A conundrum standing in the way of reform
The Common Ground Trust is not proposed as a stand-alone policy, but as a potential scheme to introduce alongside the suite of reforms recommended in the last chapter. In part, it is a response to the limitations and challenges associated with those recommendations.
In the last chapter, we discussed the urgent need to end the exploitation and insecurity facing private renters, by introducing caps on rent increases and improvements in security of tenure, alongside a mass social house building programme. We also discussed the case for tax reforms, to share out the windfall gains and unearned land rents which, in the current model, are captured by financiers and landowners. And we pointed to the need for better macroprudential supervision by the Bank of England. Such reforms would encourage both households and banks to seek out more productive and socially beneficial ways to invest their money, rather than simply driving up the price of land.
The challenge is that these recommendations will inevitably reduce the attraction of Buy-to-let and Buy-to-leave (thereby removing demand from the housing market), and potentially prompt some owners to sell (thereby increasing the supply of homes to the second hand market). If new buyers do not emerge quickly to plug the gap left by landlords and speculators in the market, the result could be rapidly falling house prices.
A fall in prices would of course be welcomed by some people, currently locked out of home ownership. In the 1990s, the average working family needed to save for three years to afford a deposit. Today, it needs to save for 19 years.[1] But, as noted, falling house prices also carry political, social and macroeconomic risks, among which are households stuck in negative equity and economic contraction.
The challenge we face is this: how can we address the urgent concerns of renters, discourage debt-fuelled speculation in the housing market and reduce the scale of rent extraction by banks and landlords, without triggering a destabilising fall in house prices? And if we succeed in stabilising house prices, how do we respond to the legitimate complaint that it would still take a couple of decades to regain a ‘normal’ house price-to-income ratio (figure 2).
The Common Ground Trust may not be the complete or final answer, but it is floated here as one possible way out of this conundrum.
Separating the ownership of land and housing
The Common Ground Trust (Trust hereafter) is proposed as a publicly-backed but independent non-profit institution which would buy the land beneath houses and lease it to members.[2] The Trust would take the form of a commons, where the land is controlled by a community of members, working within a constitutional framework.
People (including housing co-ops) could approach the Trust when they had found a house they wanted to buy and ask the Trust to purchase the land. They would then purchase only the bricks and mortar. Since bricks and mortar account for 30% of the price of a property on average,[3] this would allow people to put down much lower deposits and take on much lower mortgage debt than is currently the case, particularly in high land value areas. The new buyers would sign a lease that would make them members of the Trust, and entitle them to exclusive use of the land in return for paying a land rent.
When moving house, members would sell their bricks and mortar, while the Common Ground Trust would retain the title to the land.
Although the Trust would be non-profit, it would aim to accrue a surplus which would be pooled and used to fund a Rainy Days and Retirement Discount for members. This would help to improve the attractiveness of the scheme, compared to both renting and the mainstream model of mortgaged home ownership, as it would improve security of tenure for members who had fallen on hard times, or were unable to work any longer.
The Trust does not replace the need for social housing. It serves an entirely distinct purpose.
The Trust is a vehicle for bringing land into common ownership, with three goals in mind:
- To expand the number of people ready and able to buy a house, offsetting the reduced demand from landlords and speculators. This would make it safe to introduce the necessary reforms to the private rented sector, the tax system and the mortgage market discussed in the previous chapter, so that land and house prices can be stabilised.
- To reduce the scale of land rents that are extracted by financiers and landlords, and to use those rents instead to provide a safety net for members who have hit hard times.
- To give more people the opportunity to enjoy a form of private or mutual home ownership. Even with improved conditions in the private rented sector, many people will have an understandable desire for a home they can substantially renovate and invest in, and the assurance that they will never receive an eviction notice.
Example
The Smith family find a house they want to buy for £300,000. They have £30,000 in savings – a 10% deposit. If they had a higher household income they could qualify for a mortgage to cover the remaining £270,000. In this case, if they borrowed at 3% interest over 25 years, they would face a monthly bill of £1280 (figure 3a). But the Smith’s mortgage lender explains that – based on their income and credit record – the maximum they can borrow is £150,000.
So the Smiths contact the Common Ground Trust, and discover the land accounts for half the total value of the property: £150,000. The Common Ground Trust agrees to purchase the land, and the Smiths sign a lease that entitles them to exclusive use of the land in return for paying a land rent at, say, 4.5%[4] of the sales value of the land, or £563 per month. The Smiths then pursue mortgage finance to cover the cost of the bricks and mortar.
