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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 This system is outdated.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?
Seems like a good idea. This sounds similar to what building societies originally did in the 1800s (see e.g. Wikipedia article Building_society under History), although without the construction element and more flexible.
Thanks Ben! I had no idea that this is what building societies used to do. For anyone else interested, this is the essence of the point about building societies: ‘The first building society to be established was Ketley’s Building Society, founded by Richard Ketley, the landlord of the Golden Cross inn, in 1775.[4] Members of Ketley’s society paid a monthly subscription to a central pool of funds which was used to finance the building of houses for members, which in turn acted as collateral to attract further funding to the society, enabling further construction.’ (from http://en.wikipedia.org/wiki/Building_society#History)
Hi Rebecca!
As an (even more) amateur economics enthusiast, I think that you’ve got an interesting idea here! If I’m correct, you’re proposing that a purchase of a house could be “split” contractually between a number of interested parties, and that as a result there is no need for regular mortagage upkeep costs since the house is bought outright, and because each share is independent from the others, they can be bought and sold individually without impacting the overall “crowd fund”.
I do think there are some practical issues that need to be addressed however, and these mostly concern the “aim” of investing in such a crowd-funding scheme, and really as a result the scale of the scheme. Forgive me if I make points that you’ve already considered, or share information that you’re already aware of!
If you’re looking to spread your money and diversify, there are already things called Real Estate Investment Trusts (REITs), or at least there are in Australia. These act basically like a managed fund – a trust makes large investments into multiple different properties, corporate or residential, and then sells shares in the trust. These shares are then tradeable on the market, and thus very liquid and easily bought/sold (exchange traded funds – ETFs).
The advantage of these, of course, are that you’re investing with countless other shareholders, and in many different properties, thus theoretically your investment is diversified and less risky. Shares can also be relatively quickly moved on exchanges, if a sudden need arises.
The main disadvantage of these, of course, is that you’re investing with countless other shareholders – the amount of say that you have in any investment decision made is also correspondingly minimal – and there is little-to-no ‘tangible’ value to your shares, in that they cannot be redeemed for parts of properties or a house, or even special tenancy rights, so if you are investing with the intent to eventually own a house, this route has no particular advantages in that regard. In addition, while theoretically diversifying your investment between many properties, the market as a whole tends to move in concert (i.e. house/property prices tend to drop everywhere at a similar time) and valuations of property (given that it’s a fairly illiquid asset) can vary significantly. The value of your ‘stake’ then really depends on a market-set value, and any significant growth often has to be financed by leveraging (which it basically the same as a mortgage anyway!). In addition, there is always the not insignificant “skim” by the managers and decision-makers of the fund.
On the other hand, you have small “group-funded” investments in a single property. Obviously the advantages of these is that you can have a more significant say in what happens with the property. You also have the advantage of knowing each and every one of your co-venturers, which could possibly make trust issues smoother. It also is a good way to build up towards owning a home completely, since it is feasible that the cost of the house could be split between tenants, so that you “buy and rent” at the same time, and it is imaginable that one could eventually become the sole owner of the house by “buying out” the other shareholders.
The main disadvantages here, however, are that the ‘shares’ in the house are practically as illiquid as property as an asset itself. Managing conflict and disagreements within the co-owners will largely be a function of trust and familiarity, and hence it makes it difficult if one co-owner wants to ‘sell out’ to a stranger. There will also necessarily be costs to maintain the property, which can be as substantial as rents in itself! For example, if you buy an apartment in a large complex in Australia outright, there are still ongoing upkeep fees (called “body corporate fees”) for the maintenance and repair of common property, which can in themselves be nearly as much as renting a similar property! Finally, once again there is the difficulty of valuing the share of the house, since the contractual obligations, part-share nature and illiquidity would not make it a particularly attractive investment.
In conclusion, I think that there are a number of difficult ‘balances’ that would need to be struck to make “crowd-funding” houses possible and attractive, and that the practical reality will be a lot more messy and complicated than you might expect.
1. Investment vs. living homes: if your purpose of investing in property is to have appreciable income growth, then this almost always necessitates some sort of leverage (since growth in the property market tends to be much slower compared to shares) and risk. If you intend, on the other hand, to simply own a home to live in (where income growth from the property doesn’t really matter) then perhaps a small-scale “crowd-funded home” might make this possible.
