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Crowd homebuying (or: How to own a home with no savings and no mortgage)


04-22-2014

 

by Rebecca Roache

Follow Rebecca on Twitter here

I originally posted this on my own blog. It’s not the usual sort of post I write for Practical Ethics, in that it’s not going to involve any ethical debate. But neither is it an ethically irrelevant topic, since I’m hoping that what I describe could help make life better for many people. I hope you’ll let me know what you think.

People rent rather than buy their homes for various reasons. Renting is more convenient and flexible than buying, since it’s easier to become a tenant than an owner, and easier to move on from a rented property than from one that you own. But a major reason that many people rent rather than buy is because they have no choice: they cannot afford to buy.

I want to challenge this view. I will argue that it is only because of the way in which our current system of buying and selling property works that many people cannot easily invest in property. This system is outdated. Overhauling it would make owning property easier for people not currently on the property ladder and more profitable for current homeowners. It would also give homeowners the flexibility and convenience currently enjoyed by renters, and it would give renters the security and investment opportunity currently enjoyed by owners. Further, overhauling the current system need not be complicated at all: it can be done by implementing tried-and-tested practices that are already used for other purposes.

A disclaimer before I start: I am a philosopher, not an expert on the property market. Reading about financial matters sends me to sleep. Whilst, as a reluctant tenant, I have given this matter a great deal of thought, these ideas are going to be half-baked. I know this already, so you don’t need to leave a comment to point it out. If you know more about how this could work than I do, please help educate me and help develop this idea by sharing your expertise in a comment. I may update this post to reflect improvements suggested by commenters.

 

You don’t need savings to afford to invest in property. You don’t even need to qualify for a mortgage.

Very often, people who rent property spend as much—or more, even—on their monthly rent payments than they would spend on mortgage payments if they owned the property they rent. Despite this, they can’t afford to buy a home because mortgage lenders won’t lend them enough money to buy the sort of home they need given their existing salary and savings, even though their rent payments demonstrate that they can afford the outgoings required to make mortgage repayments. They can’t save significant amounts for a deposit to buy a property because they are spending too much money on rent, and much of the savings they do have are tied up in security deposits, earning interest for their landlord or their letting agent.

Not being able to move from renting to buying, then, is not simply a matter of not earning enough money. It’s because the Kafkaesque and archaic system of renting and buying property in (and perhaps also outside) the UK makes it difficult for people to invest their money in property, even if they are very keen to do so, and even if they are already spending a significant amount of money on property in the form of rent payments.

Among the features of the current property system that makes it difficult to get a foothold on the property ladder are:

-          The fact that the more people with whom you pool resources to buy a property, the more risky and complicated buying and owning a home becomes.

-          The fact that, unless they want to become landlords, people expect to be able to live in any property they own or co-own.

-          The fact that anyone who cannot afford to buy a property outright (so, nearly everyone) is dependent upon mortgage lenders to help them become a home-owner.

-          The fact that—shared ownership schemes aside—you either have to buy an entire property, or none at all.

-          The fact that—shared ownership schemes aside—you have to choose between buying a property or renting one; you can’t do both.

(I’ll return to shared ownership schemes later. Ignore them for now.)

None of these features of the property market is essential. Buying, owning, and renting a home would be easier if we did things differently. Let’s consider an alternative way.

 

Crowd homebuying

Forget about the aspiration of becoming the sole or joint owner (subject to keeping up mortgage payments) of the home in which you live. Forget about the fact that the more people with whom you co-own a property, the more complicated and risky life becomes (what if someone wants out? what if we become enemies? what if one of the co-owners stops making their mortgage payments?). Forget about having to live in a property you own. Forget about the fact that if you’re a renter, you’re not an owner, and if you’re an owner, you’re not a renter (as I said, I’ll come back to the idea of shared ownership). Forget about having to rely on a bank to lend you a mortgage unless you’re wealthy enough to buy a property outright. All of these things are well entrenched in the way the property system currently works, but they’re not essential.

I want to suggest that we move to a system of crowd homebuying. Here, roughly, is how it would work, and why it would be better than the current system.

Property shares  Instead of buying a property either alone or with one other person, people could buy a share of a property (or a portfolio of properties) thereby co-owning it with any number of other shareholders. Don’t assume that you’ll all have to live there together. I’ll come to that.

Using internet power to attract shareholders  Potential shareholders could be recruited and co-ordinated using the internet, perhaps using a crowdfunding model. The system I’m proposing could be a form of equity crowdfunding, which is a relatively novel form of crowdfunding. There are existing efforts to support equity crowdfunding—for example, via this site and this site.

Property investment could be like any other shareholder investment  Suppose there was sufficient regulation and infrastructure to support such a shareholder system, perhaps similar to the sort of regulation and infrastructure that supports shares in companies. Shareholders in a (portfolio of) property could be shareholders in a company. Returns on investment could be paid in the form of dividends, or by the sale of shares in a rising property market.

Costs reduced and pooled  This sort of centralised regulation could cut costs for everyone, since legal work, insurance, surveying costs, and costs associated with the management and sale of property could be pooled.

No mortgage interest to pay  With enough investors, there would be no need for mortgages. Since the vast majority of the money one pays to a mortgage lender is pocketed by the lender as interest, a crowd homebuying model could offer better value for investors.