With the land rent as committed monthly spending, the amount the Smiths can borrow drops to £120,000. Let us assume, conservatively[5], that the interest rate also rises slightly to 3.5% to take account of the fact that this is a novel mortgage arrangement and ownership model. But with this loan, and their deposit of £30,000, they have enough to purchase the bricks and mortar.
Their monthly mortgage repayment costs are £601, bringing total monthly housing costs to £1163. Once they have paid off their mortgage, and assuming stable land values, the Smiths can expect monthly costs of £500, until they reach retirement (figure 3b). For comparison, if they were to rent a house like this it would cost around £1100 per month indefinitely (figure 3c).
Figures 3a, 3b and 3c: Comparison of monthly nominal housing costs facing mortgaged home owner, Common Ground Trust member and private renter
How would land rents and house prices be set?
Land valuations could be produced as part of the regular valuation process required for the progressive property tax recommended in Chapter 3. Land valuations are routinely undertaken for the purpose of taxation in places like Denmark,[6] and in recent years the OECD and Eurostat have been working with national governments to improve land valuation practice and incorporate land into national accounting frameworks.[7] A typical approach to land valuation would start with an estimate for the overall property price, based on sales data, and subtract the rebuild costs, to arrive at a residual land value. New computational techniques and big data (revealing, for instance, the price premium arising from proximity to public transport) should make the land and property valuation processes far less painstaking than they might have been in the past.[8]
There is a case for land rents to be regularly updated, to ensure that they stay in line with market values.[9][10] However limits to this variation could be built in to ensure both security of tenure for the homeowner, and solvency for the Common Ground Trust. For example, households paying the basic rate of income tax could have their land rent increases capped at the rate of median wage growth.
When a house already held within the Common Ground Trust system is resold, the resale could happen under one of two models. The Common Ground Trust could fix the land rent, and allow the house to be sold through a normal process of competitive bidding.[11]Alternatively, the Trust could fix the price of the bricks and mortar, based on the rebuild cost, and allow the land rent to be determined by a process of competitive bidding by the prospective homeowners. In either case, the land rent would subsequently track a published land value index (within the aforementioned limits).
In the short- to medium-term, land rents would be used to recover the cost of purchasing the land. After these costs had been repaid, land rents in excess of operational costs could be pooled and used to fund a discount for members who had fallen on hard times, or were entering retirement. The retirement discount would be available only to members who had been paying in for a minimum period, such as 25 years. It would reduce but not eliminate the land rent, partly to encourage downsizing where this is possible.
Who is the Common Ground Trust designed for?
Membership of the Trust would be most obviously attractive for people who want to enjoy a form of home ownership, to gain greater security and agency over their own living space, but who cannot meet the mortgage deposit requirements.
Membership of the Trust would also be open to housing coops which are fully mutual (only controlled by people living in the property) with an asset lock, so that nobody can profit from or speculate with the assets.[12] This co-operative model allows people without any savings at all[13] to escape the private rented sector and gain collective control over their housing. Rising land prices have increasingly acted as a barrier to the establishment of new housing coops at affordable rents. By removing the upfront cost of land, the Common Ground Trust would support the rapid scaling-up and long term sustainability of this sector.[14]
People wishing to release equity from their homes (e.g. in retirement) may also be interested in selling the land beneath their homes to the Trust, especially in cases where interest rates on home equity withdrawal products were more expensive than the land rent. Membership would not be available for speculators, landlords or second home owners.
Supporting community led development and agricultural dwellings
In the longer term, the Common Ground Trust model could potentially be extended to agricultural land and used to facilitate the development of housing for landworkers (see Chapter 8). Similarly, the model could be used to facilitate self-build and community-led development. The Trust could purchase the land, and let the self-builders and/or community groups focus on raising the finance for the actual build cost (see Chapter 6).
Governance and financing
The initial capitalisation of the Common Ground Trust would ideally be financed by government. The tax reforms outlined in the last chapter, and the abolition of harmful policies like Help-To-Buy, will improve public finances and help to make this possible. Options for the ongoing financing of land acquisitions include government-backed borrowing and bond issue. The Trust would require an executive that is answerable to the members, and a statutory asset lock to ensure that it is insulated from the whims of future governments. The constitution would ensure that the interests of future members and society in general are not overridden by the immediate interests of current members.
Why not use other demand-side supports in the housing market?
There are of course other ways that the government can reduce the risk of a damaging house price fall. For instance, keeping interest rates very low, loosening mortgage loan-to-income ratios, and extending the Conservative Party’s Help-to-buy policy are all levers for fuelling demand in the housing market and thus propping up prices. The drawback of such approaches is that they push households deeper into debt and increase the fragility of the macroeconomy, for the reasons set out at the end of Chapter 3. The Common Ground Trust offers a more sustainable and progressive approach.
