A counter-intuitive approach to home affordability

Jewish, Islamic and Christian tradition all eschew interest-bearing debt.

By JOSEPH COX
October 20, 2018 21:10
4 minute read.
A counter-intuitive approach to home affordability

pesonal loan with bad credit. (photo credit: PR)

Itai and Elisheva (fictional people) are a newly married Israeli couple who cannot see a road to home ownership. Instead, prices are spiraling out of reach. When the government announces that it will allow first-time home buyers to borrow 90% of the value of their new homes, Itai and Elisheva are delighted. They will be homeowners, enjoying the skyrocketing values all their peers seem to have benefited from. And they will shove down the sense of uncertainty as they dedicate a substantial portion of their next 20 years of earnings to the bank they chose to borrow from.

And then, in 2020, amid a global inflationary spiral, interest rates double. Itai and Elisheva can’t afford the new higher rates on their mortgage. And the bank, which borrowed money to finance the transaction, is hit hard by the drop in the value of the fixed portion of the mortgage. A country that not long before had the lowest rate of personal debt in the OECD, finds itself leveraged to the hilt. In the financial contagion that follows, Israel is made deeply vulnerable.

And all of it could have been avoided.

Modern monetary policy and financial wisdom embrace debt. Debt fuels economies. It allows people to leverage themselves, releasing liquidity and oiling the gears that make the modern world turn. Without debt, the argument goes, businesses could not be funded, the poor would have no recourse in times of need and homes could not be purchased. Without debt, nations would collapse; lacking the funding for major projects to carry themselves into the future.

But Jewish, Islamic and Christian tradition all eschew interest-bearing debt. Today, we dismiss and supplant these ancient ideas because they are not based on a modern understanding of finance or monetary policy. But perhaps we have not been as wise as we imagine.

The story of Itai and Elisheva shows the dangers of debt to individuals. But corporations, even otherwise profitable corporations, have brought down by leveraged buy-outs when they fail to meet the level of profitability necessary to meet debt obligations. Pensions, including the United States Social Security and Medicare systems, are often compensation borrowed from workers with the promise they will be paid back later in life. But pension systems globally – both public and private – are going bankrupt. Many will either not repay those they owe money to or devalue their currencies so they can technically meet their obligations. The result is that the elderly will suffer a lack of access to health care, housing and even food. All because of debt.

But debt does not only create risks, it also inflates the value of assets. Low-interest rates and long-term debt enable housing prices to shoot upwards. Certainly, with Israel’s rising population, we are seeing increasing value in real estate. But have values actually doubled in ten years? I believe increasing access to debt is enabling the price rises we’ve seen. And enabling first-time home buyers to borrow 90% of the value of the homes will only accelerate this process.

Instead of building a financial cushion, we are inflating a bubble. And any number of factors, many far beyond our control, can pop it.
The financial collapses we’ve seen throughout the ages should have us seeking better answers. Our recent collapses show that those answers are not to be found in the magic of central banking and monetary policy. So, perhaps they exist in those misguided and ancient texts. I believe we should restrict the issuance of debt while replacing it with something better: equity financing.

Consider an equity mortgage: Itai and Elisheva would buy 10% of a house and pay market rent on the remaining 90%. The bank would prefer Itai and Elisheva as renters because they have a vested interest in the upkeep of the property. But other renters could be found. In that case, Itai and Elisheva would receive 10% of the proceeds. Likewise, if the home is sold, Itai and Elisheva would receive 10% of the proceeds and the bank would receive 90%. If values go down, nobody is “underwater.” And if they go up, everybody benefits. And either party would have the ability to negotiate the sale of their portion to the other.

In this scenario, credit-worthiness becomes far less important. The focus is on the value of the property and the care Itai and Elisheva would show it. They wouldn’t leverage decades of their earnings to repaying the bank. They wouldn’t become debt slaves. And losing a job or experiencing an economic decline would not cost them their largest asset.

This concept can be extended. Companies can be encouraged to seek equity financing by not allowing the deduction of interest payments. After all, high-levels of debt have traditionally made stock market crashes far worse than necessary. And countries can borrow money in return for a set percentage of their GDP. Creditors would thus be interested not only in their borrower’s survival, but in their success.

This might all seem like a pipe-dream, but with modern computing they could be made real almost overnight. We need only legalize and officially encourage these sorts of loans while applying light taxation to newly-created interest obligations. This would not cripple short-term financing for regular business transactions or bankrupt existing debt-holders. The market would do the rest.

This sort of move would slow economic growth. But it would also make property more affordable, mute the effects of economic recessions, protect companies and livelihoods, and protect our families from the unknowable risks the future may hold. And, ultimately, it would result in a stronger nation.

The author explores Torah concepts in the modern age at TorahShorts.com


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