Module 1 Flashcards
Real property as a product
Finite
Immobile
Durable
Unique
Finite
Limited supply of land, and it is impossible to create more, therefore the idea of scarcity is integral to the idea of real estate
Price
amount paid by a specific buyer to a specific seller under specific terms and circumstances of a specific transaction.
Value
is the monetary worth of property, goods, or services, including the perceived anticipation of future benefits. Present worth of a property
Meaning of Value as pertained to real property
Usefulness, desirability, and defined worth
Usefulness
include location, size, features, design, and upgrades/improvements
Negative factors to usefulness and desirability
things that restrict ownership rights, land-use bylaws, and title restrictions
Desirability
must be demand for it, and there must be some shortage of supply. Also unique characteristics
Defined worth
Must be purchasable or transferable.
Factors affecting desirability and demand
- Changes in Family composition (divorce, down sizing empty nesters)
- Population growth (birth rate/migration, business relocation)
- Employment Conditions, wage levels, and consumer confidence: ex… High employment rates contribute to consumer confidence and encourage purchase of homes, same a higher income. Low employment also the same
- Consumer preferences
- Investor Confidence
Consumer Preferences
can stem from changing family composition and patterns. Include such things as young, growing families who need larger homes, or empty nesters downsizing. Also affected by logistical issues such as job relocation and wanting to live closer to work or from personal priorities such as desire to retire in the country or to live nearer to recreational space.
Investor Confidence
Many investment options available to lenders and investors. When the real estate market is healthy, investing in mortgages provide higher returns. If slow or unstable, lenders and investors may prefer to put their money into other vehicles.
Investor confidence increases availability in mortgage money, making it easier for buyers to purchase.
Bank of Canada and what it does
Nations central bank. Not commercial bank and does not offer banking services to the public. Mandates monetary policy, bank notes, financial system, and funds management. Defined under the Bank of Canada Act as promoters of economic and financial welfare of Canada. Works to maintain financial well being of Canada and does so by regulating creit and currency in the best interests of the canadian economy. Not a government department; constructs its decisions independantly from Government of Canada
Main Influence of BOC
Can change overnight lending rate.
Overnight rate
The interest rate at which major financial institutions borrow and lend one-day (or overnight) funds among themselves. Set and controlled by the BoC
Prime Rate
Set by individual financial institutions to be used as a base to set interest rates. Often adjusted by financial institutions when BoC adjusts overnight rate.
In general terms, when the Bank of Canada adjusts its overnight rate either up or down, financial institutions usually follow and adjust their prime rate in the same direction. Therefore, if the overnight rate increases this could possibly have a negative effect on the housing market while a decrease could have a positive effect on the housing market. Lower interest rates translate to lower mortgage payments for the average borrower, and for some people an interest rate difference of 0.5% can mean the difference between being able to purchase a house or not. It must be underlined that mortgage interest rates are not entirely set by these rates; much more complex factors are considered to determine mortgage interest rates.
Prime Plus
above prime rate
Prime minus
Below prime rate
Government influences on supply and demand
- Lending policies (federal gov)
- Direct ownership of property
- Legal Policies
Lending Policies
The federal government can implement lending policies that affect the ability of consumers to access the real estate market. For example, in 2010 the Canada Mortgage and Housing Corporation (CMHC), a government-owned corporation, increased the minimum amount of down payment required for non-owner occupied rental properties to 20%. After that, buyers planning to purchase rental or investment properties with a government-backed mortgage required more of their own money to put towards the purchase price than before. This change may have reduced the number of people who could afford to make such purchases. In 2012, the federal government capped the maximum amortization for a CMHC-insured mortgage at 25 years, down from 30 years. The effect of the change equates to an increase in interest rate of approximately 0.9% on a typical mortgage, which may be enough to prevent some people from qualifying. At the same time, the government also implemented a policy to restrict the total amount that borrowers can withdraw in equity when refinancing their home to 80% of the value of the home, down from 85%. While both policy changes were intended to encourage “responsible borrowing,” the net result could be reduced access to mortgage financing and a negative impact on the real estate market.
Direct ownership of Property
Governments also influence the real estate market through direct ownership of property. Municipal government not only own streets and recreational areas, they also own buildings used for commercial/industrial purposes residential housing units used for public or subsidized living. Government-owned property can impact surrounding properties and areas.
