What if changing the way we buy property could be a solution to Australia’s housing affordability woes? Here’s a disruptive model that might be able to just that and allow people to rent their way to home ownership.
Despite falling interest rates, property prices and overseas investment, Australia’s housing affordability problem is well entrenched.
While our love affair with property remains strong, the significant entry barriers and an increasing reluctance among younger generations to take on onerous financing obligations is increasing the gap between the haves and have-nots.
The development industry says it has the solution with build to rent, and wants the government to subsidise it via tax breaks. I doubt aspiring homeowners envisage being consigned to a lifetime of renting as an optimal outcome. I am absolutely sure they do not want to subsidise the development industry to make profits from them in the process.
The Fifth Estate has recently featured excellent articles discussing the need for sustainable development outcomes, the advantages of new economic models that encourage societal and environmental connections, and the pressing urgency of the homelessness crisis. These articles talk to a deep rooted (desire for) connection to property as an intrinsic part of the Australian psyche.
This is not something you get from a lifetime of renting.
If we were to draw up a shopping list of the key attributes of a sustainable solution to housing affordability, it might include:
- facilitating home ownership and security of tenure
- being unsubsidised
- simplicity, accessibility and inclusivity
- capacity for quick implementation across a broad base.
What if we were simply looking for the solutions in the wrong places? That rather than trying to build more product, cheaper product, or (subsidised) rental product, the solution lies in making the ownership process more accessible.
Say we addressed the core issues head on, and put the interests of the majority ahead of those who would profit at their expense. Address the way we buy property rather than accept that ownership is out of our reach.
A new model of property ownership
We are familiar with renting and despite its shortcomings, we like the flexibility and reduced financial commitment it allows. We are also increasingly familiar with share ownership, and appreciate the accessibility and liquidity it provides. Why not simply combine the two as the core elements of a disruptive approach to property ownership?
So… why can’t we simply own shares in our home and rent the rest? For that matter, is it that important that the shares be inextricably linked to the physical property we live in?
What if they were part of a broader property portfolio, ownership of which gives us security of tenure over our abode. After all, we are used to this when we buy shares in (say) Woolworths as an example. These shares do not provide tenure over any specific Woolies asset.
Okay, lets consider this a little further. So we have multiple properties pooled and converted to shares, with more being added over time and share values determined by periodic independent valuation. Institutional investors hold the majority of shares, but are required to place a small percentage in the market at all times to maintain liquidity. All good so far.
How does it work from the individual’s perspective? I sign what is, for all intents and purposes, a relatively standard lease. The two key differences are (1) there is no term, and (2) my bond is held in shares in escrow. I have security of tenure and can acquire additional shares (and for that matter, sell down) when and as I like. I pay market rent for my home, the net proceeds of which is pooled and redistributed monthly to shareholders.
Hang on. I am a shareholder. So I get a monthly dividend cheque, and the more shares I buy, the bigger my dividend. I am effectively renting that part of my home I do not (yet) own, and only paying outgoings on what I do. I am incentivised to buy more, and so the snowball rolls down the hill.
This sounds like fun.
Who benefits from this model?
From an institutional investor perspective, a different but no less compelling set of advantages apply. With superannuation funds that are in particular increasingly frustrated at a dearth of suitable local property investment opportunities, the benefits include a diversified portfolio, liquidity, regular income stream and long term capital gain.
Significantly in this regard, the concept reduces delivery costs. Stamp duty, mortgage interest and establishment costs and real estate agent fees foremost among them. Well set up and managed, this can underwrite the financial returns for institutional investors; something of critical importance to success of the concept.
The benefits and opportunities of a successfully implemented scheme are potentially quite substantive. The proportion of owner-occupiers increases (with its inherent community stability benefits). Young people easily relocate within the portfolio as their life circumstances change. Retirees “tip in” their property as a means of funding ageing in place.
People are able to live and work in the community of their choice. Superannuation funds permit their key worker members to offset fund dividends as an effective and non-subsidised means of rent reduction. It even provides an equitable basis for the collective redevelopment of fragmented landholdings. The collective nature of the scheme in itself is likely to encourages all manner of cooperative community endeavour.
Importantly, it has the potential to provide for a broad based redistribution of wealth as a much needed stimulus for economic growth, something of increasing concern to economists and the Reserve Bank.
Oh, and it has the pleasant side effect of progressively sidelining negative gearing as an issue. Think about it. More than one third of Australian residential property is now in the hands of investors. They in turn are reliant on tenants. Presented with the option of renting or share ownership under this scheme, a majority of tenants would be expected to choose the latter.
Where is the catch? Short of gaining the support to implement the scheme and some tweaking of taxation and corporate structures to ensure equity, there does not appear to be one. The simplicity of the concept, the absence of subsidy and broad based benefits create an impetus that should ensure that with the right support, the scheme can be quickly implemented.
A little tinkering by the lawyers and accountants and a cool online trading platform, and we are away. The homes are already out there, and a significant slice of a $6-7 trillion market awaits.
David Whitting is managing director of Franklin Bailie, a development advisory established three years ago to facilitate joint rezoning and redevelopment opportunities with groups of landowners. His background includes large-scale property acquisition and development including with Australand for 20 years. David has a long-standing interest in housing affordability and “would like his children to be able to afford their own home”.
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