Introduction
The purpose of this document is to describe a model for housing that firmly
embraces the 80’s ideal of ‘property ownership for all’ but which avoids uncontrolled
spiralling property values and creates affordable housing which stays affordable. It
enables all socio-economic groups to benefit from affordable housing without the
need for discrimination and does not rely on social exclusion. Additionally embedding
communities at the heart of the design and not making affordability a special case.
It is not intended to be a communist approach to the property market but to be
a business model which is designed to be sustainable economically and
environmentally, but yet socially aware. Many of the statements in this document
include observations based on the past two decades of the property market by the
authors who have had varying levels of involvement in property and construction but
are presently unable to purchase due to the state of the current property market.
Authors: Robert Hannent & Angeliki Vlachogianni
Basic Assumptions and Observations
Subjective Pricing
The current market for property is based around a subjective opinion made by
a sales person and bolstered by the costs of the seller; the market does not price a
property against its true objective value. The current value model is based on the
idealised maximum value of the property against market parallels less the
depreciation due to perceived flaws in the portfolio. The true value of a property is the
regional cost of the land and the cost of construction (materials plus labour & fees).
The design/architecture may sometimes pay a role in adjusting the pricing but at least
this can effectively be justified in the cost of construction (fees, exotic materials, etc).
The most subjective part of the equation that is difficult to avoid is the current
approach to land costs, as they can be based on the desirability of the location
including but not limited to: communications, local amenities, environmental
conditions and socio-political factors. However, often the biggest factor in setting the
price of residential use land is based on the value of properties of similar type to that
for which planning permission has been granted, less the cost of construction, and not
based on the agricultural value plus costs of obtaining said planning permission. Thus
the price is usually based on the sale price of a property which has yet to be built less
cost of construction. It is likely that this top-down approach to land prices is the first
barrier to entry in many new builds.
Utility vs. Fixed Capital
In many European countries ownership of property is considered a utility
rather than a capital fixed asset. Thus rightly the cost of property is relatively low and
the market turnover of property is low (until foreign investment takes hold). A family
may own several acres of desirable land but would not consider selling it because it
must be passed to future generations. This ensures that the desire to sell is only based
on necessity and not on the desire to sell ones home to make a quick profit.
The desire in the UK to make profit from property has created many paper
millionaires but has had little impact on the actual liquid asset wealth of the nation.
Now that the financial markets have been affected and a correction has been made to
many property prices much of the perceived value has been wiped from these paper
profits rendering some people significantly less well-off than before . If economic
enrichment was not the basis of property sale, the price of properties would be greatly
more accessible to both first time buyers and the wider community. The question that
stands is: “is it practical for individuals to make an income from that which is
considered a necessity for living?”
Construction Costs
Even before the current economic climate the profitability of construction was
not significant and while individual employees may have benefited the profit per
project for organisations was limited. A construction company will attempt to operate
each project at a most lean level in order to sustain the profitability for both client and
contractor. The competitive nature of the tender process means that a lean but
sustainable economy is present even on economically sensitive projects (such as
Whitely Village in Surrey).
Cost Loading
Another significant factor in the inflation of property prices is the loading of
the seller’s forward costs into the sale of the existing property when moving home.
Many looking to move house will justify the cost of moving, including Stamp Duty,
agents fees and labour, by increasing the price of their existing property. This adds no
actual value to the existing property down the chain but just serves to inflate the price.
Buyers further down the chain must accept this cost if this is the best property
available to them.
Outline Proposal
Social Responsibility
The proposal is for development of a housing model, based on common large
scale commercial housing construction appropriate to the needs of the expanding
population. However the difference is the economic model applied to the sale of the
properties. The properties will be ‘sold’ based on a ‘true value + profit’ basis but the
terms of sale forbid the sale at any price above ‘cost + profit + depreciation’. Thus
through the ancient principle of ‘covenant’ the land can be constrained for future
generations, or if this is legally unsound a long lease (perhaps 999 years) on the
property could be used for similar constraining purposes.
The purpose of this is not to create social housing in the traditional sense, and
not to create an estate suitable just for low income purchasers. The purpose is to
permit properties of any scale (from flat to mansion) to be sold against a solid
principle of ‘utility’. In this way it should not affect the price of existing properties
not covered under the scheme as the normal free market housing will have its
advantages in comparison to the constraints of the scheme. Social inclusion in this
way is achieved through equality not through demographic segmentation. While it is
proposed that initially the scheme would encompass a new housing development it is
also possible for individual properties to be included before or after their construction
subject to the conditions specified and subject to the required surveys.
Profit
Profit is often a subjective term, but the level of inflation that the properties
can experience can be judged by a trust of experienced persons but perhaps regulated
by the inflation in cost of living for an area. When a person comes to sell their
property they can have the value of the land assessed and be told what level of profit
they are permitted to take from the sale. The cash profit will likely be little or none
relative to the costs but the original cost of the property off-set that sale factor. Even
the initial capital investors in the scheme could achieve a measurable profit against
their investment which may be more certain than the usual investment in property.
