Buying your own home has become an impossible dream for many Australians. Even renting a home is out of reach of many Australians. The reason is the inflation in land values and the increase in size and cost of houses without a corresponding increase in incomes. This has happened because the housing industry has changed from an Industry to supply homes to an Industry that creates investment returns through capital gains.
We need to return to supply affordable housing and stop using housing to generate capital gains with asset inflation. We can do it by funding some housing where we eliminate investors' possibility of getting capital gains and where any capital gains accrue to the buyer occupiers of houses. Instead of capital gains, we give investors a fixed stream of inflation-proof income with high-yield inflation-adjusted annuities.
With modern technology, we can scale the approach and implement it with Home Ownership Cooperatives (HOCO).
Financing Homes without Capital Gains
HOCO are not-for-profit cooperatives that use prepayments of monthly occupation to raise the capital to purchase homes. As HOCO are nonprofit, they do not generate money through profits; instead, they give investor members a guaranteed fixed inflation-adjusted annuity of 7% for 28 years. The annuity comes from buyer members who pay a proportion of their income that need not exceed 30%.
Buyers are limited in the value of the home they occupy by the deposit they bring and by their income. The HOCO sets these values.
Members negotiate with the cooperative, and together with the cooperative, they purchase a home. The homes are put into a trust that holds the title with members as beneficiaries and with the cooperative as the trustee. The member who lives in the dwelling pays a monthly rent, and a percentage of the rent entitles the member to some of the future benefits. Payers of rent have the security of tenure while they pay the agreed rent.
Each rental payment increases the entitlement by a percentage dependent on the amount paid, the home's value, and the rules of the cooperative.
The arrangement continues until the occupant has paid in full for the property. When the occupier has paid for the dwelling, they no longer pay rent but pay a fee to remain a member and support the cooperative's operation. The cooperative sets the price determined by the services offered by the cooperative. A yearly charge of 2% of the home plus land's Capital Value should cover most cooperatives' services.
Internally cooperatives value the land and dwelling based on the rental value of the property. Typically they value them at twenty times the yearly rental cost. The cooperative uses the valuations to adjust the prices and allocations within the cooperative, not to make profits.
While the regular operation of HOCO is for the Cooperative to own the title members can hold the title if they and the Cooperative agree and agree that the cooperative will get the first offer of refusal. However, the critical factor is that the person who lives in the home is the only one who can acquire benefits from the dwelling. Investor members receive benefits from all properties.
Investor members purchase months of occupation for any property. When they use the pre-purchased months to pay rent, they receive a discount equivalent to 7% per annum inflation-adjusted investment rate.
Buyer members pay rates and taxes on the property and typically pay for all maintenance and extensions to the home. The contracts can be structured so that members rent their dwelling from the cooperative or purchase their homes depending on which is most advantageous to the occupier. The cooperative adjust the constraints and parameters above to ensure the cooperative remains nonprofit.
Cooperatives give investment opportunities first to occupiers, then to investors associated with occupiers, then existing investors and finally to new investor members who have no connection to the cooperative.
All HOCO member occupiers acquire equity in the dwellings they pay to occupy. Occupiers require no deposit and are only required to pay a maximum of 30% of their income. However, they can have a deposit, and they can pay more or less than 30% of their income. It means anyone who has any income from any source should find a home to purchase.
Investors receive fixed inflation-adjusted 7% return on investment for 28 years or choose to vary the number of years they receive their funds and receive a reduced return. Investors receive no capital gains or incur no capital losses.