Here is a 12-minute presentation of the ideas in this article.
This article provides an alternative to the existing real estate market. It shows how to make housing affordable and increase the productivity of capital in any community that adopts the approach. It preserves individual ownership of houses, which is more secure than a mortgage, and removes the cost and uncertainty of selling and buying properties. The productivity improvements are startling and come by removing the unjustified profits banks obtain from home loans and the high costs of the real estate market.
The article gives a scenario and shows the cost of using banks that only serve buyers with large deposits and high incomes. It then shows how to remove bank funding and use other sources of finance, such as super-funds and money that goes into term deposits or bank savings accounts. It outlines how banks can participate by sharing their extra-ordinarily high profits with the community.
By working together in a company, owners and occupiers of homes can create a level playing field and a real-estate market that reflects the value of housing.
The Scenario
A Community Housing Market Company is formed with ten houses. Some have renters, some have loans, and some are wholly owned. Each home has a value. The Company has ten different occupiers of the houses, and each pays rent. The rent is 25% of their monthly income. The homes are financed with Bank Loans of 6.1% (2% above the Bank Rate of 4.1%). The occupiers or owners hold shares of their equity in the house they occupy. They can have shares greater than the value of their home.
Each month, the occupiers all pay rent of 25% of their income to the Company. 20% is used to operate the Company and pay for minor repairs and administration. If their equity is less than the value of their home, then half of the remainder of their payment becomes equity, and the other half pays off the share of the Bank Loan to their home or goes to pay off non-bank investors.
The investors receive 5% more shares yearly but must also automatically sell 5% simultaneously to occupiers or other investors. This is equivalent to receiving a 10% annuity as new shares.
Shareholders and investors can trade shares at the fixed price of $1 per share. Shares never change in value, and profits and losses are always in the form of more or less shares distributed according to shareholdings.
A NetLogo Visualisation
The NetLogo Model has houses and people. A house image on the screen represents the houses. The house's colour indicates whether the occupier could receive a bank loan. If it is red, they couldn't raise a deposit, Pink because they did not have the income to support a bank loan, and cyan is both. Yellow says they could obtain a bank loan. The blue stick person represents the occupier.
To run the model, setup is pressed, and a random set of values is assigned to each person and each property. The vertical position on the screen represents the equity each occupier has or could bring as a deposit. Some can come with nothing. After eight years, the model shows.
The relative position of the houses has changed — the bank loans have increased, and the Community equity has increased. After 29 years, all own homes, but the Bank Loans have increased.
We can rerun the simulation with the toggle NoBanks set on, which means we change from bank finance to existing money from private or super-fund investors. We can start with bank loans and replace them gradually with existing money from other sources like superannuation funds.
In the simulation without banks, it has taken 35 years before everyone owns their home. Community equity has increased. The extra money is invested in more houses in other similar Community Capital companies. Notably, there are no bank loans.
The modelling shows the problem with Bank Loans. Money raised through a Bank is new money (meaning Banks do not pay for it). Bank Loans are unfair and inefficient when used to transfer assets. The risk associated with the loan not being repaid is low, yet the Bank receives a much higher profit than justified by the risk.
If the Bank Loans are made fair, the profit from the new money is shared between the Bank and the Community.
Financing Home Loan Purchases
Bank Loans should be restricted to financing new assets as Bank Loans create new money for the government. Existing money should be used to fund existing home purchases.
The Banking System is meant to finance new assets. Using this precious resource to fund the transfer of assets causes many of the economic problems we see in the world. Changing the system increases productivity as in today's world, using new capital to transfer old assets does not create new value and hence the productivity of a community drops. Changing from new capital to old capital frees up new capital to make investments to help solve the world's problems.
The world of finance is complex, but economics is traditionally modelled by assuming money earns more money. In complex systems, small changes to the value exchange can make big differences. The traditional economic modelling approach assumes we can model economics with a spreadsheet and allocate resources with cost-benefit analysis using discounted cash flows. Such modelling is simple and almost always does not predict the outcomes.
The above model shows what happens when a community prevents the extraction of money through unjustified profits on the transfer of assets.
The new simplified economic system replaces capital with fixed-price shares. The ownership of shares represents your house share and is safer than owning a house with a mortgage. If you cannot pay your mortgage, the bank sells your house, takes their share, and leaves you with the rest. With a Community Company, if you cannot pay your lower rent, you can vacate the house and sell the full value of your shares automatically.
Advantages of Community Housing Markets over the Existing Housing Market
- The equity in your house is safer and more secure.
- The cost of buying and selling is near zero cost.
- You can work with others to get better prices on insurance, maintenance and repairs.
- You do not need a deposit and pay a fixed proportion of your income to purchase equity in a house.
- If you cannot afford your monthly payments, you can easily transfer to a lower-cost house, sell some of your equity or come to another arrangement.
- You can sell shares in your house rather than get a reverse mortgage.
- You have a place to invest your money if you have purchased all the shares in your property.
- Your monthly payments are likely to be lower, but you can put extra money into your property whenever you wish.
The NetLogo Tool and Community Company Model
The model is available to anyone who requests it as long as you acknowledge its use. It or variations can be used for any capital purchases, including renewable energy infrastructure.
For those unfamiliar with NetLogo, go to https://www.netlogoweb.org/ and try out a few simulations.
Next, obtain a copy of the "simple trading.netlogo" model.
It is from Chapter Two of the book "Introduction to Agent-Based Modeling: Modeling Natural, Social and Engineered Complex Systems with NetLogo" by Uri Wilensky & William Rand.
- Wilensky, U. & Rand, W. (2015). Introduction to Agent-Based Modeling: Modeling Natural, Social and Engineered Complex Systems with NetLogo. Cambridge, MA. MIT Press.
This model is in the IABM Textbook folder of the NetLogo Models Library. The model, as well as any updates to the model, can also be found on the textbook website: http://www.intro-to-abm.com/.
To find the model, click on http://www.intro-to-abm.com/. You will see the book description.
Click on NetLogo Models, move to Chapter 3, and find a Simple Economy.
Now try it on NetLogo Web
When you press setup, then go, you will see the model run.
This model is a simple model of economic exchange. It is a thought experiment of a world where, in every time step, each person gives one dollar to another person (at random) if they have any money to give. They do not give out any money if they have no money.
Change the wealth to 10 in the code, and you will see this occur.
Previously, wealth was distributed more evenly, but now the top 10% own more than the bottom 50%. This is because those with no resources cannot participate in trade. Unfortunately, this is still the reality for most people today. They lack access to investments and therefore have little wealth.
However, there is a solution in the form of Community Companies. This system ensures they gain a little wealth every time they pay rent. The principle behind this is that buyers should receive a portion of the wealth generated from the goods and services they purchase in each transaction. In the case of bank loans, the wealth comes from the interest paid.
Summary
The world of finance is complex, but economics is traditionally modelled by assuming money earns more money. In complex systems, small changes to the value exchange can make big differences. The traditional economic modelling approach assumes we can model economics with a spreadsheet and allocate resources with cost-benefit analysis using discounted cash flows. Such modelling is simple but almost always gives the wrong results.
Simulation tools provide a better way to reflect economic reality.
