he will derive part from the mortgagor and part from C.M.H.C. There is a second and more compelling reason why the supply of private funds flowing to N.H.A. insured mortgages will not disappear upon implementation of the proposed plan. Mortgage lenders, in order to minimize risk at any given revenue level, typically diversify their mort-gage portfolios. Mortgage loan portfolios are typically divided into conventional mortgages, (which are the more lucrative), and N.H.A. insured mortgages, (which are the more secure). Whether or not the proposed plan is instituted, mortgage lenders will continue to diversify their holdings in the above manner. If the plan is implemented, mortgage lenders will have no choice, given that they wish to diversify their holdings, but to approve the available N.H.A. insured mortgage applications. This is unlikely to cause lenders undue distress however, because, as pointed out previously, lenders will remain protected against loss arising from loan default and consequent mortgage foreclosure. In addition, they will continue to earn the f u l l rate of return on their inves tment. Economic Effects In discussing the probable economic effects of the proposed plan, a distinction must be drawn between short run and long run effects. Ironically, the short run result of implementing the plan is likely to 83. be an increase in the price of inexpensive housing. This will result from the housing demand of low income groups, heretofore largely in-effective, being exerted on the limited supply of inexpensive housing available within Metropolitan Vancouver,. It was estimated in Chapter II that in 1969, 5,576 units or approximately 46 percent of the total . housing flow sold for less than $22,500. This figure of 5,576 units therefore constitutes an approximation of the number of inexpensive housing units which are annually available for sale within Metropolitan Vancouver. However, as previously stated, no reliable estimate exists as to the magnitude of the low income housing demand which would be rendered effective through institution of the proposed plan. Hence, although prices of inexpensive housing can be expected to rise upon institution of a system of interest subsidy, because of a lack of reliable data, i t is impossible to forecast the magnitude of this price increase. As stated above, institution of an interest subsidy plan would, in the short run, raise the price of inexpensive housing. However, the deleterious effect of this temporary price increase could be mitigated by the awarding of differentially generous interest subsidies. Each interest subsidy granted would be annually reviewed. Therefore dif-ferentially high interest subsidy costs incurred as a result of the short-run price increase could be curtailed as the price of inexpensive housing declined to an equilibrium level. Although in the short run, institution of the plan would result in an increase in the price of inexpensive housing, this condition would not obtain in the long run. In the long run, operation of the f i l t e r 84. process would ensure that any a r t i f i c i a l short run price increase stemming from insufficient supply was impermanent. This follows from the fact that i f a low income family buys an existing home, the occupying family must sell that home. However, the process does not stop there. The family heretofore occupying the sold house must now buy another. Families, when trading homes, typically trade upwards towards higher quality. Hence the vendor family will probably purchase a home of higher quality than the one sold. Once again a family is displaced by reason of sale, and once again this family will purchase a home of relatively higher quality. The end result of this purchasing process is that "terminal families" purchase new housing. New construction increases the available stock of housing which, ceteris paribus, tends to depress the prevailing price of a l l value classes of housing. The above process continues until a l l anomalous price increases stemming from excessive demand being exerted upon limited supplies of particular housing classes are eradicated. Given the efficient operation of the fi l t e r process, we would therefore expect that, although in the short run the price of inexpensive housing would increase as a result of implementing an interest subsidy plan, in the long run these temporary increases in price would disappear. The Quality Question This study has presented a financing scheme under which low income families, currently denied mortgage financing by reason of inadequate income, will be granted housing loans sufficiently large to enable them 85. to purchase the least expensive housing currently available within Metropolitan Vancouver. However, the goal is not to enable low income families to secure mortgage financing per se, but to enable them to purchase standard detached dwellings within Metropolitan Vancouver. Therefore the crucial question is, by making mortgage financing available, have we enabled the urban poor of Metropolitan Vancouver to purchase decent housing? The above question can be restated in the following fashion: do the least expensive single family dwellings currently available within Metropolitan Vancouver represent "decent housing"? This question cannot be directly answered by this study. The sample upon which the analysis of the 1969 Metropolitan Vancouver housing supply was based comprised approximately 5,600 properties. However, due to excessive cost, this sample was never checked with reference to housing quality. The units comprising the sample were merely classified on the basis of sales price. It is therefore possible that these housing units in the lower 46 percent of the 1969 Metropolitan Vancouver housing value profile are "substandard" in nature, and by enabling the urban poor to purchase these units, we have done l i t t l e to better their lot. In 1961, 8,510 detached dwellings or approximately 5.0 percent of the existing Metropolitan Vancouver detached housing stock was classified 3 as "being in need of major structural repair." It is logical to suppose Dominion Bureau of Statistics, 1961 Census of Canada, Population  and Housing Characteristics by Census Tract. Vancouver. Ottawa: The Queen's Printer, 1963, p. 21. 