Common ownership as a non-reformist reform[15]
The Common Ground Trust creates a mechanism for the gradual, voluntary, but potentially large scale, transfer of land – our single most valuable asset – into a form of shared ownership, so that the associated land rents can be pooled and distributed according to need (in the form of discounts), rather than captured by private landowners and banks at society’s expense. It helps to establish in the popular imagination the idea that unearned rents arising from the control of a scarce natural resource should be socialised. And, if the Trust proved popular and expanded its membership, the proportion of land remaining in private ownership would shrink. Thus it would gradually become more feasible to raise land taxes and advance the broader land reform agenda. But even for those uninterested in such objectives, the scheme would offer tangible benefits:
- Aspiring home owners: the Trust would enable individuals, families and cooperatives with relatively small deposits to enjoy a form of home ownership, and with that, a degree of security and autonomy over their living space that cannot be provided even in a reformed private rented sector. This group would otherwise be waiting a long time for home ownership to become affordable;
- Existing home owners: the Trust can help to ensure house price stability, by giving the government a lever for supporting demand in the housing market, even while would-be real estate speculators are encouraged to find more productive ways to use their wealth;
- Private renters: through these means, the Trust makes it more politically feasible to bring in rent caps, improvements to security of tenure and decent home standards in the private rented sector, and to clamp down on the speculative behaviour that can lead to rapid and ruthless gentrification.[16]
[1] A. Corlett and L. Judge, 2017. Home affront: housing across the generations, London, Resolution Foundation.
[2] The model is designed for freehold properties but could theoretically be made to work in a more limited form for leasehold properties. We do not discuss this potential model extension here.
[3] Office for National Statistics, 2017. The UK national balance sheet estimates: 2017.
[4]The precise ratio between sales values and rental values varies by region. This figure is based on the average gross rental yield for England and Wales in June 2018. Your Move, 2018. England and Wales Rental Tracker. July 2018
[5] The bricks and mortar could actually be considered a safe form of collateral since the Common Ground Trust could guarantee to repurchase the bricks and mortar at rebuild cost. The rebuild cost of a house is far more stable than land values, and could be made even more so if the maintenance of the bricks and mortar were enforced by a covenant. This would reassure the mortgage lender that if the borrower defaulted on their mortgage, their bricks and mortar would have a guaranteed buyer, allowing the borrower to repay any outstanding debt to the mortgage lender.
[6] A. Muller, 2000. Property taxes and valuation in Denmark. Presentation at OECD Seminar about Property Tax Reforms and Valuation, Vienna 19-21 September 2000
[7] Eurostat and OECD, 2015. Eurostat-OECD Compilation guide on land estimations.
[8] D. Adler, 2017. Home Truths: A Progressive Vision of Housing Policy in the 21st Century, Tony Blair Institute for Global Change.
[9] If land rents for existing members systematically diverge from the market rates available on new leases, then people may be discouraged from moving house or encouraged to sublet to capture the difference. The further prices and values diverge, the more politically challenging it will be to make a revaluation, and ensure that unearned land rents are properly shared.
[10] It is of course important to ensure that the Common Ground Trust is exempt from any ban on leasehold and ground rents, and any leasehold enfranchisement legislation.
[11] A risk with taking this approach is that if the Common Ground Trust were to underestimate the market rental value of the land, the seller could walk away with unearned windfall gains from an inflated house price. If the Trust were to overestimate the market value of the land, the seller could find it difficult to fetch a fair price.
[12] Currently co-operatives can obtain only a rule-based assets lock and would benefit from a change in legislation to create a statutory asset lock for such corporate bodies.
[13] It is usual for such co-ops to raise capital through issuing loan stock to friendly investors. It is possible for members to invest in their own co-op (through loans or shares) but it is not usually a requirement.
[14] Resilience of the cooperative housing sector would be further increased with a mechanism for ensuring that surplus rents within each housing coop are used for the establishment of new co-ops.
[15] ‘Non-reformist reform’ is a term borrowed from French writer Andre Gorz, who sought to distinguish between ‘reformist reforms’, which subordinate themselves to the need to preserve the functioning of the existing system, and non-reformist reforms ‘which advance toward a radical transformation of society’. A. Gorz, 1968. Strategy for Labor: a radical proposal, Boston: Beacon Press.
[16] Chapters 3 and 4 of this report have drawn heavily on the unpublished PhD research of Beth Stratford, University of Leeds.