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An Interim Solution

An Interim Solution. 13 th February 2009 John Edwards. The Solution. Make housing affordable by sharing the benefits and share risks and costs. Background. Its founders released the first Australian repeat sales index for a capital city (1988)

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An Interim Solution

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  1. An Interim Solution 13th February 2009 John Edwards

  2. The Solution • Make housing affordable by sharing the benefits and share risks and costs

  3. Background • Its founders released the first Australian repeat sales index for a capital city (1988) • Transacted a housing derivative in 1990. A $100 million 20 year swap/insurance between Sydney Housing and CPI in 1990 • We still use the repeat sales index technology which we released to the international actuarial conference in 1992 • We have altered the index calculation method so the inherent problem with repeat sales are removed and release a non-revisionary index monthly at a suburb level. • The method allows the easy attachment of a tracking error for individual properties

  4. Why Derivatives • Basically they will allow institutional investors to shelter risks where they take equity interests in housing • They want balanced portfolios which are liquid and provide high returns – they facilitate this • Housing has always been considered a separate asset class but not a class that they have been prepared to invest in because: • It was or could be subjected to political interference • It had a high unit management cost • Is not liquid.

  5. What Is Needed? • It is not technology, IP or knowledge • It is a counter party need • We have to have parties that need to reduce or transfer risk on both sides of a transaction • Who are the large holders of housing risk? • Government • The public • The stock market crash will make it impossible to develop a derivatives market without the need for these people to reduce actual risk. Before it may have been possible to establish a “casino” in housing risk • We need a group of Companies/Trusts which own houses

  6. What Type of Instrument Creates the Need • A vehicle which exclusively owns residential property without the normal costs of ownership and management • A properly structured shared equity instrument presents the solution • It has been unsuccessfully tried I think on a number of occasions even in Australia

  7. Why hasn’t Shared Equity taken over the Home Loan Market • Investors have not been keen to base returns on one aspect of the return character of housing; Capital Growth • Should they have? No

  8. They Need • An instrument which contains both components of the return: • Capital Growth and • Rental Return

  9. I Hear You Say! • You have destroyed the point of Shared Equity • Its cost is not going to be less than a normal home loan when rent yields are high

  10. I Say No! • What has been done indicates that: • The population does not want to part with more equity then needed • Buy a fixed amount of equity up front and you will take more than you should • They want to know what they own when they sell • Base the return on a multiple of growth and they either are unsure of what they own or feel they are giving away too much • What is needed is a method which allows progressive purchase as needed to maintain affordability • We will say to a borrower – Repayments will not exceed x% of your gross income under any circumstance

  11. The Funding Instruments • An instrument which is an equity. • Has returns linked to growth and rent • Ultimately is liquid and listed on the stock market • Other instruments which are progressively purchased/funded have also been developed • The structure is new so we will start very small and adjust as needed. We will not involve institutional investors. It will be privately funded until proved

  12. Summary • We have developed a solution • It is very difficult to implement in the current environment • We are working on it and it will receive significant amounts of my time in the latter half of this year when FindMeaHome.com.au is a success. It is the first leg of the release strategy

  13. General Observations • The establishment of Shared Equity Vehicles will allow the release of swaps and other similar risk sharing instruments • The process will: • lead to house price growth • provide liquidity for this asset sector • cause a shift in ownership of our housing assets • Probably it will be the very process which actually increases risks in our housing market and presents in this asset sector similar volatility to that which we see in our stock markets • I am forced to ask, even though there is no other immediate solution that I can see; do we really want this in the longer term for our children?

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