86. that the units so described were concentrated in the lower ranges of the 1961 residential property value distribution. Assuming that the above percentage remained unchanged during the interval 1961-69, and further assuming that those units in 1969 requiring major structural repair were exclusive to the lower 46 percent of the 1969 Metropolitan Vancouver housing value distribution, we can infer that 10.9 percent of the lower 46 percent of the 1969 Metropolitan Vancouver housing value profile was in need of major structural repair. If the quality of those housing units comprising the lower 46 per-cent of the current Metropolitan Vancouver property value profile is indeed as low as the above figure would indicate, the goal of the interest subsidy plan may well be subverted. However, due to the excessive cost involved, the question of housing quality within Metropolitan Vancouver was of necessity neglected. Such a study would provide a suitable topic for some future researcher. Conclus ions 1. Given the present N.H.A. 27 percent maximum gross debt service ratio and current high interest rates, l i t t l e benefit would accrue to low income home purchasers by increasing the present N.H.A. loan maximum of $18,000 pertaining to the purchase of existing properties. 2. The above mentioned maximum N.H.A. gross debt service ratio of 27 percent discriminates against those low income families aspiring towards home ownership. Further, this low maximum, given the government foreclosure insurance scheme, appears unnecessary 87. in order to ensure adequate private funding of N.H.A. mortgages. It is therefore recommended that this maximum ratio be increased from 27 percent to 35 percent. 3. In order to render mortgage financing available to low income families, a system of interest subsidy inversely correlated with annual income should be instituted. Further, an income ceiling should be established above which families wishing to purchase housing must be serviced by the conventional market. 4. There exist some families whose incomes are insufficient to repay over 25 years even the principal of the maximum mortgage loan •necessary to purchase the cheapest available housing within Metro-politan Vancouver. The above is true even assuming the existence of a 35 percent gross debt service ratio. It is therefore clear that the proposed interest subsidy plan does nothing to better the lot of those families in the extreme low ranges of the income distribution. With respect to the accommodation of the above .described families, there may be no alternative to public housing. However, this question, being beyond the scope of the present study, remains unanswered. 5. No reliable estimate can be made as to the probable interest subsidy costs of the proposed plan, however they are likely to be consider-able. Further, because of the configuration of the mortgage loan amortization cost curve, the plan will entail relatively heavy . start-up costs. However, in so far as interest subsidies are paid to low income families previously living in public housing projects, 88. the outlay will represent a reallocation of governmental resources rather than a net new cost. 6. There is no reason to believe that the administrative costs of the proposed interest subsidy plan would prove exorbitant. 7. Upon implementation of the proposed interest subsidy plan, given the government's foreclosure insurance scheme and the desire of mortgage lenders to diversify their holdings, there is no reason to believe that the supply of private funds flowing to N.H.A. insured mortgages would decrease markedly. 8. Implementation of the proposed interest subsidy plan wi l l , in the short run, cause an increase in the price of inexpensive housing. However, in the long run, given efficient operation of the f i l t e r process, these anomalous price increases will disappear. A greater supply of inexpensive housing within Metropolitan Vancouver will result. This increase in supply will be purchased by those low income families whose housing demand has been rendered effective •through receipt of an interest subsidy. 