Four observational questions: Part 1, buying and lending
When one encounters a new ecosystem, how do you come to understand it?
Just push the AHI blog button
The question’s been on my mind lately. Currently I’m the non-faculty advisor (in the lingo, they call me the ‘client’) to a half-dozen graduate students at Harvard’s Kennedy School of Government who, for their Policy Analysis Exercise (the equivalent of a thesis for a Masters in Public Policy (MPP) candidate), are each developing ecosystemic assessments of individual countries:
A housing financial ecosystem is hard to grasp; not only are its boundaries theoretically infinite — everything influences everything else — but also many of its features are intangible, perceived mainly in the minds of its participants, expressed or memorialized in paper that itself may not be immediately accessible. The students, bright and educated though they are, have no particular grounding in their chosen country (although several of them have family or ethnic connections to their choices). Where do they begin?
Just as the ultimate philosopher could imagine the entire universe from a single seed (Zelazny, Lord of Light.), paleontologists deduce the dinosaur from its teeth, because if you know what it eats, you can learn how big it is, where it gets its food, and thus its ecosystemic niche.
Wonder what I like to eat?
In housing finance, the critters are people and companies. So I’ve been encouraging the students to look at four directly observable questions:
Get elevated and you can see the terrain
1. How do people buy and sell existing homes?
An ecosystem is defined partly by its ability to provide secure tenure in satisfactory accommodation for its full range of families and households.
Because people value security of tenure (one of homeownership’s essential benefits), people will pay money for a dwelling that gives them this in some generally recognized form. If we understand how people seek out and secure tenure, then we know much about the forms it takes, the prices at which it trades, and the consumption people can afford. The questions are:
A. Where do people who need housing look for it? Do they ask their friends and neighbors? Move in with extended family? Buy from relatives in a hand-me-down relationship? Solicit property owners directly? Go through brokers?
In 1955, we just had to drive until we saw something.
B. What form does security of tenure take? Is it ownership? Recognized by legal title? Or a long-term lease? Evidenced by a recordable document? Or is it sufferance to occupy a space for a period of time? Is the permission written? Is it externally recognized outside the community?
C. Who is the owner? Who is recognized as having dominion over the space you want to occupy? How does it arise that everyone acknowledges this person as having that ownership right?
D. What is the financial transaction? How do you buy the occupancy right from its holder? Title deed, lease, tenancy at will, monthly or weekly collection?
Both a testament to ownership and a license to charge rent
E. What credit checking does the owner/seller do on the buyer/ occupant? Is it as simply as cash up front, or more complex? Is collateral involved?
F. How long does it take you to find and secure the property? Is it readily available? Are there extensive search costs and time?
G. How many middlemen are involved? Who are they? Brokers, realtors, lenders, renter’s or buyer’s agents? How professional are they? Do you get value for money? Are their fees competitive? Or is there a guild or implicit monopoly? What about under the table payments?
It always involves looking the other day, doesn’t it?
H. How much is spent on transaction costs? What kind? Recording agents? Local fees? Transfer taxes? Stamp duty? Home inspectors?
Americans reading this know the answers off the tops of their heads; so, for that matter, do most people in most countries. Yet the answers vary widely by country, so we cannot presume that how we do it in
2. Where does housing finance come from?
Because housing demand is elastic, the ecosystem’s responsiveness and its ability to provide affordability have a direct bearing on its robustness.
Housing is expensive, and the triumph of modern housing finance is our ability to extend into the decades the period of time that people are willing and able to make regular payments to secure tenure and ownership.
(If there is one correlative of housing affordability worldwide, it’s the term of a fixed-payment purchase loan. In places as developed as
A. What portion is levered? Can the borrower get to 70% loan-to-cost? 80%? Higher?
The more leverage, the bigger the house I can buy
B. Where does the down payment come from? (In many countries it’s called the deposit.) Borrower savings, parents, family, a savings collaborative?
C. Who provides the financing? In very low income and informal communities, housing finance is basically consumer finance — it’s a loan made to a person, and the property is negligible as a collateral source. Perhaps as much as half of all microfinance, ostensibly to create businesses or employment, is actually spent on home improvements (adding a room, expanding or improving an existing home).
D. Where does the lender get its money from? Is it a moneylender? A bank? A savings cooperative?
This is how it starts: with people pooling their savings
A credit union?
We deposit with each other; we borrow from each other
A savings and loan association? Does the capital come from deposits, investments, bonds, or securitization?
E. What influences interest rates? Yes, of course it’s supply and demand, but what supply? Are rates regulated? What are the other competing uses of capital? Does the government involve itself? Are interest rates influenced by tax policy? Deductibility?
So far we’ve got the buying and selling of occupancy rights, and the financing of those transactions. Now we shift from the static inventory to what changes supply and demand: household formation or combination, and the creation of new homes.
If you think they will come, you build it
[Continued tomorrow in Part 2.]
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