The first man who, having enclosed a piece of ground, bethought himself of saying This is mine, and found people simple enough to believe him, was the real founder of civil society. From how many crimes, wars and murders, from how many horrors and misfortunes might not any one have saved mankind, by pulling up the stakes, or filling up the ditch, and crying to his fellows, "Beware of listening to this impostor!"
Jean-Jacques Rousseau, Discourse on the Origin of Inequality
To follow the Swiss philosopher’s train of thought, from a genealogical perspective, the first man to claim ownership of a piece of land is actually the one who set the first “Price”. All other prices are simply derived from that original price, be it labour or commodity or land. It was only later that the dynamics of supply and demand came into play.
As we have seen in part 1, the real estate sector witnessed depressed prices in the last decade. With one of the highest home price/income ratios, new graduates and young workers are finding it hard to move out of their parental abode and start a family. The demand is there, and so is the supply. The problem is the price.
I would like to offer a solution to new home buyers that could possibly prop up the 🏘️ market.
Fractional Leasing
Since the 2008 Great Financial Crisis, many financial ideas have popped up trying to save the real estate market (Dutch style mortgages, Jeonse from Korea, etc).
2 have caught on but were not that new nor original: Ejara/Ijara leasing and Fractional ownership.
1- Ejara leasing (تأجير تمويلي):
From Islamic finance, this has been widespread in Jordan for a long time and gaining ground in other parts of the world. To put it very simply, it’s when an owner (or bank) sells a property but the buyer pays in instalments over a long period of time. It’s only after paying all the instalments does the seller finally hands down the property to the buyer. Unlike mortgages, there is no interest (the price of property is determined on the number of instalment years). Like mortgages, if the buyer misses one payment, it’s game over and they lose the property.
For more details, here are some banks that offer this product/service:
2- Fractional ownership:
Not an innovation per se, and based on the “time share” idea, it’s where multiple investors pool in their money together to buy a property at a given time (different from REIT). The idea has been picking up since COVID when home property prices started so sky rocket again1. This financial product is only seen as a way to diversity investments and not targeted to first time home buyers2.
Some of the companies around the world offering this:
https://www.fractional.app
https://fraktion.app/marketplace
If we were to combine these 2 concepts, we would get Fractional leasing: a sort of reversed buy-to-rent financial mechanism, where the monthly rent is considered a purchase of a fraction of the property. Every time one pays the rent, they own a piece of the property they are staying in.
How it works is simple: Property owner leases a property to a Renter who pays a deposit (similar to a downpayment). After 1 year let’s say, the renter starts owning a small fraction of the property they are renting with each monthly payment. The terms will be set from the beginning, just like with Ejara leasing (unlike Ejara and mortgage, there is no tedious application process). The rate with which the rental price goes up could be linked to inflation or the real estate price index.
The main benefit of this is flexibility and freedom: if the renter loses their jobs or has to move out (job relocation, bigger house), they will leave still owning parts of that property. All the previous rent money they paid in the past years do not go to waste. If they wish, they could sell those property fractions, or keep them.
The legal framework and protections sort of exist in Jordan. Anyone can partially own any property in Jordan. What needs to be done is to find a way where the Renter and Rentee don’t have to go down to the Land Department every month and register each share or fraction of the property.
It can be done via a property management software (linked to DLS, efawateer, GAM) that looks similar to this Jordanian startup, Leasifier:
This is just a general gist of it, I am sure there are many small particularities to go over through (such as taxes, eviction notices, maintenance, etc.)
If this is to be implemented, the most important aspect is to avoid bad players abusing this scheme. This should only be reserved to first-time home buyers, not greedy fat cats who want to monopolise the real estate landscape.
Land is a Right
In the United States, 40%3 of home-owners own their homes out right, without a mortgage. And most either inherited their homes or are boomers4 who paid off the mortgage. It is becoming increasingly harder for younger generations to own a home.
In Jordan, it is estimated that 60% of Jordanians own their homes 🧿, with or without a mortgage (data is not clear). That’s why they say that a rich European is old money, while a rich Jordanian is land money. Looking at the other half, it is also important to note that a lot of Jordanians are renting on very old (and low amounts) rent contracts (similar to rent control) that could change at any moment.
Such a scheme could help first time home buyers in filling up all the vacant5 properties in the country and giving every renter the chance to own a roof over their heads. Maybe it could work, maybe not.
N.B: this was supposed to be part 3, next part will be the commercial real estate sector.