Renting would no longer mean pouring money down the drain  Crowd homebuying could offer renters the investment opportunity currently only enjoyed by buyers. A crowd-owned home could be inhabited by someone who makes a monthly payment that is equivalent (let’s say) to current market rent. Currently, a tenant’s monthly rent payment is split between the landlord’s mortgage repayment and—where the rent payment is greater than that mortgage repayment—profit for the landlord, minus any costs of maintaining the property. At the end of a month spent in her accommodation, a tenant has nothing to show for her monthly rent payment. By contrast, with crowd-owned homes, there would be no mortgage to repay, and therefore no bank interest to pay. Without parting with any more money than she does as a tenant in the current system, part of a tenant’s monthly payment could be used to buy an increasing stake in property, thereby enabling her to become a property owner as well as a renter. The remainder of her monthly payment could go towards dividends for the co-owners.

Perhaps some renters would prefer to save money by renting without investing, in which case their monthly payments would not involve an investment contribution. In such a case, whilst her monthly payment would be less than if she were also investing, a tenant’s dividend contribution could be more than it would be were she both renting and investing. Government regulation could require such a payment pattern in order to encourage people to invest—the government, after all, already takes action to encourage people to invest in other ways. With crowd homebuying, deciding not to invest in property in this way need not make it more difficult to become a property owner in the future, as it currently does, because the minimum investment in property could be much less than it is with the current system.

Owning would offer all the flexibility of renting  Crowd homebuying could offer buyers the flexibility currently only enjoyed by renters. Moving away from a system in which a homeowner is typically the sole (or joint) owner of his own home, and typically not an owner of any other home, would mean that people could own property without having to sell it simply in order to move house. People could move house whilst retaining any shares in property that they already own, including any shares in the property that they are leaving. Leaving a property that one co-owns would simply involve ceasing to be a tenant/co-owner of that property, and instead becoming a co-owner. Similarly, one could sell shares in property without moving house. The link between moving house and selling property would be broken on a crowd homebuying model.

In fact, we could get rid of the ‘buy vs rent’ mentality altogether  By giving renters the sort of investment opportunities associated with buying, and by giving buyers the sort of flexibility associated with renting, crowd homebuying could enable us to dispense with the ‘either rent or buy’ mentality that rules the current system. The current disadvantages of renting would not exist. I have already explained how crowd homebuying could benefit tenants by making it easier for them to invest in property. It could also benefit tenants by increasing their long-term security. Currently, at least in the UK, even model tenants can be evicted fairly easily from their homes. This often happens if the landlord wants to sell the property. But since crowd homebuying would enable co-owners to sell their share of a property without disturbing anyone living in it, this problem need not arise.

 

Crowd homebuying would benefit the rich as well as the poor

There currently exist schemes to help people of limited means become homeowners. These include shared ownership, in which people buy a share of their home and pay rent to a housing association for the portion they do not own; and the UK’s Help to Buy scheme, in which the government gives homebuyers an (initially interest-free) loan towards a deposit on a house, or offers increased security for mortgage lenders so that buyers can borrow more money. There are, however, drawbacks to using these schemes. Homeowners who use them usually face restrictions on being able to rent out their home if they need to move and are unable or unwilling to sell, so they are a risky option for people who might need to relocate. With shared ownership, there is less scope for buyers to negotiate on price than there would be if they were buying via the usual route, and there are restrictions when it comes to selling, too: shared ownership properties must usually be sold as shared ownership properties, which limits the market for them. The Help to Buy scheme, on the other hand, has been criticised for being likely to increase demand for housing, thus increasing house prices in the long term. And, unlike the crowd homebuying model that I have sketched here, these schemes do nothing to break the dependence of homebuyers on mortgage lenders, nor to do they reduce the minimum investment in property to a level attainable by anyone without significant savings.

I believe that crowd homebuying offers an attractive alternative to the current system. Crucially, not only would crowd homebuying help people of modest means take a first step on the property ladder, it would also offer much better value for money for wealthy investors too, assuming that they would otherwise be dependent on a mortgage on which they have to pay interest. And even very wealthy buyers who can afford to buy an entire house without a mortgage could benefit from the flexibility of being able to spread their money (and their risk) across shares in several properties, from the ease of being able to buy and sell these shares, and from the economies offered by pooled legal, maintenance, insurance (etc.) costs. That crowd homebuying would make life better for people of all incomes is reason to hope that it stands a better chance of working than schemes aimed at benefiting only the poor.

 

Could this really work?

The current property system developed in conditions where people’s salaries were not miniscule compared to the price of the sort of property they wanted to buy, as they are now. And it developed at a time when society lacked the ability easily to coordinate large numbers of investors; an ability that is now provided by the communicative powers of the internet. For these reasons and those mentioned above, the current system is inefficient and needs to be replaced.

But what would the economy be like if the entire UK property market moved to a crowd homebuying system? Would there be financial chaos? I don’t know; I lack any sort of expertise in this area. However, I think it unlikely that an essential part of the property market is dependency on mortgage lenders and the other restrictions described above. There are many successful markets that do not depend on buyers not being able (without a bank loan) to afford the products they want to buy, or facing restrictions on the ways in which they can buy, sell, or use the products in question. Crowd homebuying could work in a similar way to the buying and selling of shares in any other company, a system that has been tried and tested over many years.

A great benefit of crowd homebuying, though, is that it needn’t be an all-or-nothing system. It’s not the sort of thing that will work only if everyone agrees to use this system instead of the current one. Anyone is free, right now, to try to recruit investors in a property in which they want to live as part tenant, part shareholder, or in which they want to invest while someone else lives in it. There are some legal wrinkles associated with doing this—there are restrictions on the number of names that can appear on the deeds of a property, for example—but according to my father (a property solicitor with a side interest in investment), nothing that would be impossible to overcome. I’m wondering whether to try it myself. What do you think?

http://blog.practicalethics.ox.ac.uk/

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