Smart Contracts and Helping First Time Home Owners

One graph should scare everyone: First Time Buyers are being priced out of the Australian housing market. They made up 25% of property buyers in 2009 but this has declined to sit closer to 10%. On top of this, up to 50% Australians get help from their parent to buy their first home (versus just 3% 6 years ago), so technically the pure first time buyer portion is even lower. The Australian property market stakeholders, which includes real estate agents, government, the RBA, retail banks, ASIC and APRA, are underserving our younger generation.

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From an economic stability point of view, we should want the population to have access to being owner-occupiers, particularly as they start to have young families and become the driving power of the workforce.

Why Has First Time Buyer Percentage Declined?

Former Bank of England Governor, Mervyn King, in his book The End of Alchemy wrote about the intergenerational wealth transfer from the young to the old. In short, the global reduction in interest rates – the RBA has reduced interest rates 18 times and 5.75% in the last 10 years, down to an all-time low of 1.5% – is a major contributing factor.

Lower interest rates provide a huge help to those already with debt loads and assets: lower interest rates mean people are able to borrow more and this inflates asset prices. Lower interest rates are also a direct assistance to those paying off mortgages as the cost of debt declines. Mortgages are given out to those able to service them and most importantly have deposits to hand.

Older generations (Baby Boomers) benefitted from selling houses at high prices to mid-life adults (Gen X), who have been helped with lower interest rates. Millennials, unfortunately, then miss out as the house prices increased too quickly and too far. With the required deposit now mostly unattainable and a huge quantum of debt now a major inhibiting factor (Gen X typically has a deposit from their own prior homes and have been upgrading).

With strong price increases driven by lower interest rates, those with property portfolios can access equity in their property to be the deposit for the next house purchase. Investment property owners have the double-whammy of great returns and reduced competition from owner-occupiers.

First-Time Buyer Constraints

Simply, they don’t have access to a deposit to leverage into a new purchase. They need to save a minimum 10% of the house price value. And if they want to buy anything near a major city CBD, that will be something around $50k for a $500k apartment. Want a 3-bed house and the deposit requirement could be north of $100k.

To save the $50k or $100k, assuming aggressive joint household income of $150k (which puts the first time buyers in the top quartile of household incomes), and assuming they are able to save 30% of net income (after rental payments), the deposit could take up to 3 years to build ($100k * 30% = $30k, 3x $30k plus interest/investment gains = $100k). And this is being incredibly aggressive – very few people are lucky enough to “go and get a well paid job” as Joe Hockey said.

However, in those 3 years, house prices have roared further away and the required deposit has increased further, leading to the view of an unattainable dream. First time buyers will need even more deposit when the time comes (in Sydney, it is another 60%, or $30k on the $50k).

How Can Millennials Fight Back? (Hint: By Doing Something Different).

Whilst Gen X may have received a huge boost, technology and communications has been a major benefit to Millennials. Our view is that trying to harness that in the correct way may allow Millennials to fight back and get a footing. Obviously as a consequence, some form of behavioural change may be required.

Our view: They should buy together.

Consider that stage in life where you are renting with 2 or 3 close friends. You are paying away rent whilst still not having certainty on where you will be. You choose to either;

  1. Not buy but pay rent to someone else, or;
  2. Rent-vest (buy an investment property somewhere that is affordable and choose to rent where you want to live).

Neither Of These Options Help:

Not having a stake in property whilst prices roar ahead is an issue and as prices rise, the risk of falling further behind is a problem. Hoping for a correction is another danger – the entire system is set up for price increases and don’t think for a minute that the RBA, the government or APRA really want to take the flack for sinking house prices and risking a recession. Best bet is that they try to manufacture 3% annual price increases but this is difficult.

Rent-vesting has its own problems. In finance speak we would refer to it as basis risk. You have a desire to save towards owning in a popular suburb in Melbourne like Elsternwick but you have invested in Perth or Brisbane where house prices are lower. Your investment property can easily fall (as commodity prices decline) whilst Melbourne prices increase. Buying a CBD apartment to rent is probably the riskiest investment available as huge oversupply is about to arrive.

Fractional Ownership:

This is a recently tabled option. However:

  1. You are not really investing in property and still face that basis/rent-vesting risk
  2. Fractional models can’t get a normal residential mortgage, so the mechanics are completely different. In many ways you are better off buying shares in a real estate business
  3. You will may struggle to sell the fractional ownership and the costs associated with it may be very high

Buying With Friends:

We believe the best option is the simplest and removes costs you are already facing: buy with your housemates.

You are already paying rent – a commitment with friends. Why not go one step further, combine your purchasing power and buy where you want to live. And most likely, if it is in a popular area, the price will appreciate at a better rate than a CBD apartment. This also helps those with unpredictable incomes, such as freelancers.

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Technology To Make This Easy:

The next steps are to work out the best ways to manage the relationship with your friends and newly made investment partners. Legal contracts and making sure you square off over and under payments you each make is really important. This is what technology can deliver and I certainly don’t think Gen X will be thinking the same thing.

Taking this into the future, the home may no longer become a directly owned asset. People may choose to have their primary residence but have it part owned by other people – either in the form of intergenerational ownership or something owned with friends and rental payments paid on portions of the asset.

This complex web of ownership becomes a necessity as younger generations look to blend ownership with high debt loads that may take longer to pay off. Having sophisticated and secure methods for tracking who owns and owes what becomes a reality for the financial system and a solution that sits on distributed ledgers via smart contracts could be an obvious starting point.

Introducing coHome:

And this is what we have been working on. Our new offering, coHome, enables people a selection of tools to manage buying with friends and family.

We have launched with a small selection of services and will sequentially release more tools as requests come in for those services. We have designed out prototype smart contracts and ledgers but do require mass adoption before we start revealing how we achieve this.

For more information, please visit www.cohome.co

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