Equity-share housing finance – a biblically-based fix for the crisis of housing affordability?
UK house prices, relative to average incomes, are at their most expensive for several generations. Near-zero Bank rates (2008-21), £895 bn of money printing, strong inward migration, stagnant real wages, a favourable tax status, household break-up and limited new supply have resulted in the average house price rising to nine times average incomes – a level not seen since the 19th century.
Source: https://www.longtermtrends.net/home-price-median-annual-income-ratio/
While the recent rise in interest rates is yet to fully work through to affordability, the average first-time buyer needed to devote 39% of their income to finance a mortgage in 2023Q2 – the highest level since 2008.[1] The despondency of the younger generation about their diminishing prospects of ever affording to buy a house prompts sporadic government initiatives to subsidise first-time house purchases - thereby bidding up prices even more - and occasional, reckless mortgage innovations to enable buyers to borrow 100% of the house value once again.[2] The recent sharp increase in mortgage rates has prompted fears of a house price collapse and calls for yet more subsidies to bail-out existing borrowers.
One of the causes of our housing affordability woes is the near-universal reliance on debt to finance house purchase. This results in the volatility of house price booms and busts (see chart above) as easy loan conditions fuel a self-reinforcing boom which rapidly reverses when a recession or rising interest rates tighten lending standards and prompt foreclosures, which further force prices down. Is there a better way to finance house purchase for Christians to suggest, guided by Biblical wisdom?
Biblical guidance on home ownership and financing
Although not directly comparable to contemporary conditions, Old Testament (OT) law provides helpful pointers for reform we should consider.[3]
Home ownership is a legitimate aspiration. Owning a home is the nearest that most people will get to being direct stewards in God’s Creation in His image (Genesis 1:28; 2:15) given that very few now support themselves on agricultural land. Widespread homeownership incentivises responsibility being taken for the property itself as well as involvement in the wider community and contributes to the putting down of roots in a locality. Urban property within Israelite cities could be owned freehold and was not subject to the periodic Jubilee (Leviticus 25:29-31).
Debt may be necessary to relieve poverty but should not become a means of exploitation of the poor by the rich. While the OT law envisaged secured loans (Exodus 22:26,27; Deuteronomy 24:10–13) and regulated debt servitude, debts were to be cancelled and debt servants released every seven years (Deuteronomy 15:1-18). Jeremiah condemned the failure to cancel debts (Jeremiah 34:8-22); subsequently Nehemiah re-instituted the practice of debt cancellation (Nehemiah 10:31).
Interest was prohibited within Israel, but rents were allowed. Interest on loans to fellow citizens was not permitted (Deuteronomy 23:19) – a restriction reiterated in the OT (Psalm 15:5; Nehemiah 5:7,11; Ezekiel 18:8,13,17) and reinforced in Jesus’ teaching (Luke 6:35). In contrast, a hire fee could be charged for the renting of an oxen (Exodus 22:14,15) and for the leasehold use of agricultural land (Leviticus 25:15,16).
This combination of laws points to long-term finance being channelled either through equity or profit-and-loss contracts for commercial investment, or rental and rent-share arrangements when financing the use or purchase of durable assets, such as housing. This became the long-standing conclusion of Jewish, Christian and, subsequently, Islamic thought.
The ‘Rent-to-buy’ House Purchase Contract
Applying this non-debt principle to house purchase, the ‘equity-share’ or ‘rent-to-buy’ contract does what the title suggests – that is, the house occupier and financier share ownership in the equity in the house, with the occupier renting the proportion of the house that they do not (yet) own. A typical first-time buyer arrangement would entail the purchaser putting down 5 or 10% of the value (x) with the financier contributing the remaining 90 to 95% (100-x). Rent would be charged at a pre-agreed rate on the proportion of the property owned by the financier (100-x), with future rents linked to a local or regional rental index. Maintenance and insurance costs would be shared on a proportionate basis with the occupier paying x% and the financier (100-x)%.
The parties then agree the extent and timescale for the purchase of the house’s equity. The occupier pays a monthly amount above their rental obligation to acquire equity in the house. As they do so, the occupier’s share (x%) rises over time and the proportion owned by the financier (100-x)% declines. Indeed, payments could be structured such that, after 25 to 30 years the occupier would acquire the whole property on a schedule comparable to a mortgage.
But the equity-share partnership approach offers much more flexibility and protection for the occupier when things go wrong. First, the share of the home equity that occupier wishes to acquire need not be 100%. They could reduce their monthly payments by planning to buy less of the equity over time. Second, flexibility could be specified in the contract that allowed the occupier to pause payments if a crisis hits that disrupts household income, such as illness or unemployment. They would then cease to acquire more equity in the house and might even begin to exchange their equity in the property for rental payment delays on a pre-agreed basis. By sharing the risks and benefits of ownership, the equity-share partnership should encourage greater trust and cooperation between the two parties.
The benefits for the wider economy and financial system would be significant. Not only would this contract help to dampen the speculative boom and bust in housing that comes from its leveraged financing but it provides a way for those with long-term savings to invest in housing without the need to buy a house of their own. At present, there are few means whereby younger savers can invest in an asset that provides housing returns. If current mortgage lenders pooled savings for financing these equity shares, then they could offer returns linked to rents and house prices. Indeed, this could be the basis for pooled investment funds to own a portfolio of housing shares in a particular region or nationally, offering pension funds a long-term residential property investment opportunity that they currently lack.
What holds back this contract now? Primarily the inertia of current debt-based practices and the relative contractual simplicity of the mortgage. Banks and building societies are also penalised heavily by regulators for owning shares outright in property as opposed to holding a mortgage on the very same property. Also, when house prices are rising, buyers are reluctant not to try to acquire 100% of the equity through a leveraged purchase. But with prices now stable or falling, the opportunity arises for an equity-sharing contract to help younger buyers begin to own a flexible share of a house. It is time for a relational solution to the housing crisis.
Dr Paul Mills
July 2023
Webinar [video] & [presentation]
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[1] Source: Nationwide Building Society
[2] https://www.theguardian.com/money/2023/may/08/uk-mortgage-lender-100-loans-skipton-building-society
[3] See Mills, P.S., 1989, Interest in interest, Jubilee Centre Research Report, and 2021, Is it Time for a Debt Jubilee?, Cambridge Papers.
The views and opinions expressed above are those of the author alone and do not necessarily reflect those of the Jubilee Centre or its trustees.
