URBAN FINANCE

Evening Post, Volume CXXVIII, Issue 117, 14 November 1939, Page 11

URBAN FINANCE

, PRICES OF HOMES

DEBT ADJUSTMENT

POSSIBILITY OF CRISIS

. The possibility of a financial crisis where urban properties are concerned because of a large number of.. mortgages falling due three" or four-' years "hence, and the. danger of hous"e values going too high if general, ; values in-, crease because of the .war,. are ,me.n 7 tioned in a report on the* administration of tKe Mortgagors "and Lessees Rehabilitation Act which has just been issued by the Under-Secretary for; Justice (Mr. B. L. Dallard)..,, , The report is based on evidencegathered by the various adjustment commissions. ;,'

Adjustments of mortgages': on- :prop-L erty other- than farm land or stock 'were based, on values subsisting on. October 1, 1936. ; THe report states that fundamentally the future maintenance of these values depends on the continuation of a state of general employment at a wage level and on the maintenance of a price level hot less than ruling in October, 1936, and so long as these conditions exist or do not materially change there should be no call for any further.adjtistment. Briefly, the causes of the difficulties of urban property owners were: (a)- Excessive high purchase price; (b) lack, of .capital; and ;(c) loss of employment. , ; .,

HIGH PURCHASE PRICES.

"The third factor .precipitated : the crisis in many, cases," the, report -continues. "The first two factors were directly related :to a shortage, of.: 'the supply of houses for sale or available, for renting. Excessively .high purchase price was a direct.source ..of .trouble.. Lack of capital involved a; low deposit and the holding 1 of the property under an agreement, for sale and purchase. When property held .under agreement was subject to short-term . mortgages and a mortgage fell, due, the purchaser was immediately in grave' difficulties.' Many purchasers of this type should never have bought" properties at all, and should have, remained tenants, but they were forced into .purchasing because of their inability to rent.

"Whatever the ultimate position of these particular applicants; it is clear that unless an adequate:, supply of rental houses is made, available at a rate proportionate to the income level of the people the difficulties due to the purchase of houses on low deposits must inevitably occur..:: Where people dn the lower-income groups, cannot rent houses, they are forced vto purchase them, and their means, of lack of means, necessitates low deposit. A vendor who sells on a low deposit will do so only if he is getting more than :the property is worth. . '

FINANCIAL CRISIS?

"Generally speaking, the commissions reported th'ajb, except as Mo isolated cases, the adjustments would enable the applicants to retain the posjsession of their properties; vS6hie of 'the commissions "■■inttheirr r reports • adto the possibility of a • financial I crisis in about'three to four years' I time, when some thousands: of- mortp ! gages will fall due together.,' The mat- [ ter of refinancing will constitute a problem,, that w^ill require careful^ cpn- ! sideraiion. .'"■>. V\.v ,:•;■.,'"■"-: "-.'.',.;^ '-."■•■>':■"'.\ j "'ln the majority of "cases on first mortgage arranged on ; a itrustee basis,proved sound,.arid, while there were remissions ,-6f • interest, in some cases, the,; property generally sustained the amount: of the, principal sum due under.;the mortgage. \ Second mortgages advanced on the usual basis of 50 . per ■' cent, of . the equity over and above the .'irustee* ■first mortgage were- not so. well' secured,'and it was found that arrears of interest had to be remitted,' and, as was estimated by one commission, about one-half of the principal sum had also to be writ- j ten off. Advances on a more liberal basis on second mortgage of; on third mortgage; and sums diie; under' agree' ments for sale and purchasej suffered fairly severely. These- amounts, however, usually represented unrealised and unrealizable vendor profits. :; -

SMALL INVESTORS INVOLVED

"One commission was impressed with the number of private investors of small means in short-term mortgages. It thought that many mortgagees of that type were attracted by the higher interest rate arid by the nominally: limited term of the .advance—-that,is,,they placed ' considerable reliance and importance on the covenant to repay the principal sum at the expiration of; the term. The cpmmissionv .thought, that reliance, on. repayment, of the, principal sum at the expiration of. the.term of the mortgage was unwarranted,.; jis ; the; mortgagor could not make, arrangements^ for repayment j or ■/'refinancing.; The 'short-term,' .mortgage"^ : r uri(iq'ub.t-: edly an expensive^ fermv of'financing./ "All the commissions were.-, of _. jthei opinion that mortgagors had-in: .g^n-; eral honestly tried to meet their ..commitments," says Mr. Pallard. 'I'make one final observation pny, this'subject. If in the future extensive" price fluctuations occur—that is, if there ig a period, of high prices and' high >vages, fdl-; lowed;-by a period of ldwei*' prices aridi lower' wages—a problem' identical, with; that: at present under discussion will; recur in connection with mortgages oh ; properties purchased during the period of the high price level. The prices of; farm commodities are reflected in all spheres of economic life; and if these; are fixed at the rates ruling: duringthe last war the prices of town properties will irieyitably soar, • and immediH •ately those farm prices drop the mort-j1 gage' structure will once again become an acute' problem.1 * ; -?-'' <