As much as I hate to focus on money, the undeniable truth is that it is what drives the majority of most of our decisions. Perhaps the only exceptions are those without the mental capacity to understand its function and those who possess it in such abundance that it no longer holds any meaning. This blog is about discussing how we could cause massive change by manipulating just one aspect of the economic landscape.
The fundamental principles of economics are based on the scarcity of resources. In particular, that money and time are scarce. We choose how to spend our share of each at the cost of not spending them on other opportunities. The way that world economies are set up, this means we have two means of wealth creation: 1) by being compensated for our labour time, 2) by investing money in various ways. To those with a passion for economics, my apologies for such a crude summary of ECON101.
This essentially means that those with money surplus to their expenses have an extra method of passive wealth creation when compared to those living from paycheque to paycheque. While the internet has curtailed this difference somewhat by reducing the need for start-up and running costs for any and all who devise clever online money streams, the divide still definitely exists. Much of this is due to the cultural phenomenon known as ‘property investment’… or buying houses with the intention to earn a rent from them and eventually sell for profit. This is strictly a game for the ‘haves’, while the ‘have nots’ get stuck wallowing in the infamous rent trap. I think Brett Sutherland sums it up very eloquently in his interview with Bryce Langston linked here. (https://youtu.be/VckbqU4kK2I?t=15m41s)
Not only this, but invested money provides the wealthy with a way to avoid paying tax on income which is already surplus to their needs. Add to this the fact that capital gains are generally taxed at lower rate and it becomes clear that the only TRUE route to real wealth creation is through capital investment. This TED Talk (https://youtu.be/CKCvf8E7V1g) outlines the fundamental folly of the current approach with great clarity. It truly is a system designed to keep the poorest poor while those with expendable income lazily profit from their plight.
The solution I propose is this: that both the bond and rental payments are returned at the end of the tenancy period. If the landlord is granted the right to earn off rental payments, bank interest alone will ensure they are able to make a healthy profit before returning the tenant’s rent payments and the tenant will not suffer the ultimate loss of a large sum of money. It is a win-win. Granted, the landlord wins a little less than the current model… but that is kind of the point. It provides a more equal share in the money flows, while respecting the investor’s opportunity to profit. A representation of the two models can be seen below in graphical form.
Note that the final values of the adjusted model are NET gains (i.e. the tenant is receiving a lump sum payment of over $50,000 at the end of the tenancy! Of course, this would still be subject to tax, but it provides that tenant with the very real prospect of being able to put a deposit on a house of their own. The landlord, on the other hand, has earned nearly $70,000 on their investment by doing absolutely nothing with the rental payments. The graph only depicts interest accrued in a savings account. If they were instead to use the capital to invest wisely in other ventures, they could potentially make much greater gains. Alternatively, if they are more risk-averse, they could wait (to be sure of having the funds to return) and use the profit after tenancy as investment capital, potentially profiting further this way as well. Obviously, this is only an example model with arbitrary figures and each case would be different.
It seems reasonable that this model be combined with minimum rental periods similar to term investments at banking institutions. Perhaps also with the penalty of losing the refund of rental payments (or a percentage thereof) should the agreement be broken early with disputes being governed by a third party such as the local government agency in charge of tenancy disputes.
As Brett says in his interview above, it seems very wrong that we, as a society, allow the current model to exist. To me, this seems like a much fairer model. The property investment market becomes less like a right of the rich to passively profit at the poor’s expense and more like a reward structure for wise investment. As an added bonus, it serves almost like a savings model for the tenant.
The obvious challenge is this: How do we convince those who profit from the status quo to relinquish their hold on the current system? How do we encourage a change toward a more equitable system? How could we encourage voluntary use of such a system and/or how could it be passed into law? These are all questions for which I invite your input. Any comments about the model itself are also welcome. If you know of any outlets which may serve to help spread the idea or attract people who could help make it happen, please share. I’d love to hear from them.