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Blockchain: Solving planning and liquidity, without sacrificing England’s green and pleasant land (or its bank balance).

An essay by Sam Collett & David Bradley

Summary

The UK property market is stagnant and dysfunctional largely because of expensive and exclusive lending, as well as stultifying, choking planning processes. Properties should be built quickly where people want to live and work. People should be able to afford them. People should have the freedom to design and build their own properties, but within consensually updatable frameworks. Moreover, people should be able to part-own their property and use the equity held in it to finance property of others, such as their children, without expensive intermediaries. Indeed, this unlocked capital should one day finance the whole property ecosystem.

Emerging technology, applied effectively often creates vast improvements in the way we live and work. Blockchain can do exactly that with UK property.

This essay argues that a new blockchain based technology can, in one fell swoop, enable both a fast, non-arbitrary planning process, accommodating local and national building priorities, and fractional property ownership. The latter allows those without large incomes or capital to own property, financed directly by others’ property equity and market-based investors.

The problem with the UK property market

UK property market dysfunction is caused largely by two issues: lack of liquidity, which affects demand, and slow, bureaucratic local planning, which affects supply. So for many, housing is scarce and mostly unaffordable. We simply cannot have a property-owning democracy without property owners. Equally, we as a society seem unable to help the younger generation to own their own home, if capital is illiquid and homes are scarce.

The young are being denied property ownership

The effect of poor liquidity is largely why millions of potential buyers have been excluded from the housing market. In fact, home ownership rates have halved in the past 20 years, despite interest rates being attractively low. For the younger generation in particular, the increasing cost of an initial deposit has far outpaced wage increases, leaving those previously able to secure a mortgage unable to get onto the property ladder. Schemes that do exist; including help-to-buy and affordable housing actually distort market effects, are great for individuals but less so for the public purse or market.

The UK’s current form of property capitalism has created sections of society without capital, whilst those who have it have seen it grow fast. If these problems aren’t fixed, we risk a whole generation feeling that capitalism has failed them. The tragedy is that what has failed them is not free market capitalism, but a quirk of central planning and tolerance of distorting trade practices within a semi-market capitalist society.

In short we have a planning system that fails to reflect market needs, and lending practices that have deprived people from capitalising their property’s equity or simply locks them out completely.

Capital is tied up in property

Property owners, largely the older generation, suffer a debilitating liquidity problem because of a single fundamental issue: buyers are locked into financing arrangements with their lenders, whose contracts prevent property owners accessing equity in their property. This wealth, which could be free and liquid – is locked away.

Consider a residential property owner who holds a standard high street mortgage. Even if the property owner only owes 5% of the property’s value in debt, the lender still controls 100% of the property as collateral. In effect, all of the money “stored” in the property becomes a security for the debt, irrespective of the debt size. Given that mortgages last 25 years, this wealth is locked away from use for a considerable time. Even when the owner pays off their mortgage and is debt free, it is difficult to release the wealth stored in their property, without taking on debt in the form of equity release, refinance or bridging loans. Or they could sell the property – assuming that there are properties to downsize to – which in itself takes time and money.

The same is true for investors in property and portfolio managers, and most of all property developers. They are often expected to sell their property in order to release any cash. If they borrow, costs increase, slowing down sales, providing another barrier to more affordable homes.

Our institutions have gradually created an environment which makes it difficult to invest in properties, for homeowners to release the equity held in their properties and for first time buyers to get on the property ladder. All of this has led to less building, less mortgages and ultimately has contributed to the UK housing crisis. It can be implied that banks and other lending institutions directly control over 20% of the entire real estate market value, but yet more is debt-free, illiquid capital. The lack of liquidity in the market will lead to social issues and the idea that the free market has failed.

Planning is too rigid

The planning system started in the 1700s. Its evolution has left it as a quirk of central planning in modern society.

Though planning decisions are locally made, local planning officers have to follow central Government’s ministerial-generated National Planning Framework. This history has made it overly bureaucratic, with a series of slow steps causing weeks if not months of otherwise avoidable delays.

Straightforward cases of corruption within UK planning is rare. But the very fact that local councillors sit on planning committees can create conflicts of interest. As Transparency International UK’s  2011 report Corruption in Local Government notes, “the conditions are present in which corruption is likely to thrive – low levels of transparency, poor external scrutiny, networks of cronyism, reluctance or lack of resource to investigate [… and] checks and balances that previously existed to limit corruption has been eroded or deliberately removed.”

