According to a recent news story, three-quarters of “middle class” (whatever that means) Americans can no longer afford to buy a house. This appears to be one step closer to one individual’s vision of Klaus Schwab’s and the World Economic Forum’s “Great Reset” in which, as one enthusiast put it, “You will own nothing and be happy.” The American dream used to be owning your own farm or business. Then it became getting a good job and owning a house. Now it's degenerating into getting a universal basic income and finding a place in a government housing project.
We think that adopting the Economic Democracy Act (EDA) would reverse this trend, and a few others as well. Today, however, we’re not going into the whole of the EDA, but one part of it, the “Homeowners Equity Corporation.” Of course, it could be argued that adopting the EDA would remove the necessity for the HEC, but that is a very weak argument. From an accounting point of view, increasing revenue is never an excuse for not cutting costs, in fact, it should incentivize it.
The idea of the Homeowners Equity Corporation (HEC) is very simple. A type of “rent to buy” arrangement, instead of people buying houses directly, they buy shares in the company that owns the houses. Instead of making mortgage payments, they pay rent, and a portion of each rental payment is used to purchase shares in the HEC up to the value of the rental house. Because the house is sold at cost (including renovation) and not necessarily at the market value, acquiring a house is much less expensive. It is also much less onerous, especially for first-time home buyers and those without a credit rating. Many people who fail to qualify for a personal home mortgage have no trouble renting.
Legally, tenants in HEC-owned houses are not buying real estate, but shares in a real estate holding company, which is much easier to do almost anywhere in the world. The difference is the tenants themselves are the owners of the holding company, not third parties. The tenants therefore own what the company owns, and any profits may either be distributed as dividends, put into a reserve fund to cover operating expenses during economic downturns and to meet other contingencies, or used to accelerate payments of principal.
One significant advantage home ownership through a HEC has over more traditional ways of buying a house is that the HEC, not the tenant, is buying the house as a capital asset instead of as a consumption item. This means that although principal payments on acquisition loans are not tax deductible as an expense by the HEC, it is allowed to depreciate the houses it buys as revenue-generating assets. Thus, the HEC pays out cash that it cannot recognize as an expense, but at the same time it has an equal and offsetting expense that does not require a cash outlay.
If, therefore, the taxing authorities permit the HEC to match principal payments on house acquisition loans and the depreciation on those same houses, the net effect will be the same as if principal payments were tax deductible. Where a regular real estate holding company would need to make a profit to satisfy investors and thus charge market rents, a HEC would only have to cover costs. Making a profit is not the primary goal of the HEC, as profits would either be applied to principal repayment, retained in the HEC to build up a contingency fund for the future benefit of the tenant-shareholders, or paid out to the shareholders — who happen to be the tenants — as dividends, in effect giving them a rebate on their rent, further lowering the cost of owning a home.
Since a 99-year lease on a HEC-owned house can be tantamount to freehold ownership, the advantages far outweigh any disadvantages. It becomes much easier to sell a home, since all a tenant need do is cash out shares, not find a buyer. A family home can remain in a family, since heirs receive shares instead of title to the house, which cannot easily be divided. When a lease is up, tenants can be granted the right to extend the lease for another 99 years. Retirees who “downsize” can simply choose another HEC-owned home to move into, and not worry about taxation on any gain, which would only happen if they sold shares, not the house, and then only on the shares they sold, not the entire added value of the house . . . and then only if the shares had appreciated, not the market value of the house they were renting from the HEC.
The HEC system would also take a lot of stress out of retirement. If a couple decided a house wasn’t suitable for their retirement plans, all they would have to do is find one more suitable, surrender one lease and take up another.
It would also be a good way to solve the village depopulation problem in small towns throughout the world. A HEC could acquire the houses, renovate them, then lease them out, which would be easier than finding buyers. People who retired to, say, Italy and decided after a few years they didn’t like it would find it much easier to change retirement locations.
And so on. The advantages are numerous, and it appears it can be done under current law in many countries, although some tweaks to the law would be useful.
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