Photo by Roberto Nickson on Unsplash

How to Own a Home at Less than the Cost to Rent.

(No One Except Nick Hanauer Should Read This)

Owning a property for many young people may not seem the priority it once was. But this may be more a function of the cost of home ownership, the burden of student debt and a delay in marriage and children, than a change in attitude among the generations.

Home ownership grounds people, embedding them in the community in a way that renting does not.

As people age and take on family responsibilities, the psychological benefits of having a place of your own can become a driving factor. Making a home, being able to have pets, to landscape, re-decorate and renovate without asking someone’s permission, is empowering. Home owners also feel (and in fact are) less at risk of homelessness at someone else’s whim.

Importantly, ownership encourages people to care more for their property than if they are renting. Although you have to pay the costs, you can also ensure that critical maintenance gets done, even by doing it yourself, to your own benefit alone.

The downside is that it usually costs more to own than rent.

For a little while, in the lead up to the GFC, this seemed not to be the case as money flowed freely allowing many people to buy their first home… and then they lost it — as ‘starter’ interests rates were ramped up, or they lost work in the downturn, or the decline in values put them underwater making it cheaper to ‘walk away’.

It has meant that viable suburbs became desolate wastelands. Some still are.

While people lived there, the houses and gardens were maintained, but as people were evicted or just left, the neighborhoods became unkempt and vandalized, driving down values even further.

We went from people who needed homes having them and feeling good about life, able and prepared to spend on what they needed, generating demand and employment; to people made homeless while properties decayed and the economy tanked. The banks who financed them lost money as the decaying properties were sold for a fraction of what it cost to build, or (more often) they sold the loans to others who were left with the loss (including government).

How stupid is that?

What if there was a simple way to promote home ownership at less cost than renting, that is already proving a success in Australia?

While the actual cost of a home is impacted by the cost of materials and labour, as well as regulatory costs, it is the land component that is most sensitive to demand.

As demand rises, so do land values.

What if we could isolate home buyers from this effect without imperiling the market?

Under the scheme, a home buyer goes to a bank and gets a loan for 90% of the value of the house… but not the land. They put in 10% of the house value as the deposit.

The home buyer then bids for the property as a ‘house and land’ package, just as now, bidding against both other prospective owners (who only need to finance the house cost), and investors (who must finance the full cost of both land and house).

And here’s the magic:

In the case of owner-occupiers (not investors) the government kicks in the full land value for a 2% p.a. rental fee payable by the home buyer — to promote the individual and social benefits that ownership provides.

Now I know what you are thinking… the only way the government can get the money is via more taxes!

NO.

The government simply has the central bank create the money ‘out of thin air’.

What! That’s even worse.

No its not.

When a person borrows the price of the land and house from a bank, the bank ‘creates all the money out of thin air’.

For anyone not clear on the process of money creation, this Bank of England paper explains how it works.

It just means that instead of the commercial bank creating the money ‘out of thin air’ for the land component, the central bank creates it directly — just as it has done during Quantitative Easing (QE), where the newly created money was used to buy loans previously created by the banks.

Having the central bank provide the money directly just removes the middleman!

If that’s so, why not have the central bank do all the lending?

The simple answer is that the central bank is not in the business of assessing borrowers, and managing the loans to ensure repayment — and nor should they be. That is the job of the commercial banks.

The job of the central bank is to provide ‘risk-free’ money to the economy either directly (as with QE), or indirectly (via the banking system). They also have a role to play in limiting inflation and unemployment via interest rate policy.

To be clear, bank lending is very different to how most people think of lending.

If I lend to you, and you lend to someone else, neither of us has the money to spend. Only the end borrower does.

But when banks lend, we get to keep our money — when was the last time a banker asked for your deposit to lend to someone else?

It means that both depositors and the final borrowers have the money to spend.

How?

The answer is that banks don’t lend deposits, they create them when they make loans. (As noted above, this Bank of England paper explains how in detail).

It is as simple as writing two entries in the books of the commercial bank: debit loan to borrower and credit deposit in the same name. The debit records the amount of money the borrower owes, the credit provides access to the loan proceeds for the borrower to draw down; while the double entry keeps the books in balance.

This new money is then spent into the economy by the borrower — boosting demand. As the loan is repaid, the money is written back into the thin air from which it came, as the entries in the bank’s books are reversed, drawing money out of the economy.

The growth in net debt is what fuels the world’s economy, allowing borrowers to signal unmet needs that producers respond to by putting under-utilized global resources to work to increase output to meet the extra demand. Or, the new money pushes up prices if the sector is at full capacity. (But that’s whole other topic).

It works because we all treat ‘bank deposits’ as ‘money’. We say we have so much ‘cash at bank’, which is ‘ours’ to spend… not the banks. And mostly it works that way… until the bank goes bust and it has to call in loans that don’t cover deposits, and then we find out the money wasn’t ours. Just a loan to the bank. Or most usually now, the government has to step in to rescue the banks because failure would imperil the financial system, creating ‘moral hazard’ — which just means printing more money (but that too is another story).

The government would pay no interest to the central bank on the money provided, as it costs the central bank nothing to create it.

To be very clear, this is not printing money for government. It simply replaces the money that would have been created by the commercial bank against the land value.

Everybody (except the banks) end up ahead.

The Government ends up with an interest-free debt to the central bank AND an asset (being the land value) which increases year on year (at least in the long term) providing a real increase in the net assets of the government (which is realised upon the sale of the land), as well as a 2% pa income stream that can be used as part of general revenue, reducing the tax burden for everyone else.

The same amount of new money is created in the economy as if it was all created via the commercial banking sector.

The Government and central bank are not at risk as land values grow in the long term and there is not any requirement to ever sell the land. If an individual parcel is sold by the home buyer at less than the purchase price, the loss is simply a book entry by the government and central bank. No one has to ‘fund’ the loss, as it was created solely by book entries in the first place!

Having to pay only 2% pa on the land means the home buyer is better able to afford the cost of the home, paying less than it would cost to rent. Of course, they miss out on the capital gain on the land, but who would care if they can do the same when they come to buy again and, in the meantime, get all the benefits of ‘home ownership’?

Apart from the individual benefits, it means too that we can shift back towards a home-owning society, rather than a rental society. In effect, it helps to create the ‘land of the free’: people who are their own ‘capitalists’ forming a more stable and happy citizenry, more likely to engage in work — helping to grow the economy.

The beauty of this scheme is that it has no negative effect on the housing market and only a positive impact on the individual, the government and the community in which people live and work.

Oh, the reason that Nick should read this is so he can become even more of a troublemaker to the banking industry in the interests of the little guy! Though having a stable community that is hardworking and forward looking is good for the banks too in the long run :)

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Once was a Seeker

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Michael Andrew Haines.

Michael Andrew Haines.

Once was a Seeker

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