Improving Housing Choices
A person’s Housing Choices are primarily determined by the Capital Cost of the dwellings in which they can afford to live. Capital Costs are spread over many years. Paying the costs are typically organised so they even out over the years even though the costs might occur in lumps.
The costs include the following where the percentages are an approximate yearly proportion of the total cost.
- 17% — Initial Cost of a dwelling
- 17% — Cost of the Land
- 34% — Cost of borrowing at 5%
- 9% — Cost of Moving every 7 years
- 20% — Cost of Maintenance and Replacement
- 4% — Government Charges and Rates
Home Ownership Funding Co-operatives remove most of the 34% yearly cost of borrowing and also reduces the cost of moving. In the Co-operative, borrowing is a transfer of funds between members and money stays with the Co-operative members. Borrowing costs happen because with regular loans money may not be transferred and so is lost to the lender. With a Co-op the asset remains within the Co-op and so value cannot be lost. This removes the need to charge interest to cover risk. A return on investment is still given by giving investors in the Co-op more money— but not as interest.
The economies of scale lowers the cost of maintenance, replacement, and insurance.
Home Ownership Funding Co-operatives can reduce the yearly cost of buying a house in which the person lives to the cost of rent.
The financial and land title arrangements will vary across Co-ops. Some will have the title reside with the Co-op. Others will have separate title.
Yearly Cost of Housing for same Value Dwelling
An Example set of rules for a Co-op
- Members own the titles to the property in which they live.
- A person can become and stay a member of the Co-op if the member is willing to have and maintain a first mortgage of 10% of the market value of the dwelling in which the member must reside.
- Members can have second mortgages but only with the Co-op. The second mortgage yearly repayments are a minimum of 5% on the total market value of the dwelling.
- Members get the right to invest in mortgages up to the market value of their property. They can transfer the right to other members. Members who invest get back their investment in equal yearly or monthly amounts plus 4% times the number of years the money has been invested.
Comparison between Co-op, Bank Loans and Rent
A member invests $100,000 of money in the Co-op. They take out a $500,000 mortgage from the Co-op and use the money to purchase a home of value $500,000. They repay their mortgage in yearly payments of $27,500. Half the money paid comes off their mortgage amount. Their investment accumulates at the rate of $4,000 each year. At the end of 20 years the member has $180,000 in investment. The member has paid off $275,000 of the $500,000 mortgage and are left with a debt of $45,000.
By comparison a person takes out a traditional mortgage for $400,000 over 30 years at an interest rate of 5% using the $100,000 as a downpayment. At the end of 20 years the person will still owe $171,000. In other words the Coop member will be $171,000-$45,000 or $126,000 better off.
Another comparison is a person who rents. They will be worse off by the amount of rent paid minus the investment returns on $100,000.
The asset value of each person at the end of twenty years is
- Co-op Member — $455,000
- Traditional Loan — $329,000
- Renter — $180,000
The Co-op member will also be better off from the elimination of insurance payments, from the lower transaction fees, and the lower cost of maintenance.
Comparison without the $100,000 deposit
In the above a person pays $550,000 to live in a dwelling. At the end of the 20 years the value in ownership of the dwelling without any $100,000 starting capital and using the three approaches is:
- Co-op Member — $275,000
- Traditional Loan — $76,350
- Renter — $0
The difference comes because the Co-op members cooperate financially and reduce financial risk. In doing so they reduce the costs of owning a home.
For renters it increases housing choices by allowing them to enter the housing market and not just the renting market. For those who can get a loan they can afford more expensive homes. For people wishing to downsize it gives them a cost effective way to move to a lower cost home.
Funding Co-ops — what are they?
Funding Co-operatives are different from Housing Co-operatives. Individuals in Housing Co-operatives can use Funding Co-ops as a way to buy into the Housing Co-op . Developers can use them to fund a development. A Body Corporate or Public Housing or any group of people with existing mortgages can work together to reduce mortgage stress. Public Housing can use them and turn their clients into home owners.
Reducing the cost of funding housing will not increase house prices but will give people more housing choices.
Technically Funding Co-ops are a distributed variation on Building Societies made possible with advances in IT.