9. The plan proposed enables low income families, given current prices, to purchase the cheapest housing currently available within Metro-politan Vancouver. However, no guarantee exists that the homes comprising the lower 46 percent of the Metropolitan Vancouver property value distribution constitute "decent housing." This being true, the intent of the proposed plan, to render standard detached dwellings available for purchase by low income families within Metropolitan Vancouver could certainly be subverted. V 89. Due to excessive cost involved, investigation of the quality of the Metropolitan Vancouver housing stock was not undertaken. Such an investigation would however, constitute an excellent topic for some future researcher having an interest in the Metropolitan Vancouver housing market. APPENDIX I The f i n d i n g s of Chapter I I I i n d i c a t e i t i s necessary that no more than 46 percent of the 1969 M e t r o p o l i t a n Vancouver f a m i l y income d i s -t r i b u t i o n f a l l below $8,155 per annum i f the lower 46 percent of the 1969 M e t r o p o l i t a n Vancouver housing flow i s to be financed by f a m i l i e s i n the lower 46 percent of the f a m i l y income d i s t r i b u t i o n . I t was a l s o noted i n Chapter I I I t h a t , due to a l a c k of adequate income dat a , the e x i s t e n c e of t h i s necessary c o n d i t i o n could n e i t h e r be c o n c l u s i v e l y proved nor d i s p r o v e d . The purpose of t h i s appendix i s to present the a v a i l a b l e f a m i l y income dat a , and through a n a l y s i s of these d a t a , to a r r i v e at some t e n t a t i v e c o n c l u s i o n s as to the e x i s t e n c e of the above necessary f i n a n c i a l c o n d i t i o n . Table 23, based on p u b l i s h e d D.B.S. da t a , shows the non-farm f a m i l y income d i s t r i b u t i o n which obtained throughout Canada i n 1965. An average annual increase i n income of 5 percent was assumed to have obtained during the i n t e r v a l 1965-69, and based upon t h i s assumption, the estimated 1969 Canadian non-farm f a m i l y income d i s t r i b u t i o n , a l s o shown i n Table 23, was d e r i v e d . Table 23 estimates that 61.9 percent of non-farm Canadian f a m i l i e s had incomes below $7,000 i n 1969. F u r t h e r , the 1969 median non-farm f a m i l y income i n Canada i s estimated to have been $6,474. Table 23 DISTRIBUTION OF NON FARM FAMILIES BY INCOME CLASS, CANADA ^^Income Class $1000- $2000- $3000- $4000- $5000- $6000- $7000- $10000+ T o t a l Average Med ian Year <$1000 $1999 $2999 $3999 $4999 $5999 $6999 $7999 Income Income 1965 6.6 8.5 8.9 10.5 11.3 12.0 10.8 19.2 12.0 100.0 $6049 $5327 1969 5.4 8.2 7.6 9.9 9 .9 11.3 9.6 17.0 21.1 100.0 $7790 $6474 Source: Dominion Bureau of S t a t i s t i c s , Incomes of Non Farm F a m i l i e s and I n d i v i d u a l s i n Canada, Sele c t e d Years, 1951-65. Ottawa: The Queen's P r i n t e r , 1967, p. 29. The above estimates infer that, in Canada during 1969, 61.9 percent of a l l non-farm families had annual incomes of less than $7,000 and that 50 percent had annual incomes below $6,474. On the basis of these estimates, i t appears likely that the necessary condition of not more than 46 percent of the Metropolitan Vancouver family income dis-tribution falling below $8,155 per annum does not hold. Consequently, it does not appear likely that the families falling into the lower 46 percent of the 1969 Metropolitan Vancouver family income distribution could finance the homes falling in to the lower 46 percent of the 1969 Metropolitan Vancouver housing flow under current market conditions. Indeed,, if we assume that the family incomes in the $7,000-$9,999 income class shown in Table 23 are evenly distributed, the lower 46 percent of the 1969 Metropolitan Vancouver housing flow could have been financed under current N.H.A. requirements by only those families in the top 30 percent of the' estimated 1969 Canadian non-farm family income distribution. However, the aforementioned income distributions and income estimates relate to non-farm Canadian families rather than to families within Metropolitan Vancouver. The possibility therefore exists that family incomes within Metropolitan Vancouver are sufficiently far above the national average to vitiate the foregoing argument. This possibility will be explored later in this appendix. Additional evidence supporting the contention that families falling into the lower 46 percent of the 1969 Metropolitan Vancouver family income distribution could not afford to purchase homes falling into the lower 46 percent of the 1969 Metropolitan Vancouver housing 93. flow under current market conditions is supplied by Table 24, extracted from the Economic Council of Canada's Fifth Annual Review. Table 24 DISTRIBUTION OF NON FARM FAMILY INCOME BEFORE TAX Distribution of Total Income 1951 1961 1965 (Percentage) Lowest Income Fifth of Families 6.1 6.6 6.7 Second Fifth 12.9 13.4 13.4 Third Fifth 17.4 18.2 18.0 Fourth Fifth 22.5 23.4 23.5 Top Fifth 41.1 38.4 ' 38.4 All Families 100.0 100.0 100.0 Source: Economic Council of Canada Fifth Annual Review: The Challenge of Growth and Change, Ottawa: The Queen's Printer, 1968, p. 107. Table 24 reveals that in 1965 throughout Canada, families falling into the lower 60 percent of the income distribution shared only 38.1 percent of total income. Table 24 further reveals that this asymmetric income distribution has been remarkably stable over the 14 year period 1951-1965. Given a condition of marked asymmetry, it is clear that those families in the lower ranges of the income distribution are at a 94. severe disadvantage when competing with those in the upper ranges for the purchase of an expensive good, such as a detached dwelling. This is especially true when purchase is governed by rigid regulations such as those of N.H.A. There is no reason to believe that the aforementioned asymmetry has decreased during the period 1965-69. Further, there is no reason why this asymmetry should not characterize Metropolitan Vancouver in addition to the nation