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Solving the Housing Crisis with a Productivity Increase in Financing

By Dr Kevin Cox

Kevin’s interests are the result of many years of working as civil engineer, operating system support technician on supercomputers and developer of commercial personnel systems. He has lectured in systems analysis, user interface design and project development. His current research and development focus is on algorithms and complex adaptive systems. He works on giving individuals control over their online (particularly their financial) information with local communities.
Australia is currently experiencing a housing crisis where people can’t find affordable homes to rent and owning a home is out of reach for ordinary people. Aimed at addressing this crisis, there are three housing bills (provisional) open for correspondence:
  • Australian Federal Government Housing Australia Future Fund Bill 2023
  •  National Housing Supply and Affordability Council Bill 2023
  • Treasury Laws Amendment (Housing Measure No. 1) Bill 2023

The following article has been adapted from the submission I have made to these bills. I explain how these bills can be modified to solve the housing crisis permanently so all Australians will have the opportunity to purchase a dwelling they can afford.

The reasons why the inflation in house prices occurred are found in the 2016 Reserve Bank Publication “Long-run Trends in Housing Price Growth“.

The above bills are a response to the crisis. Adding a build-to-buy alternative can double their effectiveness.

Most of the economic ideas behind this submission can be found in Geoff Davies’s book, “The Little Green (I’m afraid of) Economics (but I want to save the world)“.

What to add

  1. The government assists local communities in creating Community Housing Markets to apply for funds under the act.
  2. The money from lenders and investors in Community Housing Markets requires them to share the profits from home loans with the occupiers, as this petition to the Reserve Bank outlines. Any government money is treated like a long-term loan, with most of the interest shared with the occupiers.
  3. Community Housing Markets (CHM) is an addition to the bill – not a preplacement for build-to-rent.

A CHM entity comprises investors and occupiers, where the market entity holds all the dwelling titles. Occupiers own individual properties, much like current strata titles, and purchase the property they occupy by paying rent. Developers, investors, governments, and local community groups can establish Community Housing Markets.

Examples of organisations that might become CHMs are government housing trusts, university student accommodation, existing body corporates, rent complexes, Common Ground, women’s shelters, housing commission buildings, and complexes.

Each rental payment transfers equity to occupiers, and equity holders sell a percentage of the equity they hold each month to renters. The CHM sets the amount each occupier pays at 25% of the disposable income earned in the previous month. The CHM decides who occupies each property by considering the occupier’s needs and ability to pay rent. The CHM decides who can be an investor. All members of a CHM get an equal voice in governance.

Investors must sell a percentage of their holdings each month. The buyers of the holdings are occupiers paying rent and approved investors. If there are no buyers, the sellers’ holdings accumulate. Fifty per cent of all rent paid purchases equity in the renter’s house. The other fifty per cent goes to operating the Market, improving the stock, and as a profit to investors.

When an occupier has purchased all their home equity, their 25% payments become an investment in all the other properties. They can sell their investments or leave them in the community entity to earn an income.

Investors receive annuities rather than dividends, where the annuities will last twice as long as the average superannuation-allocated pension.

A Community Housing Market is rent-to-buy rather than build-to-rent.

The additions will prove popular with most of the population. Banks and developers will get the same profits for new housing construction while the additions will stimulate better utilisation of existing housing. It is an improvement in the financial system, leading to increased productivity and faster transfer of capital. It means the government incentives will double the impact of the money spent through the bills.

Justification for the additions

Unless community-owned organisations are explicitly mentioned in the Act, we have found in other government programs that the organisations are excluded from participating. Unless the government specifies that interest be shared between banks and borrowers, the banks will keep all the profit from their loans. Treating government assistance as a shared interest loan increases the utility of the government money.

Recently, a new Australian Capital Territory, build-to-rent has changed to strata title sales. Without community ownership, it will be a common occurrence with this Commonwealth Program.

Housing and land price inflation are the main causes of the housing crisis. It is not a lack of supply, immigration, or other reasons that started and continued the crisis. These magnify the problem but are not the underlying cause.

