Originally published on Medium.
As income inequality increases, one mechanism for the movement of wealth from the general population to an increasingly insular property-owning class is through rent of residential property. While it cannot be said that landlords do not have some responsibilities to their tenants in most countries, the power relationship between landlord and tenant remains unbalanced. It is solely the landlord who decides if a lease should remain or expire, regardless of how many years the tenant has spent in the home. The tenants labor in maintaining and protecting the home is unrewarded, and we must rely on punitive incentives such as bonds to encourage responsible tenancy.
Many Marxists espouse the necessity of eliminating this form of rent-seeking private property, but few propose tangible ideas that could replace them beyond vague statements about government-run allocation programs. We reject this as being excessively rooted in bureaucracy, inefficient in allocation and overly centralised. Land allocation is fundamentally unsuitable to central control, due to its heterogeneous properties. Simply put, every piece of land is distinct from every other, and so determining the real value requires an enormous amount of information. A centralized system simply cannot compete with an emergent market in terms of this ability to gather large amounts of contextual information.
The goals of any theoretical system should be to reduce the appeal of personal residential property as a speculative investment asset, efficiently allocate housing, remove rent-seeking power-relationships where tenants are unrewarded for their contributions, and create systems in which ownership can smoothly transition without needing large amounts of liquidity. Fundamentally, a social mechanism of ownership must result in those who use the property being the owners, proportional to their use. We also want to peacefully redistribute residential private property from landlords to social ownership through a market mechanism, instead of state coercion.
We propose a mechanism that spreads property wealth back into the rent-paying population in a fair and just way, called Rent Based Transitory Ownership (RBTO). This system can be summarised in the statement “all rent is equity”. Every time a tenant pays rent to the owners, they purchase an amount of newly-created equity in all future payments, calculated as a percentage of all existing equity. Rent payments are refunded to the current tenant based on their equity in proportion to all existing equity, times the price of that equity.
By calculating new equity in this way, we create an inflation effect that means that equity will depreciate in value. This gives more power to current and recent tenants. This equity is not tradeable, in a similar way to pension schemes today, which is intended to limit capital accumulation. After some amount of time this equity will be destroyed to place an upper hard limit on the influence that previous tenants can hold. Simply put, this means that a tenant’s rent will decrease over time. It also means that renting a property out for long enough will mean that the majority share of equity will transition to the current tenant. The house is then managed democratically, with equity forming a voting currency.
As there is a direct relationship between property value and rent, rent must therefore be derived from that value. But how do we fairly and accurately determine the value of property? The idea of a Common Ownership Self-Assessed Tax (COST) is appealing[1], in that it combines positive and negative incentives to encourage equity holders to accurately value their property. Each year, equity holders self-evaluate the total value of the property. Crucially, a significant land tax is also charged on this total value that is paid proportionally by the equity pool. The equity pool is incentivised to price upwards to receive the maximum amount of rent, but price downwards to reduce the upfront costs of this land tax. This land tax could replace most property taxes otherwise paid. Current monthly rent is then calculated as a percentage of this total value. We also propose that these valuations and rents be made public to decrease the information asymmetry between tenant and equity holders.
What does this change about our relation to rent? Firstly, it means that all rent is an investment. This would provide a solid income base for much of the population. It also provides a strong positive incentive to take good care of the property, for medium and long term renters, as keeping it in good condition means more income later on. In a transitory implementation period, this would reduce the need for high bond amounts and free up billions of dollars for spending. This system would also reduce the need for a bank to act as a middleman. Banks currently provide liquidity for changing between atomic owners, but with a system of transitory ownership there’s no need for large amounts of capital and debt to get involved. It also allows for a smooth transition between short and medium term renting and long term habitation, and vice versa. And finally, most importantly, it lessens the capital accumulation properties of our current system of property rental.
What would this managing democratic structure look like? Fundamentally the organisation only needs to perform a few tasks, such as keeping the house in good condition, evicting bad tenants, finding new ones, and deciding to sell the property on. How is money democratically allocated to these tasks? Some, like paying a property manager, would be predictable monthly expenses that could come from the monthly rent contribution as they do indirectly today. However, some of these costs cannot be directly funded from equity, as the distribution timeline would be too slow to react to urgent necessary expenses (e.g. a pipe bursting). We propose that rent can be stored for a full rental period before being released to the equity owners, and this rental pool can act as funding for any urgent repairs. Not only must this organisation be able to perform these tasks, but it must also be limited from performing actions outside its jurisdiction that impinge on the tenant’s rights. Current laws around property-management, for instance the requirement to provide notice before inspection, provide a good foundation for the constitutional restrictions of these organisations.
Proposals for non-necessary repairs, or repairs that exceed the rental pool, can be put forward by any equity-holder by locking up a certain amount of equity proportional to the cost of the proposal. The proposal is then then voted on by everyone, with successful proposals put into action. But how do we incentivise equity holders to remain invested and interested in a property, and put forward necessary capital for maintenance? Some may be content to simply let the tenant stew and rely on land speculation to make up the costs of not providing necessary repairs. To counter this, each proposal is budgeted to a certain value, and each equity owner given the chance to provide a proportional contribution. If the proposal is not sufficiently funded by all equity holders, then the proposal is opened for further funding by all. If the proposal is then funded and completed, with one or more equity holders disproportionately providing value, then in the next equity round those who did not back the proposal lose an amount of equity proportional to the amount they did not contribute. This equity is destroyed and not redistributed. The effect of this is encouraging all equity holders to wield their power within the organisation, or see their revenue stream degrade.
At some point, a buyer might come along with a buyout proposal that would change the use of the land, for instance turning it into a commercial property or redevelopment. COST supposes an involuntary sale at the aforementioned self-assessed price, and such a system might be beneficial for public acquisition for government projects such as high-speed rail. However, for private transfer the current tenant would have the controlling vote for this transfer as a basic right of tenancy.
This scheme could be easily implemented in state-managed housing today, allowing vulnerable members of society to build predictable revenue streams and perhaps eventually own their rental homes. The scheme could then be rolled out to general residential areas through tax incentives that make RBTO more profitable in the short term — though by design it will be less profitable in the long term to any investor. It is likely then that this tax incentive will have to be significant to make RBTO the more profitable structure. Transition from traditional renting structures is simple, with current landlords being given some arbitrary number of equity that represents their property valuation spread over the term of the RBTO, and acting as the majority equity owner at first until tenancy causes ownership to transition.
[1] Radical Markets: Uprooting Capitalism and Democracy for a Just Society, Eric A. Posner & E. Glen Weyl, 2018