as a whole. Consequently, there is serious doubt as to the ability of low income families to purchase standard detached, housing within Metropolitan Vancouver under current market conditions. Table 25 comprises the most direct measure of the 1969 family income distribution which obtained within Metropolitan Vancouver. However, Table 25 reports disposable rather than gross income. If we assume that disposable income averaged 80 percent of gross income within Metropolitan Vancouver during 1969, and that the effect of transfer payments was accounted for in the construction of the table, Table 25 reveals that 71.3 percent of Metropolitan Vancouver families received gross incomes of less than $10,000 in 1969. In light of the previously discussed asymmetry of the underlying income distribution, it is unlikely that less than 46 percent of Metropolitan Vancouver families received incomes below $8,155 in 1969 i f 71.3 percent received an income of less that $10,000. From examination of Table 25 it might appear that because the average 1969 Metropolitan Vancouver family disposable income was $8,180, 95. Table 25 DISTRIBUTION OF FAMILY DISPOSABLE INCOME METROPOLITAN VANCOUVER 1969 (Percentage) 0-$2999 $3000-$4999 $5000-$7999 $8000-$9999 $10000+ Total Average Income 9.9 22.0 41.2 14.2 12.7 100.0 $8,180 Source: Sales Management: The Marketing Magazine, Vol. 102, No. 12, June 10, 1969, p. E44. that the "average" Metropolitan Vancouver family satisfied the minimum $8,155 gross income constraint required to finance those homes within the lower 46 percent of the 1969 Metropolitan Vancouver housing supply. This condition is however, more apparent than real. As Table 24 shows, the Canadian family income distribution is markedly asymmetric, therefore any figure purporting to show "average" income is of limited value. A more meaningful figure, given asymmetry, would be median family income; the income below which exactly 50 percent of Metropolitan Vancouver families f a l l . Unfortunately this figure is not published by Sales  Management: The Marketing Magazine. The income data examined in this appendix are necessarily far from ideal. As stated in Chapter III, adequate data showing the current 96. f a m i l y income d i s t r i b u t i o n w i t h i n M e t r o p o l i t a n Vancouver are simply not a v a i l a b l e . However, the data examined, although fragmentary, a l l i n d i c a t e that low income r e c i p i e n t s t y p i c a l l y cannot purchase standard detached housing w i t h i n M e t r o p o l i t a n Vancouver under c u r r e n t market c o n d i t i o n s . CONCLUSIONS The current value distribution of detached housing within Metro-politan Vancouver is such that, given current conditions, home purchase cannot be effected by a l l families. Due to their relatively weak purchasing power, low income families, as expected, are in the most disadvantageous position. Although, due to a lack of adequate data, this relative disadvantage could not be directly proven, a l l available evidence emphasizes its existence. To deny the urban poor the privilege of home ownership within a flourishing local economy is both inequitable and costly. The inequity is obvious and requires no further explanation; however, why is denial of home purchase to low income families costly? The fundamental reason stems from the self-perpetuating nature of poverty. If we continue to segregate low income families in public housing projects and effectively remove them from the mainstream of community l i f e , we will certainly be faced with a greater "poverty problem" in the future. The alternative is, of course, to assist low income families to purchase their homes. The financing scheme suggested in Chapter IV demonstrates how home purchase among low income families may be facilitated. The scheme comprises alteration of existing N.H.A. home financing regulations coupled with the granting, to eligible applicants, of a mortgage interest subsidy inversely correlated to annual income. Although far from a panacea, this scheme promises to at least weaken the pervasive effects of urban poverty. GLOSSARY OF ABBREVIATIONS Burnaby New Westminster Surrey Richmond Port Moody Port Coquitlam Coquitlam Delta Vancouver City North Vancouver West Vancouver BIBLIOGRAPHY Canada. Dominion Bureau of Statistics. Incomes of Non-Farm Families  and Individuals in Canada, Selected Years, 1951-65. Ottawa: The Queen's Printer, 1967. . 1961 Census of Canada. Population and Housing Characteristics by Census Tract. Vancouver. Ottawa: The Queen's Printer, 1963. Central Mortgage and Housing Corporation. Canadian Housing Statistics. Ottawa: The Queen's Printer, 1970. Economic Council of Canada. Fifth Annual Review: The Challenge of  Growth and Change. Ottawa: The Queen's Printer, 1968. Financial Publishing Company. Monthly Amortized Mortgage Payments. Boston: The Financial Publishing Company, 1965. Greater Vancouver Real Estate Board. Multiple Listing Sales Data pertaining to Metropolitan Vancouver during quarters 1 and 3 of 1969. (unpublished). Hummel, P. M. and Seebeck, C. L. Mathematics of Finance. New York: McGraw-Hill Book Company Inc., 1956. Teela Publications Inc. Teela Market Survey: Metropolitan Vancouver and  New Westminster County. Toronto: Teela Publications Inc., 1969. White, P. H. Prologue to an Analysis of the Residential Mortgage Market  in Vancouver. Vancouver: The University of British Columbia, 1965. (unpublished). 

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