Legal Policies
Municipal governments can implement and change bylaws related to land taxation, zoning, building codes, planning, and development restrictions. These kinds of changes could influence factors such as the costs associated with property ownership, specific uses of the land, ability to develop, and even annexation rights. This may decrease or increase the value of the affected property and therefore demand for that property. For instance, a single family home in a prime commercial corridor may have its land use changed, which may actually increase the perceived value.
Trends related to market strength
Employment statistics, migration statistics, and other demographic forecasts provide useful information about the strength of the real estate market. Other indicators such as the bank rate, consumer confidence index, and bankruptcy statistics are also important. From these, you can extrapolate what the effects on purchase financing and the mortgage market may be. This kind of knowledge is also useful when explaining behaviours of the real estate and mortgage markets in discussions with your clients.
Sources of trend information
Government agencies such as Statistics Canada, Service Alberta, and the Canada Mortgage and Housing Corporation (CMHC) offer excellent resources to help consumer and mortgage brokerage professionals alike keep abreast of the trends affecting real estate and mortgage markets.
Market trends and relationship to price
When you understand the general effects of economic and demographic trends on supply of and demand for property in a real estate market, then you also understand how value and/or price change in response.
Buidling Acivity
Government housing organizations such as CMHC look closely at building activity and/or builder commitments to begin construction on new property as a significant economic indicator. Building activity is sensitive to changes in the economy, so housing start statistics can reveal a great deal about changes in demand for both residential and commercial/industrial real estate, as well as employment levels and inventory (supply).
Statistics and how they are taken
Housing starts statistics track the number of new, privately owned housing units for which construction has started during a given time period. For example, a statistic that there have been 2,000 housing starts in the first quarter of the year means that construction has begun on 2,000 privately owned properties during that period.
Three basic housing units factored in to start data
Single family, townhouse units, condos
Each individual considered a housing start
Difference between housing production and other products
A significant difference between housing production and other products is the time it takes to start, slow, or halt production. For example, in the case of canned beverages, if market demand drops, production can be quickly slowed or stopped to prevent oversaturating the market. Slowing or stopping the production of buildings, however, cannot occur as easily. Because of costs and length of time involved in creating new housing, projects may start in a booming market and be completed in a low-demand market. The result is an increase in inventory (supply).
What is Absorption rate
The absorption rate is the number of months required to sell current property listings. It measures how fast or slow the current inventory of property for sale is being absorbed by consumers. Absorption rate is calculated by dividing the total number of available properties over a given period in a given area by the number of properties sold.
Absorption rate calculation
For example, if there were 8,000 properties listed over a 30-day period, and 1,000 of those properties sold, then the absorption rate would be 8000 ÷ 1000 = 8. In other words, there is eight months of inventory left on the market. If no new properties were listed and buying/selling continued at the same rate, there would be nothing left to buy after eight months.
Absorption rate and market type
Anything above 4 months of inventory is considered a buyers market. Anything below 2 and a half months is sellers market. Everything in between is balanced market
Who supplies market
- People who develop raw land
- those who own and renovate/and or refurbish existing buildings
Who demands market
- People who want to own real property to live or do business
- those who want to own for investment
- those who want to rent from someone else
Primary Mortgage Market
consists of lenders who originate and service new loans designed to assist in new construction, the acquisition of existing property, or renovation projects.
The primary mortgage market provides the necessary structure for the transfer of funds between lenders and borrowers. It also determines the cost and availability of mortgage funds.
Secondary Mortgage Market
Involves the purchase and sale of existing mortgage loans and servicing rights. Mortgages are purchased from primary lenders, bundled together, and then pooled and traded as mortgage-backed securities to investors such as pension funds, insurance companies, and hedge funds.
Primary Mortgage market lenders act?
Directly as mortgage originators
Secondary Mortgage Market lenders act?
indirectly as investors
Mortgage Bond Market
Is a low-risk part of the mortgage-backed securities market because bonds bought and sold are back by secured assets (real property).
Underlying asset can be sold as compensation in the case of a default by issuer of the bond.
Who are Canada Mortgage bonds issued from
Canada Housing Trust (CHT) created and managed by CMHC.
What does CHT do?
Buys previously insured and gauranteed national housing act mortgage-backed securities from approved financial institutions.
