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Locked Out: How property crowdfunding could help the next generation of homeowners

The UK’s housing market exhibits many symptoms of failure.

This report shows that:

  • Homeownership rates among young people have declined dramatically in the UK in past decades despite nine out of ten of this group aspiring to buy a home.
  • Young people now face high barriers to entry because of high house prices and strict lending criteria, as well as low yields on savings that make it hard to build a deposit.
  • If homeownership rates among 25 to 34-year-olds in 2016 were the same as in 2001, we calculate that an additional 1.8 million young people in this age bracket would be homeowners in England.
  • There has been major expansion of young people in the private rental sector. Between 2003/04 and 2013/14, the proportion of private-rented households among the 25-34 year old age bracket more than doubled from 21.4% to 48.2%. However, there are persistent concerns about quality, with almost a third of the stock not meeting the Government’s quality benchmark.
  • Housing supply has fallen significantly short of demand for successive decades. Over the last five years alone demand for 645,000 additional homes has gone unmet, driving up prices.

The report looks in depth at one particular market-based solution to these problems: property crowdfunding. Property crowdfunding allows would-be investors to club together, through online platforms, to buy a share of a property. Although property crowdfunding is in its early stages in the UK, the dramatic growth of alternative finance in the UK and the huge expansion of real estate crowdfunding in the USA – which has hit $1bn – suggest that it may grow significantly in the years ahead.

In this report we consider how the housing market may evolve over the decade ahead and the challenges and opportunities this may present.

Our future scenarios reveal important potential roles for property crowdfunding to help address the problems in the housing market, including:

  • Making saving for a deposit easier for aspiring homeowners in an environment where house prices continue to increase. Those saving for a deposit to buy a home would have a way to earn returns that keep up with house price growth.
  • Widening participation in property ownership by reducing the barriers to entry and allowing a greater number of people to share in property price growth.
  • Improving quality in the private rental sector by applying greater commercial discipline to property management along with benefits from economies of scale.
  • Boosting new supply by providing equity funding to SME housebuilders who otherwise would not be able to pursue specific development projects.

The report concludes with an analysis of what the Government should do to enable the market to develop and to ensure that individuals and society can benefit from its features, whilst ensuring that consumers are properly protected. The report argues that:

  • Property crowdfunding should be made eligible for inclusion in the new Innovative Finance ISA. The current exclusion of property crowdfunding is based on a misrepresentation of the features of the product as a high-risk equity product, and inclusion within the familiar and trusted ISA wrapper would help encourage consumers to explore the potential of property crowdfunding.
  • The Government could also consider allowing savers to use property crowdfunding when saving in a ‘Help to Buy ISA’, so would-be first-time buyers can build a deposit in a product that tracks house prices.
  • The Government should introduce a new tax-favoured investment product to incentivise investments in new housing supply. The ‘Help to Build’ product would offer an incentive for people to invest in property crowdfunding products that provide equity capital to SME developers when they build homes to rent. This could boost housing supply.

The Government should consider what role property crowdfunding could have within broader shared ownership policy. There may be benefits to looking at property crowdfunding models to give social tenants the option of buying smaller stakes in their home and enabling people to build up (and reduce) their equity stake more flexibly. There may be wider implications for shared ownership policies as property crowdfunding develops in the UK with more private tenants gaining the opportunity to buy an equity stake in the home they live in.

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Nigel Keohane
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