2. Scale: large multi-investor schemes tend to have better risk profiles and more liquidity, but on the other hand allow for less input into decision-making, less ‘tangible’ value for each share, and less potential to convert to home ownership. Smaller co-investment schemes offer more control over your investment and possible advantages in terms of “rent-to-buy” or tenancy rights, but will necessarily be subjected to more stringent contractual obligations as a result (regarding the sale of shares, maintenance of common property, who the tenants are etc.) and will possibly be more unwieldy and complicated.
Finally, regarding the effect on the property market – I’m not particularly well read on this topic (but then again, considering the accuracy of ‘well-read’ economic predictions, I think anyone can make claims) but I was under the impression that housing prices and price growth was heavily dependent on leverage (as well as undersupply, of course), in that leveraging to buy houses was dependent and causative of expectations of future house price growth, which then feeds back in a fantastic vicious circle.
Sorry for the long comment, let me know what you think! 🙂
Thanks for this, Chris! You are more knowledgeable about economics than I am, and I liked your comparison of crowd homebuying to REITs (I don’t even know if we have such things in the UK).
As I was thinking about all this, one thing that kept occurring to me was: even people who can’t afford a mortgage can invest in shares if they want to. Instead of moaning about how difficult it is to get a foot on the property ladder, why don’t they invest in something else instead? I can think of two reasons why they don’t. The first is that, if they’re renting and unable to get a mortgage, they presumably don’t have much spare cash to throw at investments in shares, and that by renting and investing in shares they would effectively have to spend twice over (rent payment + investment); by contrast, owning one’s own home means that one invests in property via one’s mortgage repayments (mortgage repayment = investment). The second is more cultural: buying one’s own home is the sort of thing that everyone aspires to do, whereas investing in shares is the preserve of people willing to learn all about how to do it, willing to take the risks associated with it, willing to tie up money for a long time, etc. This is despite the fact that, especially if you’ve never bought a home before, becoming a homeowner can be a very complicated process, comes with risks, ties up money for a long time, etc. (Although, no matter how much you lose through owning property, it’s very unlikely to be more than you lose by renting.) I don’t know how influential these cultural factors are likely to be, but it strikes me that the main issue here is the first one—i.e. that anyone paying rent is throwing money away. Crowd homebuying would help stop that happening by providing a way of investing as well as renting, and that is why it is preferable to continuing to rent while also investing via established routes.
You mention some possible problems in getting along with the other co-owners of a house you co-own. I guess this is a problem comparable to those faced by people who co-own a small business. But I don’t think it has to be this way: the communicative powers of the internet would surely make it possible to coordinate and smooth out these difficulties. I have in mind an online, not-for-profit, online organisation that acts as an agent in these sorts of transactions: if someone wants to sell their share, for example, then they have to go via the online agency who will find a buyer (or buyers). Yes, property is pretty illiquid, but I can see it being more liquid with crowd homebuying than it is currently. Currently, if you want to sell property, you have to wait until you find someone willing to buy it, then you may have to wait for them to get a mortgage, and possibly (if they also have property to sell) sell their existing property, which can place you in a long chain of sellers. Since, with crowd homebuying, people could invest whatever they could afford of their own savings without needing to rely on a mortgage, I would imagine that shares in property would be easier to sell than houses are currently. But then, what do I know 😉
Your point about the role of ‘leverage’ here is interesting. (And you have done well educating me with your comment, since I’ve had to use Google several times to look up terminology, so thanks for that!) I hadn’t considered the possible role of mortgages in crowd homebuying. But now you mention it, I don’t see any reason why, with crowd homebuying, investors shouldn’t use mortgages to buy larger shares of property than they would be able to afford on their own savings. The advantage, as I see it, is in the flexibility it would give people not to be reliant on mortgages; i.e., mortgages would be optional (to buy a larger share), but not necessary (since investors could buy a small share using their own savings. There could be a middle way, too: people could use mortgages to buy as large a share of property as they can, but where this is still not enough to get them the sort of home they need (as is the case for many would-be homebuyers today), this need not be a barrier to living in the sort of home they need, given that crowd homebuying would offer a part-invest, part-rent option.
Hi Rebecca!
Apologies if I’ve been throwing around too much jargon – I’m an amateur enthusiast, as I’ve said, and I have a tendency to clumsily swing around words like a club!
In any case, I think that the issue here is that, at the end of the day, in order to own a house, which is a tangible asset, you need to come up with a fixed sum of money, let’s call it $X (though it probably is a few more digits!). No matter what, there are only a few ways to come up with that money, though some schemes might be more cost-efficient than others.
In order to purchase a house outright, you 1) need to be able to come up with $X on the spot (i.e. now).
