Athletes Village co-op housing in Vancouver, BC.
In two recent publications, on this blog and in the Atlantic, I’ve made the case for an alternative to our current models of homeownership and renting. Homeownership in the U.S. is risky and increasingly inaccessible to the non-wealthy, yet the precarity of renting and its lack of wealth potential makes it a poor substitute for many households, especially given our threadbare social safety net. We can’t repeat the ownership-driven wealth boom of the middle and late 20th century; it’s economically untenable for property values to rise faster than wages and inflation in perpetuity, and the benefits for home value appreciation have been and continue to be inequitably distributed. At the same time, it’s difficult to make a positive case for renting when we afford tenants so few protections, homeownership remains an incredible source of wealth for those lucky enough to benefit from it, and homeowners’ anti-affordability (and sometimes explicitly anti-tenant) politics dominate most local jurisdictions.
The alternative I’ve proposed is a shared-equity rental model built on public or non-profit ownership. In short, these institutions would acquire or build multifamily housing and operate them like any other rentals, but would redistribute all surplus cash flow — and appreciation, to the extent possible — back to tenants rather than investors. Tenants pay rent, and over time they earn a stake in the property they’re helping to pay off.
Here are some potential benefits of a shared-equity rental market:
Households can start building wealth right away, without having to save up for an out-of-reach down payment or catch up to rising home prices. Not only does this make renting more appealing, it actually creates a bridge to homeownership by helping people build equity via renting.
It eliminates the risk of foreclosure and allows individuals to diversify their investments into other assets or ventures, instead of pouring all of one’s excess income into their home.
Tenants aren’t stuck in place and can move as needed, without the large transaction costs of buying and selling a home, while still building wealth.
Tenants can invest in their unit (upgrading the kitchen or bathroom, e.g.) and actually capture some or all of the value of their investment. They can make it a long-term home in a way that’s discouraged by the current model of renting, where tenants might be evicted at any time.
More renters means more people who see themselves as benefiting from affordability, and who vote accordingly — fewer “homevoters” who vote for policies that enrich homeowners at everyone else’s expense.
Waitlists for the housing program can be used to identify the neighborhoods where future acquisitions and construction should be concentrated, based on demand.
As the number of the units in the shared-equity program grows, it will put downward pressure on the rents charged for privately owned rental units.
It would benefit middle class households who are overlooked by most existing housing programs, and do so without diverting public resources away from poorer households with greater and more immediate needs.
Over the past few months I’ve discussed the idea with many different people, ranging from city staff to tech investors to mortgage regulators. I’ve given a lot of thought to the major barriers to establishing a shared-equity rental market, and to some of the biggest potential pitfalls. In this post I’d like to build on my previous writing and offer a blueprint for how a shared-equity rental market could be created and successfully scaled up.
My writing thus far has been very public-sector-centric, with the government directly involved in the acquisition and possibly even management of housing. The reason for this approach is simple: housing is expensive, and in most circumstances scaling up a program that could eventually house hundreds of thousands or millions of people would require enormous amounts of upfront capital. Even if the initial investment was eventually paid back, it would take decades to recoup the cost — the program would be limited by the amount of capital available at the outset. If the program could instead utilize long-term low-interest loans — something only the federal government can realistically offer — then it could work without the need for upfront funding.
But a program run by the federal government would have various shortcomings. For one, such programs tend to be inefficiently run, and poorly adapted to local conditions. There are exceptions, of course, but it would be risky to place the fate of the program in the hands of a single entity with a very mixed track record. For another, government leadership is fickle, especially at the federal level. It would be a disaster to have one presidential administration stand up a shared-equity rental market only to have a future administration take power, break up the program, and sell off the pieces to the highest bidders. And finally, it’s a simple fact that many people are skeptical of government-run programs, especially in the housing sector. Warranted or not, a shared-equity rental program must directly confront the inevitable accusations that it will repeat the past (and current) failures of public housing in America.
A regional co-op approach
So how can we capture the benefits of public sector support — namely, the financing necessary to support rapid and sustained growth — while addressing concerns about government inefficiency and overreach? I propose a regional cooperative housing model backed and guided by government charters. Within this framework, the federal government would establish basic rules that all co-ops would be required to follow, and in exchange the co-ops would receive a charter to operate and access to federal financing for acquisition or construction.
Generally speaking, residents of housing co-ops don’t own their units; they own a share of the entire building. This proposal would scale up the concept, with co-ops owning an entire portfolio of buildings. It would not require tenants to purchase the building; instead, the non-profit co-op would buy rental properties and tenants would accrue a growing interest in the portfolio as they paid rent over time. I outline the specifics below.
Core charter regulations
Non-profit organizations would be required to follow several regulations in order to receive a charter as a regional shared-equity housing co-op:
Regional co-ops can (and should) own multiple buildings.
All surplus cash flow — after the co-op pays its financing, taxes, property management, insurance, maintenance, and capital expense set-asides, etc. — is directed to tenants. The share of the surplus cash flow (i.e., equity) received by each household is proportional to their share of the co-op organization’s total rental income.
Tenants’ accumulated equity is transferable between all chartered co-ops. If a renter leaves one co-op’s building and moves into another’s, their equity follows them to the new co-op. If they leave and move into a home not owned by a co-op, their equity is held in trust until they want to (or are able to) draw upon it.
Adherence to these and other regulations would grant the co-ops access to favorable federal financing.
