Supporters of blockchain describe the technology as the biggest change to finance since the foundations for modern banking were established, while others say it will be as transformative as the internet.
Such claims may sound far-fetched for something as mundane sounding as a decentralised and immutable online ledger, which simplifies the trading of assets and then keeps a record. But as national land registries start using blockchain technology, the time has come to look beyond the hype and ask more profound questions about how it could influence buyer behaviour and pricing in real estate markets.
The housing market has long been the largest asset class, yet the market as a whole remains archaic, broken and geared exclusively toward traditional financial institutions. Real estate markets around the globe fall foul to closed financial loops that lock first-time buyers into long-term arrangements with just one single lender.
The perpetuated debt culture that lies at heart of the market leaves a significant portion of the world’s real estate wealth untapped and inaccessible for many. Despite interest rates being attractively low, the number of new mortgages has been in steady decline since the mid-90s.
With the increasing cost of the initial deposit outpacing real wage increases, millions of first-time buyers have been locked out and are now not able to get on the property ladder. Blockchain technology could transform the way we buy and sell real estate, doing away with hidden costs and inefficiencies and with fewer intermediaries – less middle-men who increase the costs and time to complete a transaction.
For first time buyers who can find the right property, secure a mortgage, and save a deposit, they must also pay for a range of so-called “hidden costs”. These additional payments associated with the transaction include many legal and title-related costs that continue to rise as the prudent buyer undertakes further inspections and previous sales records.
However, smart contracts that create a transparent process which reduces bureaucracy and ingrains trust on all sides. Smart contracts can be a tremendous tool for conducting real estate business. They provide a clear, immutable, and simple service where fraud, misuse, or manipulation is made much more difficult.
On top of the financial cost, it typically takes over a few months to settle a real estate transaction. The blockchain system can speed things up, as currently tedious checks undertaken by hand move to an automated system overseen and approved by the relevant stakeholders.
There’s already a handful of innovative companies utilising this new technology to transform the housing market. Just look at HiP, a decentralised real estate platform that has recognised the housing market needs to change.
We believe the real estate market should be served by an innovative and creative financial solution which challenges the market and un-taps the liquidity of those currently underserved. It fills the void left by traditional financial institutions and fosters growth in a market that also aids first-time buyers.
HiP aims to develop a system whereby equity becomes a currency and debt levels become a choice. By being able to release equity to raise money without losing ownership, free of debt, a whole new capital market can emerge.
First time buyers using the platform can use an inbuilt calculator to enter the price of the property they want to purchase as well as the down payment and monthly payments they can afford. HiP will then calculate the remaining amount needed to buy the property and this outstanding amount is offered out to investors.
This means that the first-time buyer will own a percentage of the property whilst also being entitled to a proportional percentage of profit and capitals gains when sold. Investors on the HiP exchange who have co-financed the property will also receive return on their percentage of the real estate equity they own.
This ultimately means that first-time buyers have access to financing options that were previously restricted – and they can afford the home that they need. Within this, first-time buyers will face fewer barriers to get on the property ladder due to a smaller deposit and lower monthly payments which traditional mortgage providers can’t or often won’t offer.
What also makes HiP unique, is that that those first-time buyers can build up equity over time and can increase their stake as and when they can afford it. The plethora of problems with the real estate markets all over the globe are too numerous and complex for one single solution to fix everything, but we can be sure that blockchain will play a vital part in the way we look at property in the future.
By Kai Peeters, Founder and CEO, HiP