Taking housing back from the banks


'The Housing Revolution' by Chris Johnston The housing crisis is here, but its effects are just beginning to be realised. The market has outgrown itself, and the conventional method of buying homes has outlived its usefulness. There must be an alternative.

I started thinking about the power of the housing market when I first considered home ownership for my family. I did the usual calculations and found there is a ridiculous amount of money involved, and I started thinking there must be a way of subverting that power to make it available to those who can't access secure long term housing.

I now work in the crisis housing and support field, helping people who are subject to the desperate shortage of housing. There are two key reasons for the shortage. The first is that housing is controlled primarily by market forces, and a market is only able to understand money, not people — and especially not disadvantage.

The second is a lack of creative thinking and action by governments who are driven purely by economics and politics. Both the market and the government benefit from the way things are, and therefore neither can entertain the possibility of an alternative future.

In the current housing market, Joe and Jo, a young couple considering buying a first home for their family, will have to maintain a double income to do so. The wage of one would cover living expenses, while the other's wage repays the loan. Without interest, the loan would be repaid in 11 years. With interest, the repayment period is extended to 25 years.

In other words, for 14 years half of their work is for the profit of a financial corporation and its shareholders. That represents a high value, which can be used to subvert the conventional method of purchasing a home and create an alternative. Imagine if Jo's employer bought them a house and in return she worked for free for 25 years ...

An alternative source of capital is needed. No-interest capital can liberate a significant amount of people's time. Assuming a source of no-interest capital can be tapped, a 'common equity' housing model could be developed, consisting of a pool of communally owned houses paid off by the occupants at cost.

Instead of buying a property conventionally, or renting from someone else, Joe and Jo could live in a common equity owned house. As a communally owned house, they would treat it as their own, live in it as though they own it, and make modifications and improvements to the property.

They would have security of tenure and could plan to be there for the long term with their family, neighbours and community. They would pay $200 per week back into the common equity, so they can make more creative decisions about the balance between income generation, recreation/lifestyle, family and community.

A basic numeric model shows that with an initial no-interest investment of $2 million, invested in 10 properties, with people paying $200 per week to live in them, and a new property added whenever a balance of $200,000 is reached, after 50 years there will be 115 properties in the common equity. After 100 years there will be 1446.

The key ingredient is an initial outlay of no-interest capital to get the ball roling. Where it comes from, and how, I'm not yet sure. In wealthy countries, massive amounts of capital exist in churches, corporations, individuals and trusts — it's possible one of these sources could be tapped.

What happens when we take the financial institutions out of the housing market? I suspect eventually all properties will be de-valued by the amount represented by interest paid on loans.

It is the interest amount that puts most upward pressure on housing prices. When you sell a property, you want to make a profit over the combined cost of the property and interest. If no one has the burden of interest, when the time comes they can sell for less, as demanded by buyers, without making a loss. (This assumes there is sufficient housing available, which there currently is not — another effect of the overall high price of housing.)

Under the common equity model, everyone who is needed in the industry will still get paid — builders, developers, investors etc. Reductions in income will occur to anyone whose income derives from a percentage of the value of properties — councils, agents etc. The only total loss of income will be for financial lenders.

The result: housing is brought down to a level that is accessible to everyone and is a right rather than a privilege of the privileged. We can only hope.

There are myriad thoughts and ideas still required. More benefits could be mentioned, and more negative effects and impacts will need to be considered. What I suspect we need now are many key-holders to open the many locks in order to make it all work.

This article was adapted from Chris Warren's blog at Bring Down the House. Bring Down the House is neither a commercial profit-making venture, nor a welfare program. The blog was set up to attract more minds to contribute to the project people with the required expertise, passions and connections for it to become more than just an idea.

Chris WarrenChris Warren works in crisis support with people experiencing homelessness. He facilitates a post-church faith community and holds a degree in theology. He lives in Victoria but is soon moving to Alice Springs with his family.

Topic tags: Chris Warren, common equity housing, housing crisis, interest rates



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Existing comments

Congratulations on a really inspiring article. I do not know if Chris Warren's scheme is technically viable in terms of money flows but it certainly merits close inspection and development.

I liked his statement that 'a market is only able to understand money, not people - and especially not disadvantage'. How true.

Years ago, driving to university (in the good old bad old days when university education was virtually free), I noticed that someone had painted on the university drive, 'People before profits'. I immediately adopted that slogan as a personal catch-cry.