The following outlines why housing and land prices have inflated. The suggested bill additions will save the government billions of dollars by increasing the financial productivity of businesses and governments when dwellings change ownership.

Market economics

Western economies are built on the idea of free markets, where many buyers and sellers converge on a fair price through market operation. Buyers purchase from sellers who give the most value for the least money, sellers sell to buyers who will pay the most. Over time, the market sets a fair price – or at least in theory. Unfortunately, there are many market failures, particularly where capital is the dominant cost. These market failures are extraordinarily expensive. The money lost could be available for more productive investments.

Capital Markets, where the market attempts to set the price of capital, cannot arrive at an optimal price. Setting the price of money by buying and selling money creates a random outcome, as confirmed by observing the “random walk” price outcome of stock markets.

The housing market is a defacto Capital Market, as purchasing a house requires much capital. It means the buyer with the most money (or who can borrow the most) will obtain a contested dwelling. If they don’t need it to live in, they can rent it out, and the renter will pay the capital plus give the landlord a small profit and an ongoing stream of unearned income.

The small profit turns into a large amount over the life of the property. In addition to this, owners also benefit from the inflation of house values. This all means it is inevitable for house prices to keep rising until renters can no longer afford rent – which is the situation in Australia. When enough renters and house buyers become paupers, the political pressure will cause prices to collapse or cause some other economic correction.

This is the case today in Australia, where we have a Housing Capital Market failure.

Bank loans

Banks have a license from the government to create new money (or capital) by making a profit from issuing loans. New capital arises when an enterprise makes a profit or surplus. With loans, the repayments and interest are earned by the borrower. Today, the bank keeps all the interest money even though the borrower did the work to create it. When the Reserve Bank increases rates, bank profits increase by borrowers paying extra and receiving nothing in return, this is unfair.

Many people view the Reserve Bank’s decision to raise interest rates as unfair and potentially illegal, as it disproportionately harms those with less wealth and benefits the wealthy. At best, it is a crude way to control inflation, and it encourages inflation because today the increased demand for housing comes from investors and new buyers. The existing home buyers being punished by the rising interest rates are not responsible for adding extra demand or pressure on house prices.

When banks share 70% of the loan profit with borrowers, borrowers will either reduce their loan repayments by about 20% or shorten the loan period by about 30% when keeping the repayments the same. This has an immediate impact on inflation. Depending on how many banks change, it speeds up the movement of capital, amplifying the government’s initiatives with these bills. Read more at this previously mentioned petition to the Reserve Bank of Australia.

Rent-to-buy or buy-to-rent

Build to Rent benefits landlords and developers and disadvantages occupiers and savers investors. Rent to Buy benefits occupiers and investors in houses while leaving landlords and developers with similar profits. With the existing bills, the government makes a clear choice on who it favours.

Making the occupiers the partial owners of houses transfer the profits from landlords to occupiers and investors. It removes the unnecessary landlord middle-man, speeds up the movement of capital, and dramatically reduces the cost of transferring owner-occupiers from one place to another. It is complementary and compatible with the existing housing and rental market. Houses and occupiers can move seamlessly between the two systems.

The main difference is that when an occupier pays rent, 50% purchases equity from investors, and 50% goes as profit to the investors.

Sharing interest and profits versus reducing
interest or profits

Sharing interest differs from reducing interest as the sharing effect is delayed and removes the cost of paying interest on interest. Financial system operators seek ways to compound their profits and resist attempts to remove unnecessary interest payments. The borrower supplies the money, but the lender collects the interest on the money.

Taxes on profits are one way to reduce rates, but this is unpopular. Speeding up the movement of capital will increase the productivity of capital and reduce the gains from speculation. This will be a more popular option.

Extract from a previous submission.


Insert a clause requiring the Future Fund to distribute funds through Community Housing Capital Markets into the bill.

Community Housing Capital Markets

In a Community Housing Capital Market, 50% of every rental payment becomes equity owned by the occupier. To the occupier, it is like a mortgage payment. To the investor, it is like an inflation-adjusted annuity that lasts twice as long as a superannuation pension.

Open this article on Medium.