The Bank of Mum and Dad for Orphans
The Bank of Mum and Dad is Australia's fifth biggest home lender and is likely to rise in the coming years. But what about children without parents with Capital or have parents with Capital but no idea how to help them?
Community Housing Capital Markets (CHCM) provides the lowest cost solution that gives the most benefit to the Community, where the Community may include mums and dads or others with Capital.
Any contract lawyer can set up a CHCM Company, and service organisations themselves, funded through a Community Capital Market, can provide the necessary logistics and operational support for a CHCM.
Excluding government charges and taxes, there is almost zero cost to transfer Capital with a Community Capital Market. This means the participants in the market use criteria other than the lowest price of Capital to decide on Capital allocation. For a CHCM, anyone with income can afford to join and build equity in the dwelling in which they live. The dwelling may even be the home of mum and dad.
Here is how it could work.
A group of homeowners get together and form a CHCM Company. A CHCM Company buys the title to all the homes while the occupants are designated custodians. Custodians act as though they own the house and are responsible for looking after it, benefiting from living in it and paying to live in it. They can also choose to exit from the CHCM by purchasing the title or selling their shares and moving to another CHCM that will accept them.
Occupiers pay rent depending on how much equity they have in the CHCM and any other criteria decided by the CHCM board. Every time a person pays rent, 50% becomes shares in CHCM, where the shares are purchased from an existing shareholder. The amount of rent is set by the CHCM depending on the shareholder's circumstances and the dwelling's value. Every month every shareholder receives a return on their investment and sells shares. The CHCM sets the return plus a monthly sale of shares.
The CHCM savings come from removing the need to transfer the Capital from one party to another and from the reduction in Real Estate Transfer Costs. These costs are typically more than the dwelling cost but spread over 30 years. Community members pay to live in the dwelling, pay investors for the use of their money, and build up an investment that they can use if needed.
Each CHCM sets its own rules within its jurisdiction. Its form may be a Pty Ltd Company, a Cooperative, a Trust, or any other legal entity. The innovation is to use occupation payments to transfer Capital.
A possible rule is for owners of shares in CHCM to receive an indexed 7% annuity over 28 years. The rent on a property is set at 0.5% per month of the Capital value. For occupiers, rental payments are 25% or more of their disposable income, and 50% or more of their rent buys shares in CHCM released by the annuity payments to investors. The value of the dwelling in which a person can live is determined by how much equity they have in CHCM, as 50% of the notional income from CHCM is subtracted from their rental payments.
With these rules, an investor will receive an indexed annuity of 7% for 28 years, and every renter can gain home equity and live in a dwelling for 25% of their disposable income. The local CHCM can adjust the parameters, including selling and buying properties.
A feature of the system allows each individual's Capital to wax and wane according to their ability to pay. In particular, as people's income drops, they can call upon accumulated Capital to pay their rent.
If members accumulate the Capital to purchase the dwelling in which they live, their rent drops to a body corporate fee to cover costs incurred by CHCM.
Critically every member can see the overall state of the entity and whether it is running into financial difficulties. If it is, the operators can recommend remedial measures such as increasing rents, holding off on investor repayments, adjusting Capital values, reducing operating costs, merging with other entities, or buying and selling properties.
Like many social problems, if we can solve a problem for the disadvantaged, then we also solve the problem for everyone. The Bank of Mum and Dad works if Mum and Dad have assets and the willingness to help their offspring. CHCM is a system to extend the idea to all community members, with or without parents. It is made practical by removing the high ownership transfer costs, including loan interest.