Results bear this out. During the decades following World War 2, Britain built 300,000 houses a year. Today it is half that. The planning challenge today is to balance what many property owners want with what the country needs as a whole.

This is where blockchain technology can help.  

What is Blockchain and how can it help?

Blockchain is a breakthrough technology that can enable the property market to work with less financial or governmental intermediaries. In finance it is expensive, market restricting banks and mortgage lenders, and in planning it is central government guideline creators and councillors making possibly self-interested planning decisions. Solving these issues alone can make the property market more democratic and rejuvenated.

Blockchain is the distributed ledger technology behind Bitcoin and the vast majority of cryptocurrencies. Blockchain is a computer application containing a ledger, which stores and approves a series of date-ordered, time-stamped (by the millisecond) transactions. Blockchain applications are distributed in that they are kept on multiple internet-connected computers. When a transaction is approved by majority, it is mirrored on the rest and becomes an immutable record. This makes hacking particularly hard.

The other side of blockchain technology is smart contracts. These govern the rules of the transactions stored on the blockchain and can be used for a multitude of purposes, including Bitcoin or Ethereum. A smart contract is – at its simplest – a series of rules. When certain conditions are met, actions are programmed to happen automatically. Most Fortune 500 companies, from finance to airlines, are exploring blockchain technology for efficiency and other business benefits. So are some governments.

Blockchain allows for a friction-free property owning democracy

Our solution is to use Blockchain to solve these two major areas of stagnation in the property market: liquidity and the planning regime.

If a smart contract is simply a series of rules, and the blockchain is an immutable record of ‘transactions’, it is easy to see how planning rules could be loaded into this program, and how the transactions that make up the purchase of a property could also be added to a ledger. Where there are rules, privacy issues, and the need for a ledger, blockchain can be useful.

Fixing both liquidity and planning has three big advantages. First, the UK will have enough homes for everyone, where they want them. Second, people on lower incomes without much capital will be able to own part, if not all, of a property. Third, this policy proposal should be attractive to most voters and politicians of all political parties, because it gives what most people want: a home and a means to accrue capital without using public money.  

How to solve planning

But the greatest prize in using distributed ledger technology, such as blockchain, is that it can be programmed to reflect a pre-set, but consensually updatable rules that govern where buildings can be built, what they look like, the amount of light they can block out, the amount of access required and so forth. It also acts as an unalterable audit chain, to ensure all building works are carried out according to the blockchain stored specifications.

With regards to the UK property market, blockchain and the associated smart contract can allow near instant planning decisions based on a pre-agreed (though updatable) set of rules and guidelines, without human involvement.

The heavy lifting is in the formulation of rules. But with clever system design, it should be possible to allow local input of rules that have to obey nationally set guidelines and priorities. This essay’s remit is not to outline how exactly the solution would work, but attempts to explain the principles along which it could operate.

So, potentially every Land Registry entry and all building regulations could be added to the code, and merged with planning guidelines that reflect certain voted-for-by-the-people requirements, such as right to light or minimum distances between properties. These could vary depending on whether an area is urban, rural or an area of outstanding beauty.

The system would include a feature, so that all citizens could have their say in what the guidelines are, to make it democratic. It would also provide a means to check automatically that a building’s construction applies to building regulations. Since blockchain is a ledger of time stamped transactions, human time checking on such matters is saved, whilst the contractor has proof of compliance if “a roof caves in”.  

This process should be politically popular because it gives locals a degree of control whilst “draining the swamp” throughout unpopular planning departments.

But where it could become really exciting is that citizens could potentially use applications on this blockchain system to design their own houses online, through blockchain-connected, easy-to-use computer aided design programmes. The application could automatically ensure every decision they make with a mouse click would be approved upon completion via consensus.

Thus, local people can decide what to build and where – and how it should look. In essence, blockchain allows people to build their own houses, which others can comment on and approve or object to, but within pre-set (but updatable) limits. This will allow more innovation and ensure that buildings appear where people actually want to buy them.

How to solve liquidity

Blockchain could empower the young generation without property to become part of the UK’s property-owning democracy.

Liquidity can only be solved by the concept of fractionalised ownership of properties, which blockchain most easily facilitates. This breaks the cycle of single lender, single owner. The owner would be free to sell ownership of equity to others, or indeed to use that equity to buy a share in someone else’s property. This unlocks capital and makes property as an asset class easier to invest in.