Allowing multiple co-ops in a given region has various advantages. The regional focus would ensure that the co-ops were more intimately familiar with the market in which they operated, and attuned to its unique needs and circumstances. It would also engender competition and innovation that could help improve the acquisition, management, and equity-sharing practices of the co-ops within the bounds of the charter regulations — tenants would be drawn to the better-managed and more generous co-ops. At the same time, requiring transferable equity between co-ops would ensure that renters were not locked into a single unit, building, or region if they wished to move but wanted to continue building equity.
Property value appreciation
How property value appreciation is handled in a shared-equity rental program is a serious consideration. On the one hand, if tenants are allowed to capture 100% of the property value appreciation for the building in which they live, they may be incentivized to vote in ways that promote higher rents and home prices — to act more like homeowners, in other words. On the other hand, if tenants receive only the co-op’s surplus cash flow and none of the property appreciation, its wealth-generating potential will be only a small fraction of that of traditional homeownership. A balance needs to be struck in which tenants capture some appreciation, but do not benefit from excessive appreciation (i.e., faster than inflation or wages). Two policies can address this, both of which should be included in the charter regulations.
First, tenants share in the property value appreciation of the co-op’s entire portfolio rather than only the building they live in. This prevents tenants from seeking out faster-appreciating neighborhoods and equalizes gains between all tenants. The goal of a shared-equity rental housing market is not to maximize returns to some fortunate tenants, after all, but to create more of a level playing field for all renters and to avoid the risks associated with investing in a single property that homeowners face.
Second, tenants cannot receive property value appreciation in excess of the metro area inflation rate. (This could also be tied to a more localized inflation rate, or the national inflation rate, or even median wages.) If a property’s value appreciates by 4% but the inflation rate is only 2.5% that year, for example, the excess 1.5% appreciation is retained by the co-op rather than the tenant. This prevents tenants from benefiting from excessive home value appreciation: If home values go up faster than inflation, they do not benefit, whereas if home prices fall or stabilize, tenants benefit from lower or stable rents. Excess appreciation could be held by the co-op to assist with disbursement of funds when tenants wish to cash out, or fund additional property acquisitions or development, or be collected by the federal government to fund a housing insurance program that offsets property value losses experienced by other regional co-ops.
Financing
Upon chartering, regional shared-equity co-ops would have access to favorable financing from the federal government. In my Atlantic article I referred to this as the next 30-year mortgage: a financing tool that would open up the shared-equity rental market in the same way that government-backed mortgages broadened the homeownership market nearly a century ago.
In the current rental housing market, wealthy investors assemble a down payment, take out a loan, buy a property, and have renters pay off the loan on their behalf. Under this program, the government would borrow money from itself on behalf of renters, then renters would pay the loan back over the ensuing decades and capture excess revenues and appreciation for themselves.
The details can vary, but the general goal is for the financing to allow for acquisition without requiring a down payment — no upfront capital. A 40-year loan with an interest rate 1-2% below the going rate on the private market would be sufficient. The monthly payment on a $5 million loan with a 4% interest rate and 30-year term is nearly $24,000, for example, whereas a 40-year loan at 3% would cost under $18,000 per month.
Additionally, co-ops should be limited in the amount of financing they can access, especially during the first several years. During this trial period they should be expected to demonstrate effective and efficient property and financial management. Having proved themselves, they would be permitted to expand more rapidly, with increased access to federal financing. The total amount of financing available to a given region would also need to be limited in order to prevent co-ops from going on an acquisition spree and driving up property values regionwide.
Note: I believe federal financing support is ultimately necessary for a shared-equity rental market to scale up to the point where it can serve millions of households. However, social impact investing and philanthropy, including the use of tech industry funds already being directed toward housing efforts, could help prove the concept at a smaller scale and encourage faster adoption by the public sector.
Paying renters
An early challenge for shared-equity rental programs would be disbursing funds to tenants who wish to cash out, whether to buy a home or for any other reason: Just because a co-op has paid off some of its debt and its portfolio’s value had increased would not mean it could immediately access those funds and return them to tenants. Limits would need to be placed on how much funding renters could draw from the program, especially in early years. The details of these limitations are beyond the scope of this post, but it’s important to note that homeowners are similarly limited in their ability to access their equity without selling their homes, especially during the first several years of ownership, so this problem is not unique to the shared-equity model. As the program grew and became more established, a buffer of revenue and property value would accrue and the disbursement of funds would become more flexible, just as it does with traditional homeownership.
In the case of renters who wished to draw on their equity in order to purchase a home, the federal government should allow homebuyers to borrow against their rental equity for use in their down payment. The actual funds would remain with the regional co-op in which the tenant was invested, and the government would place a claim on the tenant’s rental equity to be collected at a later date.
Conclusion
Shared-equity rental housing is not a solution to the housing crisis, nor is it intended to be. That will require different strategies. Instead, its purpose is to narrow the widening gap between homeowners and renters, and to reshape housing politics so that more households see themselves as benefiting from low rents rather than high property values. It is not a solution to the housing crisis itself, but it is a way to make those solutions more politically palatable.
There are many ways that such a program could be designed to be successful. A regional co-op model with access to federal financing is one possibility, allowing proponents to sidestep the contentious politics of public housing and creating a framework in which different approaches could be pursued and best practices developed. As always, I welcome input on the details of the proposal. Co-ops in general are uncommon in the U.S., so I’d be interested to learn how co-ops that own multiple buildings operate in other countries. I also invite any interested parties — potential research partners, funders, non-profit operators, public sector staff, and so forth — to reach out if you have any interest in collaboration.