Using debt financing doubles the cost of owning a home.
By changing the way, we repay loans we can eliminate both interest and inflation, and the buyer of a house does not have to rely on capital appreciation for the investment to hold its value. For public housing, the savings are transferred over time to the occupants of public housing.
Rent and Buy Mortgages eliminate interest, remove the effect of inflation so removing the need for the house to appreciate in value. Using Rent and Buy for public housing provides a way for people with low incomes and few resources to gain a deposit for their own home.
Rent and Buy Mortgages provide alternative funding so that anyone who can afford to rent can afford to buy their own home.
How they work
The details will vary for each operator of a public housing project. A typical arrangement follows.
Saver investors purchase Rent and Buy Mortgages at an agreed rate defined at the time of purchase. That determines the amount they will get in return for their capital. Typically this will be an 6% inflation-adjusted annuity.
For example, an investor purchases an annuity for $100,000. They decide to start drawing down the capital after twenty years. At that time the annuity value is twenty times 6% times $100,000 plus $100,000 all adjusted for inflation or $220,000 with no inflation. The investor now draws that down over a period of thirty years at $11,000 per year. Alternatively, they could draw it down at the rate of $22,000 over fifteen years.
If the investor does not start drawing an annuity the rent money collected is invested in mortgages on other properties.
The investor can sell their mortgages on a secondary market. When they sell they get cash and pay tax on any increase in value over the original $100,000.
Occupants of dwellings buy part of the mortgage on their house each time they pay rent. For public housing, the rent paid is determined by the renter’s ability to pay. In return, the tenants look after the dwelling and pay for the utilities and operating costs.
Renters have the option of purchasing all the mortgages at any time. Renters accumulate mortgages, but they cannot sell any mortgage of the dwelling in which they reside until they leave. When they leave they have access to the mortgages they own to use as a deposit on a new home.
Over time the total amount of rent paid is equal to the total amount of money returned to investors.
What it looks like to Renters and Investors
Renters think of themselves as home buyers as they are accumulating mortgages (ownership) over the property. Investors think of themselves as purchasing a flexible high-value inflation proof property backed annuity.
What does it look like to the government
The government supplies the governance, executive oversight and initial capital as they do now with public housing. They set the rules on how much renters pay and the return on investment. The government is the initial mortgage holder of properties it builds or buys. It sells those mortgages to renters and investors as the investment moves into private hands. The sales enable it to purchase and build more public housing if it is needed.
As investors and renters all acquire mortgages it is expected governance will move to all the mortgage owners.
What does it look like to the operator
The operator will operate as a bank except it takes no responsibility for the money because it does not create debt. It does what most people think banks and real estate people now do. They take money from savers and use it buy properties on behalf of the savers and rent them out.
The government can be the operator but they are likely to outsource the operations to organisations with expertise in real estate rentals and issuing mortgages.