Fractional ownership means dividing a property into “slices” of debt and equity. As the house grows in value, these shares gain in value; thus making the share desirable to investors who are able to buy fractions of an owner’s property. A trading exchange would emerge, which allows the buying and selling of debt and equity. So property owners could trade their property equity for debt or sell their debt or equity to other investors on the platform.

The same would happen for investors. Rather than having to sell the property to release their assets, they would simply trade some of their shares in a property – for profit or loss. And investors can invest in any property without the hassle of ownership.

Blockchain technologies enable not only the trading of debt and equity, but the ledger that allows stores all transactions, immutably, anonymously, and securely.

A marketplace would emerge, of financial products such as loans, mortgages and packages which users can choose from. The platform should be open, to allow anyone to create their own financial products (such as mortgages). Again this is where the power of the blockchain comes in. This should create competition that spurs lower costs, facilitates more innovation, and increases more participation in property ownership than before.

In effect a system like this would create a secondary market of trades between debt and equity, and unlock capital so desperately needed through all of society; all powered by the marketplace.

Benefits of blockchain to the UK property market

First time buyers would be able to afford to buy the home they need. If they cannot afford to buy outright, they could buy the portion they can afford and still live in it. Similarly, they would save money by not having to pay mortgage interest. Instead they would pay returns to shareholders in their property.

Existing homeowners could release cash more easily and cheaply; they would not be constrained by the tight requirements of lender agreements and extortionate amounts of interest. They can decide on their own levels of debt.

Commercial property owners – landlords and portfolio managers – could use their fractional ownership of some properties to pay for the repairs of the other, or use that capital to invest in, buy or build others.

Investors could buy a share in someone else’s property. They can balance their portfolios by selecting both high and low yielding property slices.

Finally, developers would benefit by quicker access to the necessary funds, leading to more properties being built, faster.

The increased liquidity would make the property market more stable, making it more attractive to institutional and private investors alike. Transactions would be faster and cheaper to conduct, which in turn would make the market more stable. Couple this with an enhanced, sensible and fast planning system and this will lead to more homes being built where they are needed, and a larger proportion of society being able to afford them.

The Political Dimension

We would argue that apart from enforcing the law, the government’s role is to let the free market – that is the aggregate of millions of peoples’ individual decisions based upon circumstances that they are best qualified to judge – decide how things should be.

That said, this essay’s proposals (or versions of it) could be implemented within the political manifestos of most UK political parties.

Traditional Conservative Party and free market supporting voters could find the perceived threat to their beautiful views checked by their ability to get involved in the approval process. (Within guidelines which protect, for example, against noise and light intrusions.) They would also appreciate the freeing up of their property’s capital. (For example, to make passing their home’s equity on to their children easier, quicker and simpler.)

Labour Party and socialist inclined voters could be won over as these proposals make the poor richer – by being able to accrue capital more easily. (This was one of the key factors that won Thatcher Labour voters during the 1980s – perhaps a post-Corbyn Labour party will take note of this.) The Labour Party could return more to its roots, as this can be seen as 21st century equivalent of Co-operatives. Friendly societies effectively emerge, pooling their members’ property equity to build the most affordable housing possible – as well as, say, using pooled property equity to purchase healthcare for members at cheaper rates. All this will become possible as healthcare and other services adopt blockchain technology.

However, unlike proposals Socialists usually support (attempting to reduce poverty), these are based on creating a freer, more friction-free and liquid market – the benefits of which will affect greatly those with less capital.

Voters from across the spectrum will love the degree of financial freedom this proposal gives them – not only do more people own their own home but they have the ability to use the money that is rightfully theirs. Moreover they get creative freedom to plan and build, using 3D software built into the platform, based on in-built planning rules, knowing that they have the liquidity to make it a reality.

Conclusion

In this essay the case has been made for a radical new approach to home ownership, property finance, investment, and planning. If the principles outlined in this essay are implemented, the UK ‘s property market’s lack of balance will be addressed.

More houses will be built. People who cannot currently dream of owning property can become property owners. The arbitrary planning system which provides opportunity to protect the interests of the planners can be overturned and replaced by a rules-based, democratic property building and trading platform. Moreover, the wealth to fund this generation of homeowners as well as property developers is there and waiting, locked away and illiquid. The change is economically possible as long as we can start to make use of these funds and make use of technology to change planning.

We as a society need to fix the UK housing crisis, and then propagate globally. The marketplace and PropTech can solve this issue alone, but it is a pivotal time for the government to look into the possibilities and create popular policies based around this market-based solution.

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