If, on the other hand, you don’t have enough on hand to pay now, but you anticipate that over, say, the next 25 years your income will be sufficient to cover $X, you basically then 2) arrange to make your payments of $X in parts spread over a future time. Given that something NOW is worth more than something in the FUTURE (or at least that assumption is made), you pay a premium for the arrangement. The second option is basically a mortgage arrangement – you pay an interest premium for the privilege of breaking up and delaying your payments of $X
The third and final option really is to 3) try to grow your saving to a level where you can make $X in the future – basically, invest with a mind to buy a house. This option covers a whole lots of possibilities, including, as you have mentioned, investing in the stock market, but it also includes investing in property, though that may seem like a tautology. I use “investing” here in terms of putting money away into some sort of vehicle (be it property, stocks, bonds) in hopes of a future gain in money – hence I don’t include buying a house to live in (since the house itself is the ends) as an ‘investment’. When I say investing in property, there are all sorts of clever schemes that I’ve heard of, including:
A) buying (either upfront or mortgaged) a cheaper house in the far outer suburbs, renting it out and hopefully selling it for a profit some years later, all while renting closer to the city and possibly eventually realising enough gains to buy a practically close house
B) buying a shared house between two, where one tenant-owner “rents” out a room to the other as a tenant and achieves tax deductions
I think that any crowd-sharing scheme for property would fall under the third option 3) since essentially, you are still putting money into the house in order to “invest” and realise gains by selling off your share of the property. I think it would be difficult to convert a share in a property, unless it was a significant majority, into actual full ownership of the house, since presumably the other people sharing with you would have the same goal in mind! Of course, you could theoretically buy them out – but that in itself requires money, and presumably to buy the full house will still cost $X (or even more since people want to own a house themselves and are loath to give up their share)! The counter-argument to that is that you can buy shares in the house as the opportunity arises, both in terms of your savings and people being willing to sell. However, the issue here, however, is that you essentially still pay for the time – whether because the shares of the house get more expensive as property values rise, or because you still presumably need to pay rent at market rates for somewhere to stay in the meantime, even if you’re staying in the shared house (since there is upkeep, maintenance, council rates, insurance etc. as well as the slow “tax” of inflation, though I’m not sure what the rates are like in the UK, and people will want to be compensated presumably).
I would argue it’s not quite correct that renting is ‘throwing’ away your money – I completely understand that it may seem that way, though, as a long-term renter myself, as at the end of the day, you don’t have anything tangible to actually show for your payments. Arguably, though, rent is the value of the time you spend in whatever house (think of hotels), as well as the upkeep and maintenance (since many landlords themselves are mortgaged to the hilt). And in many ways, you’re also paying for the valuable flexibility that renting affords – you can decide not to live in the house anymore if say your job changes, and move somewhere else without leaving anything behind, something that you would not enjoy if you actually owned the home. Naturally, if you intend to stay in one spot and settle down and have no use for that flexibility, it is more economical to buy a house outright.
I think that the issue is, in the end, the economic market, whether it’s property or shares, is a zero-sum game and motivated entirely by self-interest; there’s no such thing as a free lunch! Perhaps it’s conceivable, through a crowd-share scheme, that you could lower the overheads associated with getting into the property market, or perhaps by cutting out the banks altogether you could make savings by minimising the middlemen (taking their fees). I’m not entirely confident, however, and I believe there’s no such thing as a free lunch!
P.S. Some quick back-of-the-envelope calculations may be of interest to you. Of course, these are drawn from commercial websites, and as such the confidence intervals and statistical validity of the results are in no way guaranteed or even expected.
The median market rent for a flat in Oxford is £1200/month. The median selling price for a flat in Oxford is £220,000 . A mortgage from Barclays Bank for this amount with a minimum deposit (£10,000) paid back over 25 years means repayments of £1288. So based on these completely lousy and unreliable calculations, there is a good case to be made that a mortgage is a better proposition than renting (surprisingly, the banks give an alright deal…or the landlords are ripping us off). There are hidden costs to note however – upkeep, maintenance and rates for the house (which are not insignificant), the intrinsic value of ‘flexibility’ and the cost of being ‘locked into’ a mortgage and home, and the ‘cost’ associated with coming up with large sums of money (i.e. whether where you can afford now is really where you want to live).
In any case, much food for thought! Apologies for the very long reply once again, since this is a topic that I’m both intellectually and practically (as a student) interested in!
Chris, thanks for another great comment – having a hectic time but am going to reply properly in a couple of days!
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