Efficient Housing Markets
Markets are efficient when there are many buyers and many sellers, all with equal access to information about the goods and services offered, and all are free to accept bids and prices. All can compete equally in the market. In such a situation, the market will determine the price.
Unfortunately, this cannot happen with capital markets because everyone cannot compete equally. In a capital market, those with the most money will always be able to outbid those with less money, pushing up the price of ownership beyond its optimal value.
We see this every day with housing. Landlords who already own properties can outbid a prospective tenant with only wages and no assets. It pushes up the price of houses, which means that capital investment as ownership is inefficient as more capital than needed goes into a home, and hence the return on investment is lower than it should be.
To overcome this problem, we can change the market and allocate houses to the occupants to whom the homes have the greatest value.
For example, assume ten houses and ten prospective buyers. Let the prospective buyers and investors set a reasonable return on capital as double the return given by superannuation allocated pensions. Let the group allocate the houses from the lowest priced home according to the income and needs of the buyers. For example, a worker in the district gets priority over a worker who lives 50 kilometres away. The group of buyers create an organisation that owns all the houses, but each buyer has tenancy rights over the homes they occupy and purchases the capital in the home as they pay rent. The group of buyers sets the rules of who gets priority. Everyone gets the same price.
If we do this, a community can allocate houses to maximise the value to the whole community. The capital in the homes generates the most value for the community.
A public capital marketplace operates this way, and it achieves it by first removing the ability of capital to generate more money (that is, pay interest or allow capital gains). Secondly, when there is contention over who gets what house, we calculate who receives the most value from the property, and the place is allocated to that person— providing they can afford to rent it. Finally, there is no overhead cost of transferring tenancy.
The difference in the cost of housing using this approach is to:
- Eliminate the cost of interest on a loan on the whole house.
- Eliminate the cost of house price inflation.
- Eliminate mortgage insurance.
- Eliminate the cost of transferring house ownership.
- Eliminate real estate costs of auctions and “selling a house”.
- Eliminate the need for deposits.
The rules of the group of people who own public capital in the houses determine who moves into a vacant property. Consumer choice is in selecting the group a person chooses to join.
New developments, like an apartment or greenfields, or an existing system with a single owner like a public housing estate, are possibilities for starting public capital. Groups of homes under a body corporate or retirement villages could move quickly to the model. However, individual property owners could work together in a housing cooperative with separate tenancies and a collective agreement.
Public capital will correct house prices and better reflect the cost of occupation. It will occur because public capital builds equity with every rent payment. Buyers pay a minimum of 25% of their income while building equity. Buyers do not require deposits.
Initially, public capital will outcompete debt capital, and people will exit the rental market, which will drive down rents and the price of properties. However, the debt and rental markets remain and will adjust to the competition with lower prices.
Comparison between Public Capital and a Mortgage
When we use public capital all the capital stays within a closed community. When we use mortgages the interest payments go out of the community.
With public capital, investors receive a return that lasts twice as long as superannuation while the buyers are able to get into the housing market and build up equity without a deposit and with low rent payments.
Each year with debt about half the money paid exits the community.