What is Canada Mortgage Bonds (CMB) designed for?
to enhance retail and institutional investment in the residential market
to ensure a competitive alternate source of mortgage funds
Two types of Institutional Lenders
Traditional and conventional or deposit taking and non-deposit taking
Components of traditional lenders
- deposit taking
- large enough to be regulated under federal and provincial laws
- Lend money in exchange for interest fee
- Broadest range of financial services
Types of traditional lenders or deposit taking lenders
Chartered banks
credit unions
trust companies
Conventional or non-deposit lenders components
- offers many of services of banks but not licensed as a deposit taking institution.
- Have to find alternative solutions for funds as they do not hold money from traditional bank accounts
Types of Conventional (non-deposit taking) lenders
- Life insurance companies
- loan and finance companies
Components of Non-institutional lenders
- similar to non-deposit taking lenders, except that they are considered to be outside of the mainstream and are more specialized.
- offer fewer financial services
- cannot accept deposits
Types of Non-institutional lenders
- mortgage bankers
- mortgage brokerages
- certain trusts
- loan, finance, and insurance companies
Components of private lenders
- type of non-institutional or alternative lender
- offer narrower services than non-inst.
who are private lenders comprised of
- individuals and/or groups of individuals who loan money.
Two main types of private lenders
syndicated mortgages and mortgage investments corps (MIC)
Types of Investors
- Individuals
- Groups of Individuals (private investors)
- businesses that act of behalf of many people (Institutional investors)
Difference between private investors and institutional investors
Institutional lenders deal in extremely large amounts of money from pooled funds and invest or manage financial contributions from many individuals and businesses.
Institutional investors are considered
Very knowledgable about investing, more able to invest broadly, less likely to fail or lose investment value.
Specific Types of institutional investors
pension funds mutual funds hedge funds insurance companies brokerage houses banks
How are institutional lenders accountable
- Investors must approve of investments
- If returns are not satisfactory, investors will pull out
Main sources of money for non-deposit taking lenders
investor money (primary means)
service fees
interest charges on loans
banks
Why banks invest in non-deposit taking lenders
- can take advantage of higher-risk and potentially higher-return deals, but distanced and somewhat protected from the associated risks
How do banks reduce risk through insurance
- must be accountable for defaults, so they are generally conservative in their loan policies
- maintain large cash reserves and other liquid capital as back-up security
- distance themselves from borrower default by making them take mortgage default insurance
What is reducing risk by securitizing
mortgage back securities
using backed up securities to minimize risk
Why was Risk and the development of regualtions enacted
regulations have been developed as a way of mitigating risk. Deposit taking institutions are highly monitored and regulated IOT reduce the risk that people who make deposits will lose their money or be taken advantage of in some way by the banks.
- If banks took advantage, people would not have money to buy goods and banks would have less money to lend.
- protect against peoples privacy
- ensure transparancy and accountability
- preventing criminal activity
How are regulations different for non-deposit taking lenders
- degree of regulations change the further a lender is from mainstream fin services
- further the lender gets from true bank status the narrower the range of fin services and higher the degree of investor involvement
- investor are regulated different than banks
Three parties involved in mortgage transactions
borrowers, lenders, and a mortgage broker or associate.
What is a mortgage brokerage
a legal entity licensed to deal in mortgages
What is a mortgage broker
a licensed individual who is authorized to operate and be responsible for managing a mortgage brokerage in AB. Must have worked for min 2 years as associate before becoming licensed as a professional broker
What is a mortgage associate
someone who is lecensed to facilitate mortgage transactions between borrowers and lenders. Must be licensed for min 2 years before you can apply for a brokers license. During that time, may only deal in mortgages with brokerage
Who does a brokers professional network include
Loan and/or insurance underwriters business development managers real estate professionals financial planners/advisors licensed real estate appraisers lawyers professional and trade organizations
What do loan and insurance underwriters do
individuals who assess and approve/decline deals based on internal policies that determine risk of particular lender
What BDMs do
Sales relationship reps, and VP sales bring business by recruiting brokerages to deal with the companies for which they work
How can BDMs help
knowledgeable about products their companies offer and new products. Can also answer questions about how to package or submit applications.
They do not collect or verify documents
May be able to take initial look for strength and weakness.
what do financial planners do
Help people reach financial goals with clear picture and plan. May plan things like:
Retirement strat saving plans mortgage options that support the action plan insurance options tax options estate planning
