The ResiTech Boom Emerging from the Housing Crisis
Driven by necessity, another PropTech subsector has recently begun to boom — let’s (for now) call it ResiTech.
It has been difficult for young people to buy houses for a long time. The rise in the price/earnings ratio has shown no sign of abating since the GFC, and now the rapid rise in interest rates has increased the level of difficulty for prospective first time buyers. This combination of issues seems to have focussed entrepreneurial minds on helping to solve what seems to be an intractable problem.
The problem, in short, is the difficulty younger would-be homeowners face in assembling a cash deposit big enough to satisfy debt providers lending a maximum 85%, plus a combination of high house prices and bigger debt servicing costs thanks to the end of the low interest rate environment. The horrible prospect faced by many has been to be abandoned to live in poor quality rental properties at high rents while trying to save a big enough deposit to buy a house, but seeing house prices continuing to rise to the point where homeownership remains unaffordable. Higher interest rates are the latest slap in the face. While lower house prices might or should be the result of this shock, there doesn’t seem to be a sufficiently significant re-pricing going on.
There have been several nextgen or tech-supported attempts at a solution to this particular perspective on the ‘housing crisis’. Apps aimed at improving the tenant’s customer experience are at the lower end of the ambition scale; co-living is another potential help, as is the growth of professional providers of single family rental products. But none of these help would-be buyers.
We have seen co-ownership models, which encourage prospective house buyers short of a deposit to part-rent, part-buy homes in partnership with equity-providing investment capital. This looks like a neat proposition to investors, as search costs, vacancy levels and maintenance costs are reduced by self-interested co-owners. This model has not exactly taken off, perhaps because the financial benefits of house price growth do not accrue in full to the occupying co-owner.
Enter the latest solution, rent to buy. Under this model, the would-be homeowner finds a house she wants to live in and eventually own. She occupies the home as would a traditional tenant paying a full rent to an investor. For the investor, the co-ownership benefits of reduced search costs, no vacancy and minimised maintenance costs are again available — reminiscent of the peek-behind-the-curtain of his new venture Adam Neumann recently offered to audiences.
The transformative modification is the option provided to the tenant to buy the property at some point in the future, ideally at a price fixed in advance (the purchase price), in return for the payment of a higher than market rent. The investment platform will try to arrange high loan-to-value (say 85%) mortgage loans and make these available.
The buyer’s deposit is funded by any savings they bring to the table at the outset, some of the rent premium they pay (the remainder being retained by the investor), plus the phantom deposit effectively delivered by house price growth. So let’s say our customer starts with £10,000, finds a £400,000 house renting for £20,000 annually and is asked to pay a 20% rent premium, of which 10% goes to the platform and 10% is set aside as equity savings for the customer. After 5 years her deposit is £10,000 plus some interest, say £12,000. If the house price rises by 2.5% a year, it will be worth £450,000, but she will be able to buy for £400,000. An 85% mortgage on a £450,000 house is £382,500, so she needs £17,500, which is more than covered by her savings.
There will be several variants on this approach, but it appears that appetite amongst would-be buyers is likely to be strong. Raising capital might be (as ever) another thing.
There is evidence of success for this model in the US, and there will no doubt be many European variants. The devil will be in the numbers and the details of the contract between investor and occupier, but this ResiTech variant might just work.
Andrew and the Pi Labs research team recently completed research into the fractional ownership and democratisation of real estate. You can download a copy free of charge by following this link.
