How to solve the pensions, housing and banking crises all in one

by: Brian Hall
  • 06/11/2014
  • 0
How to solve the pensions, housing and banking crises all in one
What would happen if crowdfunding cash was invested in buy-to-let? The Royal Institution of Chartered Surveyors (RICS) recently published a discussion paper on crowdfunding to 'highlight the possibility that this sector, rather than the banking system, may well be the source of the next liquidity shock to the housing market'.

It modelled what would happen if just 5% of the £995bn in conventional savings was switched into property – and this was potentially market changing.

But also added to the mix must be the funding that will become available with changes to the pensions system from April 2015. According to the Association of British Insurers, 353,000 annuities were purchased in 2013 at a value of £11.9bn.

With annuities no longer mandatory from April, much of this money may soon be invested in property. Recent research for Hargreaves Lansdown suggested that about 200,000 savers plan to cash in their defined contribution pension pot next year, with 16% investing in bricks and mortar.

So tens of billions of pounds in new funding per year may become available, with crowdfunding providing a mechanism by which this can be invested in buy-to-let.

Maybe crowdfunding could help resolve our housing problems by encouraging new builds, to resolve the enormous supply issues, while driving down private sector rents and encouraging increased homebuying in the longer term.

There is a risk, of course, that these new funds could cause an asset price bubble. Prior to the credit crunch, property prices tripled over a 10-year period and recently we have seen house prices boom again, particularly in London. The work done by the RICS and Hargreaves Lansdown encourages discussion on this important issue.

Moving on, in terms of profitability, I calculated that crowdfunded buy-to-let will provide a higher return than conventional savings on a modest net rental yield.

Our own index shows that cash buyer, five-year, net annual returns have consistently been at between 6.05% to 6.22% over the past four quarters, even after overheads, provisions and opportunity costs are deducted. These returns are more stable than those of geared buy-to-let investments, which can be highly volatile.

With cheap online distribution and streamlined processes, economies of scale and buying properties off plan at lower cost, crowdfunding could raise standards and drive down private sector rents.

The cash investor only has to return more than putting their funds on deposit, while the geared investor has to repay a mortgage. Increased competition might cause geared investor margins to reduce causing them to exit the market.

If the sector were to transition from a mostly private geared investor to a crowdfunded cash buyer foundation, it would help the UK in terms of de-leveraging particularly if this can be achieved without triggering an asset price bubble.

The solution would appear to be for crowdfunders to concentrate on new builds, rather than competing with established players for existing housing stock.

The crowdfunding infrastructure could then evolve to service a range of innovative renting or home buying solutions. It is an interesting development that could benefit investors and consumers while increasing competition, by challenging the traditional deposit takers, buy-to-let mortgage lenders and private landlords.

Perhaps the government, Bank of England and regulators should encourage crowdfunders and help them realise their full potential.

Brian Hall is founder of The Model Works

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