Depreciation
This is the most significant factor in the proposal as it defines the relative cost
of each property in real terms based on its condition. As the properties were
constructed against a strict schedule of work and surveyed upon completion the
cost/value is well known. Additionally the lifespan of the materials used is calculable
against their use and verifiable at each point in the lifecycle of the structure. So when
a property is sold it can have its value assessed in a very accurate way to reflect the
true value of the asset, not just its subjective value. If the kitchen is tired then its value
from the original cost can be assessed against the cost to return it to a modern
equivalent. If an extension is added or any improvements made then this does
contribute to the value of the property but only as much as the actual cost.
Construction
Selection Criteria
The land should be selected for not being of present residential use (preferably
brown-field) but where government planning initiatives require that green-field land is
used for housing this kind of socially responsible development is a consolation. The
construction of the properties should be based on sound commercial principles with
funding coming from a range of sources (including private investment). The architect
should be selected by standard competition on merit against the criteria for the
construction. The main contractor would be selected on a standard tender basis on the
merits of not just cost but also environmental record, sustainability proposal, and
corporate/social responsibility.
Environmental Factor
The design of the properties should not take ecological design to extremes but
should use standard sustainable building methods and take into account alternative
methods where fiscally appropriate. Examples are solar heating, wind turbines and
ground source heat pumps. The location’s municipal facilities such as street lighting
may be off-set with a single decent size renewable energy source suitably positioned,
for example a wind turbine however in general the use of such alterative energy
sources should take into consideration their disadvantages. Additionally special
provision should be made for foul water management and the availability of non-
drinking water for garden use and/or toilet flushing.
Communications
In a housing development each property should be fed from a single combined
multi-satellite, VHF and UHF reception facility in order to remove the need for each
property to be fitted with satellite dishes and aerials. Each property should be fed with
fibre optic cable connections to facilitate this service and also to provide high speed
internet access. Because of social diversity in the UK it is advised that a range of
satellite services be available to support the different communities, with the correct
selection of technologies it is possible to support each property having a nominal
choice of two satellite slots to their property and the selection/connection to a
different satellite dish can cost the same as the most basic cost of having a dish fitted.
The availability of a high speed internet connection also permits wider
learning and social inclusion as indicated by Lord Carter’s Digital Britain report
among other such studies. When building a development it is now current best
practice to ensure the highest level of connectivity for the future and the development
at Ebbsfleet is an example of making use of both satellite and telecoms over fibre.
Buying and Selling
Process
When a buyer first approaches the seller they must be informed of the
constraints of the property and their relative obligations to it. Upon the decision to sell
the property the current owner should notify the trust in charge of the process and
they will provide an independent survey to give the owner the true price. This survey
is quick and relatively pain free as the majority of the data about the properties
construction is already known, the purpose of the survey is to assess change in the
state of the property by a qualified surveyor. Promptly after the survey the present
owner will be given the true value of the property and provided with an easily
prepared set of documents for the sale. If there are any significant changes to the
structure then the surveyor can assess the quality/value of the work and the owner can
submit supporting cost data such as invoices and receipts. The owner is then able to
list their property as for sale.
Market Forces
The trust can offer to support the sale of the property, in order to avoid large
agent’s fees and to avoid marketing costs, the trust can maintain a list of interested
buyers to be contacted when a property is available. Because the sale price of the
property is limited, selection of the most worthy purchaser may be based on criteria
other than that of value but it is perhaps important to let some degree of freedom
dictate the sale. While it is tempting to say the local government housing authorities
could have first choice in who would be able to purchase properties, this may reduce
the social diversity in the development as only a certain economic demographic would
be eligible to buy.
It is still a matter of debate as to which method is most suitable for the
selection of the purchaser, currently there are two proposals for the sale process:
1) In order to permit those who are most enthusiastic and able to purchase
there could be a ‘first come, first served’ basis and when a property enters the market
it a notice can be sent out to all interested parties. The first to positively respond will
be accepted. This is the most susceptible to corruption but at least if the trust is the
agent then it will be less liable to interference. It does however allow market forces to
act and those most keen to purchase to be given a better chance.
2) The function of the trust could be funded through lotteries relating to the
sale of properties. In order to be eligible to purchase a property the prospective buyer
could purchase a low value premium bond against the trust and when a property is
available the lottery is drawn against those who are on the active waiting list. The
bonds should be a fixed term life bond to ensure they provide an income to the trust
but of a value low enough so as not to form a barrier to entry (perhaps two hundred
pounds). This option is less open to market forces and randomises the purchase but
could be seen as more fair.
Further development of the model for purchasing is desired so that the most
optimal mechanism can be found for the sale and distribution of the property. The
most important factor is that the model is comfortable for purchasers as well as sellers
and that it permits an easy market flow.
Conclusion
It is obvious that this housing model would not be the universal panacea to the
problems of the housing market in the UK. It is just seen as an accessible route to the
market for many who are currently renting or who are struggling to own a property of
the size most appropriate to their needs. It is designed to model a way in which
ownership of land is based on utility and necessity rather than capital growth. There is
no need for any specific government initiative to validate the scheme and any
individual or group could make their development comply with the scheme. Profit can
be earned from the sale but by capping the potential no spiral is entered.
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