The function of the economy is to serve society, not the other way round. What we need is a 'people's bank'. We used to have one. Which bank? The Commonwealth Bank, established by a Labor government in 1911 and sold off by another Labor government in 1996.
Sylvester | 23 June 2008

Hi Chris, This is a big problem. Good to see alternatives being sought. While interest rates have to be a problem sure desire is a greater. People around me are paying huge amounts for houses that are closer to the city. The interest rates are the same aren't they whether you buy in Northcote or Caroline Springs. As I see it the auction system with its % fees to real estate agents is a bigger driver. If all houses had to be sold rather than auctioned then the speed at which prices accelerated might slow. What do you think? I am not an economist.

All the best. Thanks for the article.
Eugene Lock | 23 June 2008

Greetings Chris.

I enjoyed your article. If you are looking for a model that circumvents the interest trap investigate the Muslim solution which does not charge interest.

All the best.
keith wallace | 23 June 2008

Sounds good but where does the owner (?) in this common equity housing gain equity for future loans etc.... as normal appreciation kicks in - and what about inheritance issues - what happens to 'my' equity I've invested into the property and may someday want to bequeath to children?

wouldn't it be much similar to remind traditional welfare oriented governments to invest in public housing stock to take the energy out of the heated housing market
Robert Speirs | 23 June 2008

Great idea Chris. Have you also looked at the new The Land Rent Bill: "Under the scheme rental payments would not go to paying off the land but tenants could buy their land at any time for its unimproved capital value." This scheme also recognises the part that high interest plays in the problem of home ownership.

It is good to recognise that the cost of building a house has not increased. In fact with new technology etc. it may be cheaper. It is the price of land that has skyrocketed to alarming levels at this time and so this is the area that needs attention.

How can we address the issue of spiralling land costs? Negative gearing, rezoning, speculation, the fact that huge easy dollars can be made in land banking. It is interesting that in times of easy credit it all seems to go into land purchases.
Anne Schmid | 23 June 2008

Fantastic, we desperately need to rethink the housing market, which is quite accurately a ponzi scheme.

There is only equity gain in residential property when prices are frenzied by negative gearing, first home buyer grants and restrictions on land supply by government.

Wealth should be created elsewhere, small to medium business, commercial property development, intellectual property et al, fields of endeavour that have real worth.

If you want to speculate play tattslotto.
Jonah Bones | 23 June 2008

Congratulations on a perceptive article. I also was 'struck' by the sentence, "a market is only able to understand money, not people." As another respondent points out, we used to have a bank that was a people's bank!
Thomas Curran | 23 June 2008

What an inspirational article/concept which I really hope gets the attention and funding it deserves! I totally agree that accessible housing should be a right rather than a privilege as stated in your article.

Congratulations on your research and let's hope your ideas can become a reality, in a time where looking at alternatives is desperately required.

Best of Luck. I look forward to hearing any updates on progress.
Karen Hallam | 24 June 2008

Well done, Chris. I started thinking about all this when reading Leonie Sandercock's books in the 70s. Then I was made a "refugee in the suburbs" by successive "landlords" (speculators, really) who kept on selling up and putting moving costs in my court. No legal or financial recourse until my GP recommended me, in my fraught state, for public housing - stability at last!
Frank Bremner | 27 June 2008

thank you all for your comments, questions and encouragements. i'm not sure how long people will keep coming back here to check for further comments and answers so I have chosen to reply to comments on the BRING DOWN THE HOUSE blog and apologise for the inherent narcissism in that. It is also a forum more siuted to ongoing dialogue and hopefully leading to action.

A sample of what you'll find there:
it is market parameters set by industry and government that create high demand and force buyers to play the ‘who pays the most, wins’ game. the greatest disadvantage is for the homeless and those at risk of being homeless.

some of my first ideas were about interest free loans, but the government/churches/corporations etc. are not that generous with their surpluses/equities/profits, otherwise they would be doing it.

it is worthwhile reflecting on whose hands the value of the land is in, and who benefits most from it. on the other hand, people are building excessive 'mcmansions' because conventional 'sense' (and possibly financiers conditions) is that you shouldn’t build under-valued houses on over-valued land.
chris warren | 28 June 2008

As a young(ish) person looking at buying housing, I think something drastic does need to happen. The unit next to ours (which we rent) sold for $540,000+, which we worked out to be 44 years rent. Hence we are in no rush to buy!

As I have learned throughout my life, community is the way to go!

Karen | 16 July 2008

That's great, I never thought about housing back from the banks like that before.
Raymond Kirk | 17 January 2009

Thank you for taking this step. It would be interesting to know how helpful it has been for you personally. I like the idea of do follow blogs, but get very irritated when the bulk of the responses are of the kind, "Great post, I enjoyed reading it," or "Fantastic blog, keep up the good work."

aamir | 08 September 2010

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